A lesson on climate disclosures? World first greenwashing case dismissed in full (ACCR v Santos)

Introduction

After four and a half years, the greenwashing case against Santos Limited (Santos) has been dismissed in full.

The Australian Centre for Corporate Responsibility’s (ACCR) application against Santos was considered the first case globally to allege that a company’s net zero target was misleading, rather than only inadequate (see our initial coverage here).

The case was heard in late 2024 before Justice Markovic in the Federal Court. Judgment was published last week, with reasoning published this week.

The decision is of broad significance for companies, both for its implications on greenwashing litigation and the guidance it provides on what companies should do to set climate-related targets. It comes at a pivotal time as companies are beginning to release the first mandatory sustainability reports, which are required to include disclosures regarding targets, as well as other climate-related forward-looking information.

The long-anticipated decision clarifies that:

• Statements regarding net zero roadmaps, plans, expectations or targets are representations of future matters and must be based on reasonable grounds. This case demonstrates that having a reasonable process for setting targets, implemented by well-qualified, informed and experienced people, can go a long way in helping to demonstrate reasonable grounds.
• Whether a target is misleading depends on what a reasonable member of the target audience would understand. Here, the relevant audience was a large and diverse group of investors, who would understand that long-term net zero objectives may be achieved in different ways, which may change over time as circumstances change. Santos’ use of conditional and uncertain language and visual cues – such as graduated shading on its roadmap and terms like ‘planned’ and ‘potential’ – meant a reasonable member of the target audience would not expect Santos to have substantiated a range of future scenarios or undertaken detailed economic or market analysis. Companies should ensure their own disclosures similarly reflect the level of uncertainty applicable to their targets.
• Companies cannot ‘set and forget’ targets. In this case, it was found that the target audience would expect the ongoing evolution of Santos’ targets to be reflected in Santos’ future climate and annual reports. Companies must therefore continue to monitor their targets and whether they have reasonable grounds for them and, if they consider it appropriate to update or change them, reflect that in their disclosure.

What was the case about?

ACCR, a non-profit shareholder advocacy and research organisation - and Santos shareholder - filed proceedings in August 2021. It sought declarations that Santos engaged in misleading or deceptive conduct, as well as injunctions prohibiting any repetition of the conduct, and to issue a corrective statement on the environmental impacts of its operations.

ACCR claimed that Santos engaged in conduct that was misleading or deceptive, or likely to mislead or deceive, in breach of section 1041H of the Corporations Act 2001 (Cth) and sections 18 and 33 of the Australian Consumer Law (ACL).

Specifically, ACCR claimed that Santos made various misleading or deceptive representations in its 2020 Investor Day presentation, 2020 Annual Report and 2021 Climate Change Report, including that Santos:

• produces ‘clean energy’ and its natural gas provides ‘clean energy’ (Clean Energy Representations), whereas ACCR claimed that gas is not ‘clean’ and Santos is a heavy emitter of greenhouse gases;
• had a credible and clear plan based on reasonable assumptions to achieve its 2030 emissions reduction target and to achieve scope 1 and 2 net zero emissions by 2040 (Targets), whereas ACCR claimed that the Targets did not account for additional emissions and depended on a number of qualifications and assumptions to offset emissions; and
• will be able to produce ‘clean’ or ‘zero-emissions’ hydrogen in future (Clean Hydrogen Representations), whereas ACCR claimed that Santos was proposing to produce blue hydrogen, which generates material additional emissions.

Santos disputed these allegations. It contended that:

• the Clean Energy Representations did not convey that natural gas consumption produced no emissions, and no reasonable member of its target audience could have been misled;
• references to ‘zero-emissions’ hydrogen in the Clean Hydrogen Representations referred to hydrogen produced from natural gas with carbon capture and storage (CCS) and offsets for residual emissions, rather than production of hydrogen with literally no emissions; and
• its net-zero roadmap reflected assessments in the context of ‘a highly uncertain future in an industry marked by rapid changes in markets, technology, economics and regulation’, and that a reasonable member of its target audience would have understood this and not be misled.

The Federal Court dismissed ACCR’s application. ACCR may appeal the judgment to the Full Federal Court but has not yet indicated an intention to do so.

What did the court decide?

