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Greenwashing: 9 Questions to Help Issuers Air Out their Dirty Laundry!

BACKGROUND

The Australian Securities and Investments Commission (ASIC) has recognised there is rising demand for environmentally friendly, sustainable or ethical investment options from investors in Australia, particularly those in a younger demographic.

There is increasing global unease about the risks of greenwashing of financial products, which may be partly driven by a lack of clarity about labelling or a single generally accepted taxonomy in this area. This has been recognised by international regulators as well as the International Organization of Securities Commissions, which has established a Sustainable Finance Task Force that covers greenwashing and other investor protection concerns (including ASIC as a participant).

The European Union recently adopted a legal framework introducing a taxonomy seeking to define which investments or economic activities can be considered sustainable or climate friendly. The US Securities and Exchange Commission has also announced a task force to identify gaps or misstatements in environmental, social and governance (ESG) disclosures, as well as compliance issues relating to the ESG strategies of funds.

It is in this context that ASIC has issued a new information sheet – (INFO 271)  How to avoid greenwashing when offering or promoting sustainability-related products. INFO 271 Is directed at issuers (i.e., responsible entities of managed funds, corporate directors of corporate collective investment vehicles (CCIVs), and trustees of registrable superannuation entities).

Interestingly, while INFO 271 focusses on sustainability-related products issued by funds, ASIC notes its principles may be applicable to other entities that offer/promote financial products that consider sustainability-related considerations, such as listed companies or entities issuing green bonds.

WHAT IS ‘GREENWASHING’, AND WHY IS IT AN ISSUE?

In INFO 271, ASIC defines greenwashing in relation to investments as “the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical”. 

ASIC believes greenwashing distorts relevant information that a current or prospective investor might require to make informed investment decisions. ASIC believes it can erode investor confidence in the market for sustainability-related products and poses a threat to a fair and efficient financial system.

CURRENT REGULATORY FRAMEWORK AND APPLICABILITY TO GREENWASHING

The Corporations Act 2001 (Corporations Act) and the Australian Securities and Investments Commission Act 2001 (ASIC Act) contain general prohibitions against a person making statements (or disseminating information) that are false or misleading, or engaging in dishonest, misleading or deceptive conduct in relation to a financial product or financial service.

ASIC expressly reminds issuers of the need to comply with these existing prohibitions when promoting sustainability related products, and specifically notes the particular risks associated with representations made about future matters unsupported by reasonable grounds.  ASIC notes that whether a particular statement or conduct is misleading or deceptive will depend on all of the circumstances of the particular case, and the overall impression created for an investor.

To help improve the quality of disclosure, ASIC recognises the recommendations by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) and encourages voluntary disclosure that is in accordance with the TCFD framework.

9 QUESTIONS FOR ISSUERS TO CONSIDER

To reduce the risk of greenwashing and avoid misleading or deceptive greenwashing practices, INFO 271 provides a list of nine key questions (together with illustrative examples) which issuers should consider when preparing communications about sustainability-related products. 

The 9 questions are designed to facilitate ‘truth in promotion’ by using clear labels and defining sustainability-related terminology.  In addition, the 9 questions facilitate ‘clarity in communication’ by providing clear explanations of how sustainability-related considerations are factored into investment strategies.

 

Question

Comment and Information

Example(s) Provided

1.  Is the product ‘true to label’?

Financial product labels guide investors about what they will be investing in, and investors have commensurate expectations about a product’s label to align with the underlying investment strategy.

Given the lack of standardised labelling for sustainability-related products, issuers need to exercise particular care to ensure that the product labels they use are not misleading.  ASIC emphasises that issuers should “think carefully about using absolute terms in a product label”.

ASIC provides examples ranging from the straightforward to the more nuanced.

For the former, labelling a product as a “No Gambling Fund” where, under its terms, the product may nonetheless invest in companies that earn less than a certain percentage of their revenue from gambling activities (e.g., less than 30%), is an example of not being ‘true to label’. 

