Regulators’ interest in so-called ‘greenwashing’, where firms overstate their sustainability related conduct or credentials, continues unabated. Most recently, in March of this year, gas company Clarus voluntarily withdrew an advertisement in which it said that renewable gas was flowing in its pipelines, after complaints were made to the Advertising Standards Authority. Clarus was indeed mixing in biomethane from a composting plant, but the complainants said that the statement was misleading because the majority of the gas delivered to customers was fossil fuel.
Private activists are also bringing actions, such as the proceedings Greenpeace recently issued against Fonterra, claiming that Anchor butter packaging with the words “100% New Zealand grass-fed” is misleading when grass typically makes up 80% of the cows’ diets. The latter was perhaps not an obvious litigation risk, which demonstrates the extent of the exposure for companies and their insurers.
“Washing” risks, including not only “greenwashing” but also other misleading claims of social benefits intended to appeal to consumers, investors, or workers which are sometimes referred to as “social washing”, continue to pose one of the greatest risks to businesses and their statutory liability insurers arising from ESG related obligations. Added to this is an emerging risk that may be described as “AI washing”, where firms overstate the extent to which they are designing, producing, or using, artificial intelligence tools and impliedly overstating their commercial prospects as a result.
The laws prohibiting ESG-washing and AI-washing in New Zealand are primarily the prohibitions upon 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 these laws is far from simple, and breaches may be unintentional or inadvertent. Organisations may make statements about their ESG or AI credentials which on their face are true, but could be considered misleading and deceptive if they create a misleading impression overall.
While the risk of regulatory action in response to ESG-washing, and particularly ‘greenwashing’, has been a known risk for some time, such action 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. Organisations that publicise their ESG credentials or make similar statements about their use of AI, and their statutory liability insurers, face an increasing risk of claims and penalties.
‘AI-washing’
AI-washing may be described as the practice of overstating an organisation’s or a product’s AI use, capabilities or prospects for the purpose of gaining a competitive advantage or improving its reputation. Misstatements may appear in the way in which an organisation describes its use of AI, the efficacy of its AI over existing techniques, the flexibility of its AI, or the extent to which its AI is fully operational. In turn, these misstatements can prejudice consumers by landing them with goods or services that do not meet expectations. More broadly, this type of conduct can mislead the market as a whole and 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 contains inaccuracies, this can result in unwanted bias and misleading or entirely erroneous outputs, known as ‘hallucinations’. This risk is amplified with AI systems that are designed to make decisions independently, without human intervention at any stage of the decision-making process. As an AI product or service can evolve, representations made before the time of sale may no longer be true when the product or service is sold or shortly thereafter.
AI-washing has recently become a particular focus of the US 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 United States. In many of those cases, the SEC found that the investment advisers had neither developed nor implemented the AI capabilities they advertised.
The United States is not alone in taking action against AI-washing. The European Union’s new AI Act includes strict transparency requirements to protect consumers and markets from deceptive AI usage.
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 breached the Fair Trading Act with misleading statements about emissions reductions in a public advertising campaign.
In Australia, both the Australian Competition and Consumer Commission (ACCC) and the Australian Securities and Investment Commission (ASIC) have continued to focus on ESG-washing as a top enforcement priority. 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 ten 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 rubbish bags, for making allegedly false or misleading representations that certain kitchen and rubbish bags were partly made of recycled ‘ocean plastic’. 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 greenwashing focus this year will be broadened to include listed entities, managed funds and superannuation funds. Two recent examples of successful regulatory proceedings are those against Vanguard Investments Australia and Active Super. The Australian Federal Court ordered Vanguard to pay a AUD12.9 million penalty for making misleading claims about ESG exclusionary ‘screens’ which were used to select only investments that complied with its ESG criteria. Vanguard admitted that it had misled investors into believing 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 that 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 a number of 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 United Kingdom-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 United Kingdom and relates to an failure by Boohoo to disclose labour rights violations at its suppliers’ factories, which were exposed by the United Kingdom media, leading to Boohoo’s share price falling significantly. The media exposed the mistreatment of workers, including some who were being paid well below the minimum wage and forced to work in unsafe and unsanitary conditions during the Covid-19 pandemic.
Given the increased risks of penalties for ESG washing and AI washing, and the difficulty of accurately pricing emerging risks, insurers may wish to make more extensive inquiries of their customers’ processes for ensuring that any ESG statements they make are factually accurate, as well as any statements made about the use of AI in their goods or services and their capabilities.