The Court found that Santos had not engaged in greenwashing. That is, ACCR had not established that any of the contested representations were misleading or deceptive, or likely to mislead or deceive, as alleged.

We set out below some of the Court’s key findings.

Were the emissions reduction targets future representations?

The parties disagreed on whether the Targets were ‘future matters’ for the purposes of section 4(1) of the ACL, which deems such representations misleading, unless supported by reasonable grounds.

Santos argued that the contested Targets were statements of ‘present intention or belief’. That is, the representations reflected a present intention of setting a target Santos intends to pursue, rather than a representation that it believes it will have achieved those targets in future.

The Court rejected this argument, relying on authority that promises, forecasts and predictions fall within the category of ‘future matters’, and that future representations do not lose their character if they also imply a present belief. The Court found that the Targets were inherently statements about the future, even if they involved some opinion or belief held at the time of making them.

Who was the target audience?

The parties also disagreed on the characteristics of the target audience for the contested representations.  The Court was required to consider the likely characteristics of the relevant audience, to assess the likely effect of Santos’ representations on an ordinary or reasonable member of that audience.

ACCR submitted that the target audience was neither homogenous nor uniform, encompassed a variety of public investors, and included large sophisticated investors, as well as small unsophisticated investors.  Santos contended that the audience should be limited to investors with certain knowledge and awareness of matters relevant to the investment, who had read the materials containing the representations, and had ‘sufficient interest in climate change and the impact of fossil fuel companies’ to notice the statements and have a reaction to them.

Her Honour adopted a hybrid position, finding the target audience to be a broad and diverse range of institutional and individual investors with interest in climate change and/or the impact of fossil fuel companies on climate change, but with varying levels of knowledge and interests in these matters. The target audience would understand that there is an ongoing energy transition, that companies setting long-term strategic objectives may achieve them in various ways, that the pathway to achieve those objectives would change, and to expect Santos to adapt to technological and regulatory developments. The target audience would not necessarily have scientific training or precise familiarity with how net zero or energy transition objectives may be achieved.

These findings underpinned the Court’s conclusions that Santos’ representations were not misleading or deceptive, as summarised below.

Clean Energy Representations

The Court found that the contested representations did not convey that natural gas is ‘clean’ but that it is in relative terms cleaner than coal and diesel. A reasonable member of the target audience would understand that natural gas materially contributes to GHG emissions and Santos’ references to ‘clean energy’ and ‘clean fuels’ did not convey a contrary position. Accordingly, the representations were not liable to mislead or deceive.

Clean Hydrogen Representations

Justice Markovic rejected ACCR’s claim that an ordinary and reasonable member of the target audience would understand ‘clean’ hydrogen and ‘zero emissions’ to mean hydrogen was produced with no scope 1 or 2 emissions.

The Court found that the target audience would understand ‘clean’, ‘zero-emissions’ and ‘carbon neutral’ hydrogen to mean the production of hydrogen from natural gas with CCS with no net emissions, including because most emissions would be caught by CCS and Santos could purchase carbon credits to offset residual emissions. Accordingly, the representations were not liable to mislead.

The Targets

ACCR claimed that Santos’ representations regarding the Targets were not clear, credible, realistic or based on reasonable assumptions.

Although the Court acknowledged Santos’ ‘emphatic language’ concerning its ability to achieve the Targets, her Honour found this was in the context of Santos’ judgment of the real possibility of achieving the targets if markets, regulations and technology evolved as it anticipated.

Drawing on expert evidence, the Court accepted that Santos had developed its targets as part of a ‘wider strategy’ and that such targets were long term and ‘must of their nature have included a number of interdependent and unpredictable assumptions which were sensitive to factors beyond Santos’ control.’

The Court also considered the detailed scoping and forecasting Santos had undertaken, including the technical and economic feasibility of Santos’ blue hydrogen and CCS operations, the future viability of using carbon credits to offset residual emissions from blue hydrogen and how these would impact Santos’ long-term GHG emissions rates. This involved extensive analysis by the Court, based on detailed evidence provided by Santos. Ultimately, the Court found that these factors did not demonstrate that Santos’ representations concerning the Targets were misleading or deceptive because Santos had reasonable grounds for making the representations.

What are the practical implications of this judgment?