For the latter more nuanced example, ASIC references a “Social Investing Fund” which balances different factors when considering an investment, including social matters such as labour practices and gender targets.  However, in practice, the sustainability-related considerations (i.e., the social matters) are not significant in the manager’s investment decisions.  This, in ASIC’s view, is also an example of not ‘true to label’.

In addition, ASIC provides an example where a sustainability-related product is labelled as the “Stewardship Equity Fund”.  However, the issuer is not actively involved in stewardship activities.  This is also not ‘true to label’.

2.  Does the issuer use ‘vague terminology’?

Issuers should avoid using broad, unsubstantiated sustainability-related statements or ‘jargon’ without providing clarifying information.  Therefore, sustainability-related terminology (including in a product label) should be adequately explained in the PDS or other promotional material.

In this regard, ASIC noted that terms such as ‘socially responsible’ or ‘ethical investing’ or ‘impact investing’ can mean different things to different people and can vary across products or issuers. 

ASIC provided the following examples of vague terminology requiring further clarifying disclosures:

  • Commitments or disclosure such as “contributing towards positive impacts for investors and the world” will require issuers to also elaborate and disclose what it considers to be “positive impacts for its investors and the world” or how its investments contribute to those stated outcomes.
  • Statements relating to an issuer’s investment managers focusing on sustainability-related factors that have “a material financial impact on investments” will require the issuer to also clarify how it defines the concept of “material financial impact”.

3.  Are ‘headline claims’ potentially misleading?

If an issuer’s communications or disclosures contain a headline claim about sustainability-related matters, the headline claim should not itself be misleading and exceptions and qualifications should not be used to rectify an otherwise misleading impression. 

If exceptions and qualifications are required, they should not be inconsistent with other content in the disclosures, including any headline claims.  Also, the more that a qualification is required to balance the information contained in the headline claim, the more prominently placed the qualification should be.

ASIC suggests that promotional statements that are designed to be read as headline claims in absolute terms – are unlikely able to be rectified by further disclosure.

For example, if an issuer makes a headline claim in its promotional statements that it does “not invest in tobacco products” (however, the issuer under the relevant terms of the product is allowed to invest in companies involved in the manufacture, sale and distribution of tobacco products under certain circumstances), then the headline claim is likely to be misleading (and unable to be rectified by further disclosure).

4.  Has the issuer explained how sustainability-related factors are incorporated into investment decisions and stewardship activities?

Issuers should disclose and clearly explain their methodology or policy for integrating sustainability-related considerations into investment decisions and stewardship activities.

Where a weighting system is used to evaluate certain sustainability-related considerations and/or to prioritise certain sustainability-related considerations over others, issuers must consider whether to provide a description of the weighting system (in order to better inform a retail investor’s decision to acquire the sustainability-related product).  This includes providing a description on how the weighting system or approach is applied by the issuer’s investment managers. 

In addition, when describing the issuer’s stewardship approach, an issuer should be careful to not overstate the level of influence they have over the companies targeted or selected by the issuer.

ASIC provides an example where an issuer’s disclosure states that it ‘considers’, ‘integrates’ or ‘takes into account’ sustainability-related factors when assessing new and existing investments.  Here, the issuer would need to explain clearly what these terms mean and use specific and clear language  to help investors understand the product’s sustainability-related investment strategy.

5.  Has the issuer explained investment screening criteria? Are any criteria subject to exceptions or qualifications?

Disclosures should enable investors to fully understand the product’s sustainability-related investment screening criteria.  It should be clear whether the particular investment screen applies only to a certain product offering or to the issuer as a whole.

Where a screen applies to part of the portfolio, the percentage covered by the screen should be disclosed.  Any screening exceptions or qualifications, including thresholds, should also be disclosed.

ASIC expects issuers to provide enough information to enable investors to understand any screen exceptions or qualifications. 

