Exploitation of Indigenous businesses: a new form of greenwashing?

The concept of greenwashing is well known. But as environmental, social and governance (ESG) litigation and regulatory action continues to rise, and business disclosures are increasingly scrutinised by regulators, investors and consumers, other forms of social ‘washing’ are emerging, including what Supply Nation calls ‘black cladding’.

Like greenwashing, ‘black cladding’ is a form of misleading and unethical business conduct which involves a non-Indigenous business or individual taking unfair advantage of an Indigenous organisation or person to gain access to otherwise inaccessible opportunities through Indigenous procurement policies or programs.

Genuine engagement with Indigenous persons and organisations, either through procurement, employment or joint ventures, is a form of responsible business conduct which can deliver positive social outcomes for the Indigenous community. However, where engagement is not genuine, organisations can be said to be ‘black cladding’ and consequentially face reputational, operational and legal risks, as well as risk undermining the goals and progress of Indigenous procurement policies and responsible business conduct.

What is ‘black cladding’?

Supply Nation, Australia's leading database of verified Indigenous businesses, provides a useful (and generally accepted definition of) ‘black cladding’ as the practice of a non-Indigenous business entity or individual taking unfair advantage of an Indigenous business entity or individual for the purpose of gaining access to otherwise inaccessible Indigenous procurement policies or contracts.

As a recent National Indigenous Australians Agency’s Discussion Paper highlights, whether or not an organisation is engaged in ‘black cladding’ is not as simple as calculating ownership percentages.

Businesses also need to consider the following:

• ‘Figurehead ownership arrangements’ i.e. where an Indigenous person is used to promote a business but is not involved in its ongoing management and work;
  
  
• Indigenous owners not being actively involved or included in decision-making;
  
  
• Indigenous owners obtaining unequal or unfair financial returns from business involvement;
  
  
• not being upfront about sub-contracting arrangements;
  
  
• low rates of Indigenous employment; and
  
  
• poor legal, governance, commercial and financial arrangements.

How can businesses be at risk of engaging in ‘black cladding’?

Businesses are at risk of ‘black cladding’ if they falsely represent to be Indigenous-owned and led or positively engaged with the Indigenous community in order to access Indigenous procurement opportunities or gain some kind of business advantage.

The most likely way this risk could materialise is where:

• a business represents (either directly or indirectly) during a tender process, in its marking materials or on its website, that it is Indigenous-owned and led (including by marketing third-party certifications like Supply Nation’s) and/or that it supports the Indigenous community, for example by employing a certain percentage of Indigenous people or procuring from Indigenous businesses; and
  
  
• the business does not have the required governance or contractual arrangements or does not otherwise carry out business activities in a manner that genuinely reflects the level of Indigenous ownership, management or positive engagement with Indigenous stakeholders which is represented.

Supply Nation recognises two levels of Indigenous ownership – registration and certification. Registration of an Indigenous organisation requires 50% or more Indigenous ownership, whereas to be certified, an organisation needs to have 51% or more Indigenous ownership, management and control. Slightly different requirements apply for the registration and certification of joint ventures between Indigenous and non-Indigenous organisations.

A business that markets itself as having a Supply Nation registration or certification may engage in ‘black cladding’ if it does not in fact meet the relevant requirements on an ongoing basis but promotes that registration or certification in order to gain access to otherwise inaccessible Indigenous procurement policies or contracts. For example, a Supply Nation certified business accessing those opportunities should ensure it is managed and controlled by Aboriginal and/or Torres Strait Islander people in practice. Similarly, a Supply Nation certified joint venture should ensure that it is in real and practical terms led / managed by a Principal Executive Officer who is an Aboriginal and/or Torres Strait Islander person and that key business decisions are made by an Aboriginal and/or Torres Strait Islander person or persons.

The South Australian Independent Commission Against Corruption has also identified the practice of a non-Indigenous business including an Indigenous supplier in a bid for a public contract, but then not allocating the work to the Indigenous supplier or misrepresenting labour hours performed by Indigenous workers as an example of ‘black cladding’, as well as a ‘red flag’ of potential corruption in public sector procurement.

Engaging in ‘black cladding’ could expose a business to reputational, operational, and legal risks.

What are the legal and other risks associated with ‘black cladding’?