Future-facing statements vs statements of present intention

• There is now case law establishing that statements around net zero and other emissions reduction targets are likely to be statements about the future, rather than statements of present intention - meaning that they must be supported by reasonable grounds at the time of making the statement.
• Companies making future-focused, climate-related commitments can take into account future uncertainties which may impact the achievement of their objectives. However, they should be able to demonstrate (with evidence) a reasonable process of considering the operational, market and regulatory uncertainties impacting long-term objectives, and how, despite these uncertainties, those objectives are based on reasonable grounds. Companies should also ensure the uncertainties and assumptions are clear in their disclosure.

Understanding the target audience for climate-related commitments

• Understanding the target audience for climate-related representations will be critical to considering whether representations are misleading or deceptive, as well as the ongoing market disclosure obligations for companies making these representations.
• The relevant audience in this case was found to be a large and diverse group of investors, who would understand that long-term net zero objectives may be achieved in different ways, which may change over time as circumstances change.
• Companies making representations to investors and stakeholders cannot set these targets and then forget about them – they will be expected to monitor progress against the targets and update the market if circumstances change. This will also impact companies’ obligations under the mandatory sustainability reporting regime, discussed below.
• Statements made to less sophisticated investors, or consumers, may be assessed differently. Critically, this target audience had some degree of familiarity with the relevant Santos investor reports and would understand that long-term strategic objectives may be achieved in a variety of ways, with that pathway to evolve as circumstances change. Greenwashing claims made more generally (for example, in consumer-facing marketing or product advertising) are likely to be assessed differently.

Interpretation of net zero commitments and realistic pathways to achieve net zero

• Where targets are challenged, Courts will closely examine internal processes and context for target-setting, as well as the relevance of international and domestic regulatory frameworks and policies, such as the Paris Agreement, disclosure frameworks, and applicable Australian Government policy. In this case, that examination extended to employee communications and decisions made in formulating the Targets, Santos’ existing blue hydrogen and CCS operations, and the Australian Government’s focus on investing in the transition to hydrogen at the time Santos made the representations.
• The Courts are likely to find that, in comparable circumstances, reasonable investors understand some of the operational, market and regulatory uncertainties associated with setting climate-related targets, and are therefore more likely to understand that statements about roadmaps or plans that are framed in contingent and uncertain language are not rigid steps or the only possible pathways.
• The Court also recognised the role of offsets in the energy transition, rejecting ACCR’s position that offsetting actual emissions with an ‘avoidance’ offset necessarily means emissions are still being released, which is inconsistent with a net zero world. Rather, the Court accepted expert evidence that offsets have a ‘key role’ to play in the transition to net zero and that Santos’ reliance on offsets to achieve the Targets was based on reasonable grounds.

Implications for the mandatory sustainability reporting regime

• Companies that have spent significant time and effort developing long-term emissions reduction and climate-related targets can be comforted by the fact that cost and market uncertainty were not enough to successfully challenge these targets in this case. In particular, this case found:
  • appropriately disclosed future-facing net zero roadmaps would not be expected to be rigid and would be seen as adaptable;
  • the mere fact that solutions or emerging technologies required to achieve targets are costly was not a reason to conclude there were no reasonable grounds, in circumstances where Santos continued to investigate and consider how it could address the relevant technical and commercial challenges; and
  • the fact there was no methodology for obtaining Australian carbon credit units (ACCUs) from supplying blue hydrogen was not a showstopper – it was reasonable for Santos to consider that a methodology would be developed by its target deadline of 2040, having regard to analogous developments and Government policy at the time.

Implications for strategic climate litigation

• The judgment is the latest of several unsuccessful strategic climate litigation cases. The Court’s decision that ACCR pay Santos’ costs (on a party-party basis at this stage) may reduce plaintiff’s appetite, especially following Santos’ successful application to be awarded indemnity costs against the Environmental Defenders’ Office in relation to the Munkara v Santos NA Barossa Pty Ltd.
• Nevertheless, this case may have achieved its intended purpose by focusing public attention on corporate climate change disclosures. ACCR brought its claim in 2021, years before there was clear regulatory guidance on greenwashing in Australia, and which inevitably informed market practice on how to avoid it.
• Given the continued focus on greenwashing by climate stakeholder organisations, class action plaintiffs and regulators, legal challenges to greenwashing will continue – particularly where it is suspected that companies do not have reasonable grounds for making representations.