ASIC provides two examples in INFO 271 to demonstrate inadequate disclosure regarding sustainability-related investment screens:

  • The first example covers an issuer making the following promotional statement about its sustainability-related product: “We target investments in companies that have robust plans to manage cybersecurity and data privacy risks (depending on the nature of their business)”.  However, the issuer's terms state that this screen only applies in relation to technology companies.  In this example, ASIC is of the view that this qualification has not been prominently disclosed in the respective communications and disclosures.
  • The second example covers a circumstance where a sustainability-related product applies a revenue-based exclusionary screen that excludes investments in companies earning “more than 10% of their revenue from providing palm oil as an input ingredient”.  In these circumstances, ASIC would generally expect the issuer to disclose what 'revenue' means in this context (for example, whether 'revenue' refers to a company's gross or net revenue, or whether this is based on revenue as reported by the company in its audited financial statements).

6.  Is the issuer's level of influence over the benchmark index for the sustainability-related product clearly and accurately explained? 

If issuers are able to influence the composition of an index against which portfolio composition is determined or performance is measured, then they should disclose their level of influence. 

 

 

In addition, if an issuer has in substance some degree of active management over an investment decision-making process (for example, as a result of its ability to influence the composition of a benchmark index), then it should not state that the process is passively managed. 

 

In relation to the first point, ASIC states that, for example, an issuer should disclose if it has any influence over the investment screens applied by the index provider when constructing the index.  Otherwise, investors may be misled to believe that the product issuer has little or no involvement in the development of the product's underlying investment screens when the issuer actually has some involvement.

In relation to the second point, ASIC provides the following example:  A sustainability-related product adopts a passive investment strategy by tracking a combination of sustainability-related indexes administered by third-party index providers.  However, the PDS does not disclose that the product issuer has active input on any adjustments to the negative or exclusionary screens applied to the underlying indexes. 

In ASIC’s view, this example shows an issuer failing to disclose relevant influence over the composition of a benchmark index.

7.  Has the issuer explained how it uses metrics related to sustainability?

If issuers rely on sustainability-related metrics (such as ESG scores) to assess whether an investment aligns with their products stated objective/strategy, then issuers should disclose the following:

  • The extent to which the metrics are used to evaluate new and existing investments in implementing the investment objective or strategy.
  • The sources of the sustainability-related metrics, including whether these are based on proprietary methodologies or from certain third-party providers.
  • A description of the underlying data used to calculate the sustainability-related metrics, as well as the calculation methodologies for those metrics.
  • Any limitations arising from reliance on the metrics (where applicable).

See ASIC’s guidance on applicable disclosure relating to sustainability-related metrics in the previous column.

8. Are there ‘reasonable grounds’ for stated sustainability targets?  Has it been explained how this target will be measured and achieved?

ASIC expects that where products have a certain sustainability target, issuers should explain the following:

  • What the target is.
  • How and when the issuer expects to meet the target.
  • How it will measure progress or milestones.
  • Any assumptions the issuer has relied on when setting that target or when measuring progress.

Where an issuer has adopted a stewardship investment approach to achieve its target, then issuers should:

  • explain the rationale for engaging with particular companies to influence changes in their corporate behaviour; and
  • provide regular updates on their progress with those companies, including stewardship activities and outcomes, such as voting and engagement activities.

ASIC provides an example where an issuer prominently states on its website that it is committed to reaching net zero carbon emissions across all of its investment portfolios.  However, the issuer does not provide investors with information about how and when it expects to achieve this target.  Instead, the issuer has only made a general statement in its latest annual report that the issuer remains committed to “driving real positive changes for our environment”.  ASIC views that this level of disclosure does not provide investors with adequate information about the issuer's strategy or progress towards achieving its 'net zero' objective.  Accordingly, this is an example of a failure to disclose how and when an issuer expects to meet a sustainability target.

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

 

ASIC reiterates that when an issuer offers a financial product to a retail investor, the general disclosure obligations for a PDS apply to any offer of financial products to those investors.  Consistent with these requirements, the issuer should provide investors with adequate information that is concise and clear enough for investors to understand the sustainability-related considerations incorporated into the product being offered.

This information should be consistent across all mediums' including regulatory documentation, voluntary disclosures (e.g., sustainability reports by the issuer) and social media platforms. 

ASIC emphasises that where an issuer's approach to investing is guided by third-party frameworks (e.g., UN Sustainable Development Goals or the UN Principles for Responsible Investment), issuers to disclose of this fact.

In this regard, ASIC states that issuers should ensure that all information that they publish that is relevant to a retail investor's (or their adviser's) investment decision regarding a particular sustainability-related product is easy to locate and readily available, particularly when this information is made available through their website.

 

Issuers should also be conscious that providing significant volumes of sustainability-related information in numerous online documents and/or dispersed across various platforms may not be particularly helpful for an investor deciding whether to invest in the issuers’ sustainability-related product.

 

GREENWASHING IS A CURRENT FOCUS AREA FOR REGULATORS

ASIC has observed that greenwashing 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. 

ESG assets are growing at a rapid rate.  ASIC have noted that, in our region alone, sustainability labelled investments have more than doubled between 2019 and 2021, and, globally ESG assets are projected to exceed US$53 trillion by 2025 (which represent more than a third of total assets under management).  In this regard, transparency and trust are paramount as the market for these products continues to develop and grow. Accordingly, the issue of greenwashing will be a relevant consideration for Australian regulators, not only for ASIC but also for the Australian Prudential Regulation Authority (APRA) and the Australian Competition and Consumer Commission (ACCC).  This means there will likely be increased regulatory focus and engagement in relation to ESG in general, and greenwashing in particular.

It is worth noting the ‘true to label’ aspect referenced in INFO 271 is in line with ASIC’s current focus on this area, as evidenced by its recent (and continuing) surveillance into the marketing of managed funds, to identify the use of misleading performance and risk representations in promotional material.  For further information, please see our article ASIC scrutinizes marketing of managed fund performance and risk.

HOW WE CAN ASSIST

Issuers will need to comply with existing requirements when promoting or offering sustainability-related products.  Such requirements include the prohibitions against misleading and deceptive statements and conduct, as well as disclosure obligations.  Accordingly, issuers will need to carefully assess the terms of its products and relevant disclosure to ensure that it is not engaging in ‘greenwashing’ that results in consumer harm. 

We can assist issuers to ensure that any disclosure (provided in relation to products) matches what it is actually doing.  We can also assist in ensuring that issuers meet their obligations under the various requirements to disclose how ESG considerations are taken into account in investment decision making.  In this regard, it is important to note the following, amongst other requirements:

  • The Corporations Act and the ASIC Act contain general prohibitions against a person making statements (or disseminating information) that are false or misleading, or engaging in dishonest, misleading or deceptive conduct in relation to a financial product or financial service. For example, see requirements in sections 1041E, 1041G and 1041H of the Corporations Act, and sections 12DA and 12DB of the ASIC Act.
  • Risks of breaching the misleading statement prohibitions may arise in relation to representations made about future matters that are not supported with reasonable grounds (see requirements in section 769C of the Corporations Act and section 12BB of the ASIC Act).
  • Disclosure obligations include section 1013D(1)(l) of the Corporations Act (which states that where a financial product has an investment component, its issuer must include in the PDS the extent to which labour standards or environmental, social or ethical considerations are taken into account in selecting, retaining or realising an investment).  In addition, it is important to consider the guidelines contained in Regulatory Guide 65: Section 1013DA disclosure guidelines.
  • For shorter PDSs:
    • See also Schedules 10D(7), 10E(7) and 10F(7) of the Corporations Regulations -which sets out the content requirements for shorter PDSs, in particular, the extent to which labour standards or environmental or ethical considerations are taken into account in selecting, retaining or realising investments relating to the product.
    • See also INFO 155 - Shorter PDSs: Complying with requirements for superannuation products and simple managed investment schemes.

 


For more information, please contact Brendan Ivers, Erik Setio and James Crinion.