Financial regulator steps in to crack down on ‘greenwashing'

With a growing demand for socially responsible investments, the Australian Securities and Investment Commission (ASIC) has published advice to help firms avoid ‘greenwashing’ when offering or promoting sustainability-related financial products.

Fearful of the growing risk of investors being confused or misled, ASIC considers ‘greenwashing’ to be misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical.

According to ASIC, ‘greenwashing’ distorts relevant information that a current or prospective investor might require to make informed investment decisions, eroding investor confidence in the market for sustainability-related products and posing a threat to a fair and efficient financial system.

The advice follows a review conducted by the ASIC on a sample population of superannuation and investment products that identified areas for improvement, including making labels, sustainability terminology and investment strategy considerations more transparent.

“Managed funds and super funds are responding to the increasing investor demand for sustainability-focused investments. Investors are not only motivated by their values here, but also by long-term financial returns,” ASIC deputy chair Karen Chester said.

“Transparency and trust are paramount as the market for these products continues to develop and grow. In our region alone, sustainability-labelled investments have more than doubled between 2019 and 2021. While globally, ESG assets are projected to exceed US$53 trillion by 2025 and represent more than a third of total assets under management.”

Chester says the information sheet will help issuers comply with their existing regulatory obligations.

“Labels or headline statements about a product’s green credentials should not be misleading. Being ‘true to label’ is not a nice-to-have; it’s a regulatory must-have.

“It’s also a must-have for investor confidence and trust. And a must-have for both fair and efficient market outcomes here. Misdirected investment here will inevitably be at great economic cost.

“We have set out nine important questions for issuers to ask themselves. We would hope and indeed expect issuers to review their practices against our information sheet.”

The information sheet, aimed at those responsible for managed funds, corporate collective investment vehicles (CCIVs) and super funds, and other entities that offer or promote financial products, will assist those providing investors with the information required to make informed decisions.

“This is and will remain a priority area of focus. ASIC is continuing to monitor the market and will be looking for misleading claims about ESG and sustainability,” ASIC commissioner Sean Hughes said.

“We are also appealing to industry and investors to alert us if you see suspected greenwashing in financial products.”

Hughes encourages consumers to weigh-up investment options that suit their values and look out for vague or ambiguous language or exaggerated marketing claims that lack a reasonable basis.

“This is clearly an evolving area, which is attracting attention from investors, funds and policy-makers alike. ASIC will continue to monitor sustainability disclosure practices and will make changes to INFO 271 to ensure our information remains relevant, contemporaneous and useful,” Hughes added.

The guidance follows the International Sustainability Standards Board publishing its proposed standards on climate-related and general sustainability-related disclosures in March.

The ASIC has provided several examples to ensure its message is communicated appropriately, including:

• Example of a product that isn’t true to the label:

A sustainability-related product is labelled 'No Gambling Fund'. However, under its terms, the product may 'invest in companies that earn less than 30 per cent of their total revenue from gambling activities'.

• Example of vague terminology requiring further clarifying disclosures:

On its website, an issuer states that when making investment decisions, the issuer's investment managers will focus on sustainability-related factors that have 'a material financial impact on the investment'. The issuer does not clarify how it defines the concept of 'material financial impact'.

• Example of an inadequate explanation:

An issuer's disclosure states that it 'considers', 'integrates', or 'takes into account' sustainability-related factors when assessing new and existing investments, but does not explain how. This is unlikely to help investors understand the product's sustainability-related investment strategy. The issuer should explain clearly what these terms mean and use specific and clear language.