‘Black cladding’ gives rise to similar legal and other risks as greenwashing. These include:

• damage to reputation and goodwill;
  
  
• breaches of misleading and deceptive conduct laws;
  
  
• breaches of contract; and
  
  
• possible criminal offences (e.g. the offence of intention to defraud by false or misleading statement).

In 2024, the Australian Securities and Investments Commission (ASIC) has maintained its enduring priority to address misconduct impacting Indigenous peoples. We can therefore expect to see attention on ‘black cladding’ from both regulators and stakeholders.

Indeed, ASIC successfully brought action against the funeral insurance provider ACBF Funeral Plans Pty Ltd (ACBF) for misrepresenting that it was Indigenous-owned or managed. ACBF sold funeral expenses insurance policies primarily to Indigenous customers. ASIC filed proceedings in the Federal Court in October 2020 alleging four misrepresentations by ACBF, including that ACBF was owned or managed by an Indigenous person or persons.

In relation to the representation about Indigenous ownership and management, the primary judge found that ACBF had in fact made an implied representation that it was owned or managed by an Indigenous person or persons. The marketing material and point of sale documentation were said to overwhelmingly convey that ACBF was an Indigenous company, and thus impliedly that it was owned and / or managed by Indigenous persons. This included:

• the use of imagery and colours associated with the Indigenous community;
  
  
• the phrase ‘Aboriginal Community’ in the name of the policy;
  
  
• the logos, which incorporated imagery and colours associated with Indigenous persons; and
  
  
• promotional statements such as that the policy was Australia’s only funeral plan dedicated to the Indigenous community.

Notably, the primary judge found the representation was conveyed despite the presence of a disclaimer ‘ACBF is a private company which is not connected with or sponsored by any governmental or similar body or Aboriginal organisation’. Even ACBF’s subsequent disclaimer ‘we are not an Aboriginal company’ was considered insufficient to detract from the ‘overall impression’ that ACBF was owned or managed by Indigenous Australians. Despite this, the primary judge found that ASIC had not put on sufficient evidence to establish that ACBF or the ACBF Group were not in fact owned or managed by Indigenous people during the relevant period. On appeal, the Full Court of the Federal Court found that ACBF had misrepresented that it was Indigenous owned or managed and remitted the case to the primary judge to consider penalties.

Misrepresenting or undermining third-party certifications could also give rise to misleading or deceptive conduct risk. The Australian Competition and Consumer Commission has said (in the context of environmental claims) that businesses relying on a third-party certification to provide credibility to a claim should ensure that they are not creating a false or misleading impression about what the certification means or does. It is therefore possible to see how a business’s reliance on third-party certification of Indigenous ownership or management, without establishing the proper management and governance mechanisms to meet and/or maintain the eligibility criteria, could lead to misleading or deceptive conduct.

Key takeaways

Businesses making claims in relation to the Indigenous ownership, management or engagement of their business, including their supply chain, must ensure they have a reasonable and genuine basis for making these claims, as well as robust mechanisms and structures in place to reflect the representations being made.

Key actions for organisations to consider include the following:

1. Non-Indigenous businesses that do business with, or market products to, Indigenous Australians should review their marketing materials and public statements to ensure they are not directly or indirectly making a false claim that they are Indigenous owned or managed. As the ACBF case illustrates, such claims can be indirectly conveyed through imagery, logos and references to the Indigenous community.
   
   
2. Businesses with Supply Nation or other third-party certification or registration should audit their marketing materials and public statements to ensure they are not misrepresenting what the certification means or does and regularly audit their corporate structure and contractual arrangements to ensure they continue to meet the relevant certification criteria.
   
   
3. Businesses looking to acquire or enter into a joint venture with an Indigenous business, or use an Indigenous business within their supply chain, should take reasonable steps to ensure that it is genuinely owned or managed by an Indigenous person or persons, and implement appropriate controls to protect and promote indigenous ownership and management going forward.

Clearly, the concept of an organisation being “managed” by a person or group is not a term of art – in any commercial arrangement between Indigenous and non-Indigenous stakeholders pursuing a business opportunity there are likely to be nuances that reflect the different roles and contributions each stakeholder provides.

The question of whether ‘black cladding’ is occurring should, however, be tested against the substance of the arrangements (that is, how they are implemented in practice) and not the form of legal or contractual relationships established.