Summary
The Australian Securities and Investments Commission (ASIC) successfully prosecuted Mercer Superannuation (Australia) Limited (Mercer) for greenwashing practices. Greenwashing refers to a person or company making false or misleading statements that a particular product or service is environmentally-friendly or environmentally sustainable when in fact it is not. The Federal Court of Australia in Australian Securities and Investments Commission v Mercer Superannuation (Australia) Limited [2024] FCA 850, determined that Mercer had made false representations about their “Sustainable Plus” investing options. The Court determined that Mercer’s false representations constituted a contravention of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act). Mercer now has to pay over AU$ 10 million in civil penalties which includes ASIC’s investigation and court costs. Additionally, Mercer is subject to an adverse publicity order for six-months, requiring Mercer to disclose on its website’s sustainable investments page: the court’s findings, the nature of its contraventions of the ASIC Act and the penalties imposed.
Background
Mercer is the trustee of Mercer Super Trust. Mercer Super Trust, with assets valued at AU$ 65 billion, is a monumental player in the Australian superannuation market. ASIC accused Mercer of greenwashing in regard to its ‘Sustainable Plus’ investment options (Sustainable Investment Options).
Mercer had represented that members who placed their money in the Sustainable Investment Options would not be investing in companies that operate in the following industries: alcohol production, gambling and carbon-intensive fossil-fuel production (Excluded Sectors). However, ASIC demonstrated that between November 2021 and March 2023, six of the seven Sustainable Investment Options had holdings in companies that were in the Excluded Sectors.
ASIC alleged that Mercer’s false representations breached sections 12DB(1)(a) and 12DF(1) of the ASIC Act. These provisions prohibit misleading or deceptive conduct and false or misleading representations in connection with financial services.
The Federal Court’s dealing with the case commenced with ASIC and Mercer jointly seeking a declaration of contravention. Both parties submitted a statement of agreed facts. Further, both parties submitted admissions under section 191 of the Evidence Act 1995 (Cth), which detailed the misleading representations made by Mercer.
Mercer's False & Misleading Representations
Mercer, over the course of the period spanning November 2021 to March 2023, made several misrepresentations regarding their Sustainable Investment Options that amounted to greenwashing. During the Federal Court proceeding, Mercer’s misrepresentations were categorised into four distinct periods:
• Video Statement (12 November 2021 – 25 January 2022): Claims made in a video on Mercer’s website, Vimeo, and YouTube, stating that Sustainable Plus options excluded investments in certain sectors.
• First Website Statement (25 January 2022 – 4 April 2022): Misleading content on Mercer’s “Sustainable Investing” webpage, asserting exclusions in investments.
• Second Website Statement (4 April 2022 – 22 July 2022): Continued false statements on the “Sustainable and Ethical Super” webpage.
• Third Website Statement (22 July 2022 – 1 March 2023): Adjusted but still misleading content following scrutiny from environmental advocacy groups.
These misrepresentations originated from a marketing strategy Mercer developed. Mercer’s marketing strategy was to capitalise on the public’s growing demand for environmentally and socially responsible investment options. Key Mercer executives, Mercer’s Sustainable Investment Manager and Chief Investment Officer, amongst others, were aware that the Sustainable Investment Options did not fully exclude investments in Excluded Sectors.
Federal Court's Application of the Law
Sections 12DB and 12DF of the ASIC Act were at the centre of the Federal Court’s decision:
• Section 12DB(1)(a): Prohibits making false or misleading representations about the standard, quality, value, or grade of financial services.
• Section 12DF(1): Prohibits conduct in trade or commerce that is liable to mislead the public about the nature or characteristics of financial services.
The Federal Court assessed the representations made by Mercer from an objective standpoint, considering how ordinary and reasonable members of the public would perceive them. The Court’s analysis involved:
• evaluating the general impression the representations gave, not just their literal truth;
• the context in which the statements were made, including the mediums (website, videos) through which they were disseminated; and
• the characteristics of the likely audience.
In applying these principles, the court drew on the reasoning from the recent case of Australian Securities and Investments Commission v Vanguard Investments Australia Ltd [2024] FCA 308, emphasising:
• Effect on the Audience: The central question is whether the representation would likely lead an ordinary and reasonable person in the relevant class to form an erroneous belief about the financial products.
