ESG washing penalties, including those related to “greenwashing” and “social washing”, continue to pose one of the greatest risks to private entities arising from ESG related obligations. Being added to this growing laundry list of washing is an emerging risk around “AI washing”. “Washing” occurs when organisations make misleading claims about their goods, services, or organisational practices to appeal to consumers, investors, or workers.

Risks include for example, overstating their sustainability related credentials (“greenwashing”), their social responsibility (“social washing”), or the use and/or capability of AI in their goods or services (“AI washing”). While the law behind ESG and AI washing in New Zealand is essentially governed by the concept of misleading and deceptive conduct in the Fair Trading Act 1986 and the fair dealing provisions of the Financial Markets Conduct Act 2013, the application of that law is far from simple. Washing can be international or inadvertent in that an organisation can make a statement about its ESG or AI credentials which on its face is true, but could be considered misleading and deceptive if it causes a misleading impression overall.

While ESG washing has existed for some years, it, along with AI washing, is becoming more frequent and significant in the context of both increasing global regulation requiring mandatory disclosure and the importance placed by consumers on these representations in making purchasing decisions. In addition to penalties arising from legal/regulatory action, other risks for organisations include loss of reputation, loss of stakeholder trust and goodwill, and employee brand damage.

AI washing

Is your product or service less intelligent than you claim? In a nutshell, AI washing is the practice of misstating your organisation’s or your product’s AI capabilities for the purpose of gaining a competitive advantage or improving your organisation’s reputation. These misstatements can be in the form of how an organisation describes the use of AI, the efficacy of AI over existing techniques, the flexibility of AI, or the extent to which AI is fully operational. In turn, these misstatements can create problems for consumers by offering goods or services that do not meet expectations, causing overpayment for goods or services and making it hard for consumers to identify whether they have received the promised good or service. More broadly, this type of conduct can erode consumer trust in AI and AI related goods or services.

What makes AI washing different from other forms of ESG washing is that some of the features that make AI beneficial can also amplify the risks of misleading statements. AI systems can change their performance over time and adapt by learning from data, but if that data contained inaccuracies, that can result in unwanted bias and misleading or entirely erroneous outputs (known as ‘hallucinations’). This risk is amplified further with AI systems that are designed to make decisions independently, without human intervention at any stage of the decision-making process. Therefore, the AI product or service can evolve, meaning that representations made at the time of sale may no longer be true.

AI washing has recently been a particular focus of the U.S. Securities and Exchange Commission (SEC). Last year saw the SEC bring cases against investment advisers for their statements regarding AI, marking the first instance of regulatory action against the practice in the US. In many of the cases, the SEC found the investment advisers had neither developed nor implemented the AI capabilities they advertised. The US is not alone in taking action against AI washing, the EU’s new AI Act includes strict transparency requirements to protect consumers and markets from deceptive AI usage. While we are yet to see similar cases in New Zealand, prudent organisations should be ensuring that any statements they make about the use of AI in their goods or services and the capabilities of that AI are factually accurate to reduce the risk of being accused of AI washing.

Greenwashing 

Greenwashing claims continue to grow both domestically and internationally. In New Zealand, we are awaiting the outcome of the first greenwashing case, in which Consumer NZ is seeking declarations from the High Court that an energy company allegedly breached the Fair Trading Act with misleading statements about emissions reductions through a public advertising campaign.

In Australia, both the Australian Competition and Consumer Commission (ACCC) and Australian Securities and Investment Commission (ASIC) have continued to focus on ESG washing as top enforcement\ priorities. In its 2024–25 Compliance and Enforcement Policy and Priorities, the ACCC identified consumer, product safety, fair trading and competition concerns in relation to environmental claims and sustainability as one of its 10 compliance and enforcement priorities for this year. This follows proceedings commenced by the ACCC in the Australian Federal Court against Clorox Australia Pty Ltd, the manufacturer of GLAD-branded kitchen and garbage bags, for allegedly making false or misleading representations that certain kitchen and garbage bags were partly made of recycled ‘ocean plastic’, in breach of the Australian consumer law. At the time of writing, we are still awaiting a judgment. On a related note, at the end of last year, the ACCC released its final guide on sustainability collaborations and Australian competition law. The guide is designed to help businesses understand the competition law risks that may arise when contemplating working together to achieve positive sustainability outcomes.

Meanwhile, ASIC has had good enforcement success in the past 12 months pursuing greenwashing cases. This focus has been renewed in its priorities for 2025 with ASIC suggesting that its 2025 greenwashing focus will be broadened to include listed entities, managed funds and superannuation funds. Two recent examples are Vanguard and Active Super. The Australian Federal Court ordered Vanguard Investments Australia to pay a $12.9 million penalty for making misleading claims about ESG exclusionary screens. Vanguard admitted it misled investors that certain funds would be screened to exclude bond issuers with significant business activities in certain industries, including fossil fuels, when this was not always the case. In Active Super, the Federal Court found LGSS Pty Limited, as trustee of the superannuation fund Active Super, contravened the law in connection with various misleading representations concerning its ESG credentials. Active Super claimed in its marketing that it eliminated investments that posed too great a risk to the environment and the community, including gambling, coal mining and oil tar sands. However, the Federal Court found that Active Super invested in various securities that it had claimed were eliminated or restricted by ESG investment screens.

Social washing

Similar to greenwashing, social washing occurs when organisations make misleading claims about their goods, services, or organisational practices in relation to social issues. Social washing often occurs in the context of statements made about an organisation’s supply chain and the absence of human rights abuses,\ forced labour, modern slavery, child labour and/or the impacts on the communities in
which their supplies operate.

Last year, institutional investors in Boohoo Group Plc, a UK-based fashion retail company, filed a claim against the company seeking compensation for allegedly misleading disclosures relating to its ESG responsibilities, which are alleged to have resulted in a financial loss for its shareholders. This claim is one of the first of its kind in the UK and relates to a failure by Boohoo to disclose serious labour rights violations at its suppliers’ factories, which were exposed by the UK media, leading to Boohoo’s share price significantly falling. The media exposed the mistreatment of workers, including that some workers were being paid well below the minimum wage and forced to work in unsafe and unsanitary conditions during the Covid-19 pandemic.