Insights

ASIC issues new guidance on greenwashing

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In June, the Australian Securities & Investments Commission (ASIC) released new guidance urging managed and superannuation funds to consider whether their sustainability-related products are at risk of greenwashing.

The announcement follows increased scrutiny from regulators in response to a dramatic increase in ESG assets, which are expected to exceed US $53 trillion globally and represent more than a third of total assets under management by 2025.1

What is greenwashing?

ASIC defines greenwashing as "the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical".

Why is greenwashing problematic?

Greenwashing is considered problematic as it distorts and potentially misleads an investor's ability to make an informed investment decision.

ASIC is seeking to prevent unsupported sustainability-related claims by reaffirming the requirement for managed and superannuation funds to comply with existing legal obligations and by providing managed and superannuation funds with a practical framework to improve the quality of disclosures.

ASIC's guidance outlines:

  • the current regulatory setting for sustainability-related disclosures; and
  • questions for investment managers to improve sustainability-related disclosures.

Recapping the existing regulations

It is important to note that ASIC's guidance (INFO 271) does not amend existing regulations in relation to financial disclosures, and no new regulations have been introduced.

The principal regulations governing conduct are set out in The Corporations Act 2001 and the Australian Securities and Investments Commission Act 2001, which prohibit false and misleading statements, and engaging in misleading or deceptive conduct in relation to a financial product.2

Applied to sustainability-related products, this means that a claim about a fund's investments achieving net-zero emissions by a particular date must be reasonably supported to avoid being misleading.

For instance, section 1013D(1)(l) of the Corporations Act requires that a Product Disclosure Statement (PDS), which accompanies a recommended financial product, specifies the extent to which labour standards or environment, social or ethical considerations are taken into account in selecting, retaining or realising the investment. This requirement applies to both the long-form and short-form disclosure statements.3

How to avoid greenwashing

While there is an existing regulatory framework to prohibit greenwashing, increased emphasis on sustainability in marketing investment products could put managed and superannuation funds at risk of incompliance if they are unable to justify their "green" label.

In reinforcing funds' obligations, ASIC's guidance promotes two central themes:

  • truth in promotion - using clear labels and well-defined terms; and
  • clarity in communication - providing clear explanations of how sustainability-related considerations are factored into investment strategies.

ASIC expects managed and superannuation funds to review their current sustainability-related disclosure practices against the following nine questions.

Question

Guidance

1. Is your product true to label?

  • Ensure that the investment policy of a particular fund or other financial product accurately reflects the label and the purpose of the product.
  • Treat this requirement as a "must-have" rather than a "nice-to-have".

2. Have you used vague terminology?

  • Sustainability-related terminology is not standardised; broad terms mean different things to different people (for example 'responsible investing, 'ethical investing' and 'impact investing').
  • Avoid using unsubstantiated statements and clearly explain what a term means.

3. Are your headline claims potentially misleading?

  • Headline claims such as 'we do not invest in tobacco products' do not always need to include all necessary information. However, ensure you use qualifications and exceptions to appropriately balance a headline claim to ensure there is no inconsistency.
  • Important qualifications should be prominently placed in the disclosure statement.

4. Have you explained how sustainability-related factors are incorporated into investment decisions and stewardship activities?

  • It is not enough to merely state the considerations. Investors must be informed about how the considerations are applied.
  • Investment strategies using negative and positive screening or sustainability weightings should detail how these factors are considered and applied before making investment decisions.

5. Have you explained your investment screening criteria? Are any of the screening criteria subject to exceptions or qualifications?

  • Provide adequate, relevant and specific information regarding screening exceptions or qualifications (including threshold-based screens).
  • Clearly explain the parameters within which an investment screen is applied (for example, to a certain product only or all products offered by the issuer) and disclose the percentage of a portfolio covered by the screen, if it is not 100%.

6. Do you have influence over the benchmark index for your sustainability-related product? If you do, is your level of influence accurately described?

  • Ensure any active management over the investment decision-making process is not incorrectly categorised as passive management.
  • The extent of influence over both the composition of, and any adjustments to, the benchmark index must be properly disclosed.

7. Have you explained how metrics related to sustainability are used?

  • Explain the extent to which the metrics are used to evaluate the investments.
  • Ensure that the sources of the metrics themselves (for example, the issuer's own methods or a third-party's methods) are adequately disclosed, including any risks or limitations arising from reliance on the metrics.

8. Do you have reasonable grounds for a stated sustainability target? Have you explained how this target will be measured and achieved?

  • Explain what the target is and how it will be met, including any assumptions relied on when setting the target or measuring progress.
  • Explain how progress will be measured so an investor has the information necessary to assess progress of a sustainability target.

9. Is it easy for investors to locate and access relevant information?

  • Ensure that information is consistent across all regulatory and financial documentation (including on social media platforms) and that it is easy to locate.
  • Avoid dispersing significant amounts of information across too many platforms and documents.

Where to from here?

ASIC has confirmed that greenwashing "will remain a priority area of focus" - a clear warning that it will not accept the misleading of investors in relation to sustainable investments.

This sentiment was echoed by Australian Prudential Regulation Authority (APRA) and the Australian Competition and Consumer Commission (ACCC) at the Australian Financial Review's ESG Summit in June, making it clear that Australia's corporate regulators are watching this space closely.

For more information about disclosure and other compliance obligations for managed and superannuation funds contact Lander & Rogers' Corporate legal team.

Photo by Danist Soh on Unsplash




1 Bloomberg: ESG assets may hit $53 trillion by 2025, a third of global AUM, 23 Feb 2022
2 For prohibitions against misleading and deceptive conduct, see sections 1041E, 1041G and 1041H of the Corporations Act, and sections 12DA and 12DB of the ASIC Act.
3 See ASIC Regulation Guide 65 for further information.

All information on this site is of a general nature only and is not intended to be relied upon as, nor to be a substitute for, specific legal professional advice. No responsibility for the loss occasioned to any person acting on or refraining from action as a result of any material published can be accepted.

Authors

Shira  Appelboom

Shira Appelboom

Lawyer

Key contacts

David Tink

Special Counsel