• Literal Truth vs. Overall Message: Even literally true statements can be misleading if they create a false overall impression.
Federal Court's Decision
The Federal Court determined that Mercer’s unqualified claims that the Sustainable Investment Options did not have any holdings in companies which operated in the Excluded Sectors was misleading. Internal emails, in which Mercer executives approved manual overrides of the exclusion polices, demonstrated Mercer’s executives knew that the Sustainable Investment Options did include investments in Excluded Sectors. The absolute nature of the claims without qualifications, created a false impression about the nature of the financial products. For our full coverage of the Vanguard case, click here.
Penalties Imposed by the Federal Court
The Federal Court imposed a civil penalty of over AU$ 10 million on Mercer as well as an adverse publicity order.
The Court structured the civil penalty as follows:
• AU$ 1 million for the first period (Video Statement),
• AU$ 2 million for the second period (First Website Statement),
• AU$ 3.3 million for the third period (Second Website Statement),
• AU$ 5 million for the fourth period (Third Website Statement).
Mercer is also required to pay ASIC’s costs of AU$ 200,000 for the investigation and subsequent proceedings.
Given Mercer’s significant annual turnover, the maximum penalty could have been between $20.5 million and $22.4 million for a single contravention. However, Mercer’s cooperation with ASIC played a significant role in reducing the penalties imposed. Mercer admitted the contraventions at the earliest opportunity and provided full cooperation to ASIC in the form of:
• disclosing internal communications; and
• taking corrective actions.
Mercer, through these actions, demonstrated contrition and a commitment to rectifying its misconduct.
Additionally, the Federal Court, pursuant to s 12GLB of the ASIC Act, imposed an adverse publicity order on Mercer. Adverse publicity orders require the party subjected to them to make publicly available any information specified by the relevant judicial body. Mercer’s website’s sustainable investment pages will have to display an adverse publicity notice for six months. The notice must detail:
• the Federal Court’s findings; and
• how Mercer made false or misleading representations about its Sustainable Investment Options.
The Federal Court in imposing the adverse publicity order stated the order would serve a purpose “which goes beyond dispelling the misleading dominant impression conveyed to consumers” by the representations, namely to “bring the outcome of the proceedings to public attention”.
Lessons for General Counsels
• Importance of Accurate ESG Claims: Ensure that all environmental, social, and governance claims are accurate and substantiated, as false or misleading statements can lead to significant legal and reputational repercussions.
• Effective Compliance Systems: Implement robust compliance systems and procedures to monitor and verify the accuracy of public statements, particularly those related to ESG credentials, to prevent regulatory breaches.
• Prompt Corrective Action: Act swiftly to correct any false or misleading representations when they are identified. Failure to do so can exacerbate legal consequences and damage to reputation.
• Cooperation with Regulators: Demonstrating cooperation with regulatory bodies, such as ASIC, can mitigate penalties and show a commitment to resolving issues transparently and effectively.
• Adverse Publicity Orders: Be aware of the increasing use of adverse publicity orders. Expect to see more as ASIC adopts a pragmatic approach, targeting business reputation and enhancing public awareness of greenwashing.
Conclusion for Businesses
Acts of greenwashing significantly reduce consumer confidence in environmental, social and governance claims. Undoubtedly, public confidence in Mercer’s statements will be significantly diminished following this proceeding. Regrettably, businesses who make genuine efforts to pursue ESG goals will now face a higher hurdle. Businesses who commit acts of greenwashing ultimately erode investor confidence in products that are designed to be ESG compliant and make it harder for consumers to obtain bona fide sustainable investments.
Recent cases, including the one against Mercer, demonstrate ASIC’s growing confidence in tackling greenwashing through litigation. This approach encourages cooperation from entities, as evidenced by the reduced penalties for Mercer due to its cooperation. With the November 2024 Senate Inquiry into greenwashing nearly upon us, the regulatory scrutiny on this issue is set to intensify. Greater regulatory scrutiny will undoubtedly drive the need for companies to ensure their ESG claims are accurate and substantiated. This facilitates greater consumer protection, market competition and maintains the public’s trust in the financial services industry. As aptly stated by a Mercer executive, “the ‘greenwashing’ topic is not going away”.
Further Information
For more information about greenwashing litigation, how to avoid ‘greenwashing’ and how to respond to a greenwashing allegation, please contact Trevor Withane: