No longer 'once in a blue moon': bluewashing risks and challenges can't be ignored

Navigating human rights issues in an evolving landscape 12 min read

Companies are increasingly attuned to the risks of greenwashing and the importance of ensuring a reasonable basis for representations about their environmental credentials. At the same time, stakeholders have expanded their focus to businesses' potential connections to human rights impacts, and other issues within the social (or 'S') domain of ESG, creating a heightened risk of so-called 'bluewashing'.

The expansion of human rights reporting and due diligence requirements around the world, and within Australia, has meant an uptick in enforcement by regulators and in strategic litigation from private sectors.

In this Insight, we explain why companies should carefully consider their representations about human rights and other social issues, and how to manage associated bluewashing risk.

Key takeaways

• In both Australia and overseas, private litigants – and, in some cases, regulators – are scrutinising and actively challenging companies' human rights and other social commitments. This is highlighting the necessity for companies to ensure they are managing bluewashing risks.
• Developments we expect to see this year encompass an enhanced focus by private litigants on companies' commitments in relation to Indigenous peoples – including commitments to ensuring free, prior and informed consent (FPIC), increased scrutiny of companies' supply chains, and the continued development of novel legal causes of action.
• Proactive action is important in reducing exposure to bluewashing risk. An effective response may include putting in place a strong set of controls to ensure that human rights-related and other social claims and commitments are being made on a reasonable basis, and implemented appropriately in the longer term.

Bluewashing: the new frontier in ESG risk

Greenwashing (defined as misleading or deceptive representations about a company's sustainability, environmental or climate credentials) is an established risk and point of concern for many companies. Both the ACCC and ASIC have announced greenwashing as enforcement priorities for FY23 and, as discussed in two previous Allens Insights, civil penalty proceedings have been commenced against a number of companies for alleged greenwashing.¹

With some of ASIC's greenwashing enforcement actions already touching on representations about social issues, private litigants and, to some degree, regulators are now utilising the greenwashing playbook to challenge allegedly misleading or deceptive representations. This includes a company's commitments in relation to social matters such as human rights, diversity and inclusion, and privacy and data protection. Bluewashing, like greenwashing, can materialise in various ways, and there is no exhaustive list of conduct that may be said to give rise to it. However, at a high level, we have seen allegations of bluewashing arise in two main forms:

• first, where companies have made commitments to respect or uphold human rights or human rights-related standards (whether generally, or with reference to specific rights or standards under certain international instruments), but allegedly have failed to act consistently with those commitments – including by failing to carry out adequate human rights due diligence to identify and address conduct that impacts upon human rights; and
• second, where companies promote the use of investment exclusions and screens to address social issues, but do not apply such exclusions or screens, or apply a narrower scope than is promoted to the public.

Bluewashing risk is heightened by the changes currently taking place in relation to global human rights-related reporting requirements. Under new reporting requirements, companies are increasingly required to disclose significant detail about their human rights commitments and actions taken in relation to human rights impacts, providing interested parties with more opportunities to identify any mismatch between these two areas. 

Risks associated with bluewashing

Allegations of bluewashing create legal, financial and reputational risks for companies, and this is especially the case when it comes to strategic private litigation, as well as regulatory enforcement.

Strategic activism and litigation

Strategic activists and litigants in Australia and abroad are bringing bluewashing claims against companies in a range of ways. In Australia, the most notable to date has been the suite of complaints brought in April 2023 by Equity Generation Lawyers on behalf of Tiwi Islanders, Larrakia and Gomeroi Traditional Owners against 12 banks, and, later, 20 of Australia's largest super funds, in connection with their financing of Santos and Santos' gas development project in the Barossa gas field. The complainants allege that the project will threaten their spiritual interests and cultural and economic rights, and that in lending to or investing in Santos, the banks and super funds acted inconsistently with alleged public commitments regarding human rights, including in relation to due diligence and FPIC.

Looking ahead, it is possible that shareholders of Australian companies may seek to raise bluewashing allegations through other means, including by requisitioning resolutions at company meetings – as has occurred in the United States with Nike and one of its shareholders, Tulipshare.

Compared with Australia, there is a longer track record of bluewashing claims being made in overseas jurisdictions.

• For instance, in 1998 an individual consumer Mark Kasky brought action against Nike, alleging that Nike had engaged in intentional or reckless misrepresentation, unlawful business practices and false advertising in relation to the working conditions in its South East Asian facilities where it was claimed that child labour had been used.² That action made it all the way to the US Supreme Court before it settled.
• A similar group of NGOs filed a complaint against French retail group Auchan, in 2014, alleging that the company engaged in deceptive marketing practices, on the basis that it had publicly stated its respect for workers' rights but a clothing label distributed by the company was found in the rubble of the Rana Plaza building collapse that killed more than 1,100 textile workers.

More recently, claims have been brought where it is alleged that companies, despite purporting to have conducted audits or due diligence, have failed to identify modern slavery in their supply chain. The current claim brought by Leigh Day against Tesco and Intertek in the UK is one such example. It appears to be framed as combatting perceived bluewashing, in that it seeks to challenge companies' representations on the adequacy of their due diligence. The claim, which is on behalf of Burmese migrant workers, has alleged Tesco was negligent in that it was, or ought reasonably to have been, aware of forced labour conditions experienced by the migrant workers.³

Such proceedings, while not commenced under misleading or deceptive conduct provisions, are a novel avenue by which strategic private litigants may challenge an alleged mismatch between a company's conduct and its human rights representations. While similar tort proceedings have not yet commenced in Australia, as explained in our previous Insight, we anticipate domestic strategic private litigants are likely observing these proceedings with interest.

Additionally, overseas claims of bluewashing tend to cover a broader range of 'S'-related matters than claims currently being made in Australia. For example, in 2021 shareholder derivative actions were brought against the boards of large US companies, including Facebook, in relation to corporate diversity and inclusion. In Facebook's case, its shareholders alleged that the board made material misrepresentations and omissions when the company publicly stated that it was committed to diversity and inclusion, but only had one African-American board member, and had no African-American or other minority individuals in its senior executive team at the time. Although the shareholders' action was dismissed for several reasons, this and other cases are contributing to a trend of shareholders resorting to strategic litigation for perceived bluewashing.

While allegations of bluewashing are often pursued in court, stakeholders have also been turning to non-judicial mechanisms such as OECD National Contact Points (NCPs) for less costly and more accessible recourse. In particular, a number of complaints brought before, and statements made by, NCPs refer to companies' human rights standards or policies, as a means of highlighting conduct alleged to be inconsistent with those standards or policies, and the OECD Guidelines for Multinational Enterprises more broadly. This approach has arisen for instance in a number of complaints to the UK NCP⁴ and numerous complaints to the Australian NCP against companies traversing the security, banking and mining sectors including numerous that are currently on foot.

Further, the OECD Guidelines have been updated recently to recommend (among other recommendations) that companies conduct human rights due diligence on downstream value chains, including consumers, and ensure that sustainability-related claims about consumer-facing products or services are based on adequate evidence. Given that the OECD Guidelines have already provided a basis for complaints of misleading conduct (eg the subsequently withdrawn complaint against BP for allegedly misleading carbon claims in its advertising)⁵, it is possible that these updates may trigger a greater focus on human rights due diligence and consumer representations under the Guidelines, leading to bluewashing-style complaints being made to NCPs.

Regulatory enforcement

ASIC has already started to target bluewashing as part of its broader enforcement priority in relation to greenwashing. It has defined greenwashing as the extent to which a company's practices are represented to be environmentally friendly, sustainable or ethical – which arguably incorporates matters that are the subject of potential bluewashing.⁶ For instance, earlier this year ASIC commenced its first court proceedings against Mercer Superannuation for allegedly making misleading statements about the sustainable nature of certain of its superannuation investment options, which were marketed as excluding investments in companies involved in alcohol production and gambling – issues which fall within the 'S' domain of ESG. Similarly, ASIC issued infringement notices against Vanguard at the end of 2022, on the basis that Vanguard had allegedly misled investors by overstating the extent of its investment screens for companies involved in tobacco sales.

We anticipate that, over time, ASIC will increase its focus on 'S' issues as part of a more stringent enforcement approach. Indeed, the regulator noted in a recent report on its greenwashing interventions that it 'anticipate[s] further enforcement action',⁷ and has also made public statements to the effect that it will 'up the ante' to move beyond fines and infringement notices, and into court action.⁸

Additionally, last month ASIC's Chair reiterated the regulator's commitment to investigating and addressing greenwashing, while also highlighting that 'greenhushing' (or the decision to stay silent on environmental commitments or credentials, to avoid a negative response from regulators or other stakeholders) is effectively another form of greenwashing.⁹

We expect that ASIC may take a similar view of bluehushing, meaning that companies need to be careful about rolling back or staying silent on their human rights or other social-related commitments. At the same time, with the trend in mandatory 'S' related disclosure regimes, as well as indications that the next iteration of the ISSB standards (a voluntary yet significant development in global ESG reporting) will cover human rights among other topics,¹⁰ companies may need to disclose in any event. As such, companies would be best placed by starting to identify and collect information required for such disclosure, and ensuring that robust governance frameworks are in place to manage this and other reporting processes in their business.

What's next in this space?

With bluewashing proceedings by both regulators and private litigants continuing to gather pace, we anticipate scrutiny of companies' human rights and social commitments will only continue to increase. In particular, we consider that the growing acknowledgement by entities such as the ISSB¹¹ of links between climate change and adverse impacts on Indigenous rights means companies' commitments in relation to Indigenous rights are likely to continue to be a 'flashpoint' for bluewashing risk.

With Australia's public and corporate engagement with the Voice referendum picking up pace, we also consider there will be particular scrutiny of companies' commitments to First Nations Peoples, including reconciliation action plans. Representations regarding companies' commitments to First Nations Peoples' rights, if not made on a reasonable basis, could become focal points for bluewashing claims.

In addition to Indigenous rights, we anticipate increased stakeholder pressure on companies to disclose accurately and remediate human rights abuses in their supply chains. As shown in our previous Insight, supply chain litigation is trending overseas and, with modern slavery in the spotlight in Australia following the publication in May of the review of the Modern Slavery Act 2018 (Cth), we anticipate increased stakeholder pressure on companies to disclose accurately and remediate human rights abuses in their supply chains.

Actions you can take now

• One of the initial steps in managing your bluewashing risk is to understand what may amount to bluewashing under applicable legal frameworks, and what exposure your company may have to regulatory enforcement, private action, or both.
• At the same time, staying silent about your social commitments or credentials is not the answer, both because consumers and investors often expect businesses to provide information about their sustainability and human rights credentials and because ASIC and other regulators may in some circumstances view this conduct as another form of misleading or deceptive conduct. Similarly, the trend in mandatory human rights-related disclosures means there may be no option to avoid making public statements in this area.
• Rather, companies would benefit from a strong set of controls around the making and monitoring of their social-related claims and commitments. When making claims and commitments, ensure that they are made on a reasonable basis, especially in the case of forward-looking statements. For practical guidance on environmental statements, see our 13 recommendations to mitigate risk in sustainability statements and greenwashing.
• Companies may also wish to consider where efficiencies might be gained from building out existing verification and due diligence systems – eg those in relation to anti-bribery, corruption and sanctions risks that could be applied to, for instance, a human rights context to assist with monitoring the continuing veracity of claims and commitments.
• Companies should also be mindful of the potential scope of their claims and commitments, and whether they are directed at their immediate operations or supply chain more broadly. Again, statements should be supported by robust due diligence practices – particularly when it comes to human rights matters, in light of the rise in allegations that companies have failed to carry out adequate due diligence to identify and address upstream and/or downstream human rights impacts. As noted in our recent Insight on the statutory review of the Australian Modern Slavery Act, some form of due diligence may become mandatory for companies in Australia following the recommendations of Professor McMillan AO.
• Consider involving subject matter experts (for instance, in relation to FPIC) to ensure that your legal team is across the 'S' domain of ESG.