Australia: ESG investing – ASIC releases new greenwashing guidance

Investors are increasingly prioritising investments in financial products and services that have a demonstrated ESG capability. Issuers of retail investment products, such as managed funds and superannuation products (fund managers) seeking to capitalise on this trend must take care not to misrepresent the sustainability of the products and services they manage.

As outlined in our recent article 'Environmental, Social and Governance (ESG) explained: Five important considerations for companies and their lawyers', the ESG activities of companies and their directors are becoming increasingly scrutinised by investors, shareholders and corporate regulators, with the latter highlighting 'greenwashing' as a particular area of concern.

Consistent with that regulatory focus, the Australian Securities and Investments Commission (ASIC) last month published Information Sheet 271 (INFO 271) to provide guidance to responsible entities of managed funds, corporate directors of corporate collective investment vehicles and trustees of registrable superannuation entities in relation to communications they make about their sustainability-related products and how they can avoid greenwashing these offerings.

While INFO 271 primarily applies to fund managers, ASIC's guidance addresses the sorts of issues that are likely to be increasingly faced by corporate boards, in particular in the context of investor or shareholder action for misleading and deceptive conduct in relation to any sustainability-related goods or services offered. This article outlines the key areas of guidance in INFO 271.

Why is ASIC concerned about 'greenwashing'?

ASIC describes greenwashing as the practice of misrepresenting, in the context of funds management, the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical.

Sustainable investing is a growing area and it is predicted that ESG assets will exceed US$53 trillion by 2025. ASIC is cognisant of the trend towards greater sustainability investing by consumers and believes that there is a growing risk of greenwashing and investor deception. Ultimately, ASIC is concerned that greenwashing may inhibit investors from making informed investment decisions and that it may undermine market confidence for sustainability-related products. ASIC's concerns align with the trend towards increased legal action by investors against directors and companies for ESG failings, including those brought by sustainability-oriented shareholder action groups.

What is the current regulatory landscape for sustainability-related investments?

While there is no uniform 'ESG law' in Australia, fund managers should be aware of existing statutory requirements relating to the promotion or offer of sustainability-related products. These include prohibitions against misleading and deceptive statements and conduct and disclosure obligations, particularly for Product Disclosure Statements (PDS).

Misleading and deceptive statements and conduct

When offering or promoting sustainability-related products, fund managers need to be aware of the prohibitions in the Corporations Act 2001 (Cth) (Corporations Act) and the Australian Securities and Investments Act 2001 (Cth) (ASIC Act) against:

• making statements that are false or misleading
• disseminating information that is false or misleading
• engaging in dishonest, misleading or deceptive conduct in relation to a financial product or service
• making representations as to future matters without reasonable grounds.¹

Disclosure obligations

Fund managers should also be aware of the disclosure obligations that apply when offering a PDS for sustainability-related products. For example, under the Corporations Act, where a financial product has an investment component, the PDS must state the particular standards and/or considerations that apply, and the extent to which labour standards or environmental, social or ethical considerations are taken into account.²

Where sustainability-related products are issued under the shorter-form PDS regime, fund managers should still ensure that the shorter PDS summarises the labour standards, environmental and ethical considerations considered.³ Further, where a PDS claims that any labour standards or environmental, social or ethical standards or considerations are taken into account in selecting, retaining and realising an investment, the PDS must comply with ASIC guidelines.⁴

Questions to consider when offering or promoting sustainability-related products

ASIC provides nine questions for fund managers to consider to assist them in avoiding greenwashing when offering or promoting sustainability-related products. Many of the questions could also apply with some adaptation to all entities offering or promoting these products, and are otherwise insightful for investors operating in these markets.

1. Is your product true to label?

Any labels used to describe sustainability-related products should be truthful to what the offering actually involves. Labels for financial products should be consistent with any approach to stewardship or investment selection used by the fund manager. ASIC warns against using specific sustainability-related terminology or absolute terms in a product's label where such terms would be misleading. For example, ASIC considers that the label 'Social Investing Fund' would be misleading for a fund where sustainability-related considerations were not significant in the fund manager's decisions.

2. Have you used vague terminology?

Fund managers should be cautious when using technical terminology related to sustainability when making communications about their product offerings. Many technical ESG terms do not have a standard definition, and it is important that fund managers explain the terminology used in a PDS or other promotional material.

3. Are your headline claims potentially misleading?

Headline claims about sustainability-related products should not be misleading in of themselves. ASIC notes that any exceptions or qualifications to headline claims (for example, in smaller printed terms and conditions) may not be sufficient to remedy misleading representations.

Fund managers need to consider where qualifications and exceptions are placed in communication materials, whether exceptions and qualifications are inconsistent with other disclosures and whether qualifying statements made merely refer a prospective investor to another document. An example of a misleading headline claim would be where a fund issuer makes the headline claim "we do not invest in tobacco products" in circumstances where the fund only screens against companies which derive a threshold profit from tobacco. ASIC considers that because the headline claim is in absolute terms, additional qualifications or disclosures would not prevent the claim from being misleading.

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

Where funds utilise a methodology or policy for integrating sustainability-related considerations into the fund's management, such policies or methodologies should be clearly explained to investors. ASIC recommends, at a minimum, fund managers should give information about the sustainability-related considerations used and how they are accounted for in investment decisions. It would not be sufficient for a fund issuer to merely communicate that it 'considers' or 'integrates' sustainability-related factors when determining investments, without explaining how those factors are used. Any weighting of sustainability-related factors should also be explained.

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

ASIC advises that any screening criteria used should be adequately explained in promotional materials. This includes stating whether particular investment screens only apply for certain offerings, whether screens only apply to a certain percentage of the portfolio and whether there are any exceptions or qualifications to the screens, including whether thresholds are applied.

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

Fund managers that have influence over the composition of a particular index, where that index is used to determine the asset selection or performance of a product, should disclose that influence. It would be misleading for a fund manager to represent that a sustainability-related fund is passively managed when the manager has effective control over the fund's composition.

7. Have you explained how you use metrics related to sustainability?

ASIC advises that a number of additional disclosures should be made where sustainability-related metrics (like ESG scores) are used. These include disclosure of the sources of the metrics (whether they are proprietary to the fund manager or taken from third-party sources), a description of the underlying data for the metrics and any risks or limitations of using the metrics.

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

If products offered by a fund manager include the use of sustainability targets, fund managers should explain how and when the target is expected to be met, how progress against the target will be measured and any assumptions that were relied on when setting that target. A stated target of reaching net zero emissions would need to be supported with information about how and when that target is expected to be reached.

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

In order to comply with disclosure obligations, it is recommended that all information relevant to a sustainability-related product is easy to locate and readily available. This means that the communications of a fund manager should be consistent across all communications, including voluntary disclosures and on social media platforms. Fund managers should also be careful not to publish large volumes of information across different platforms, as this may not make the information more accessible for an investor.

Conclusion

Fund managers who offer sustainability-related products should give proper consideration to the nine questions posed by ASIC to minimise any risk of regulatory action for misleading and deceptive conduct or for not complying with disclosure requirements. Further, ASIC's guidance has broader application for other corporate entities seeking to mitigate against the risk of shareholder and investor action for any perceived greenwashing.

The regulatory and compliance environment for greenwashing and ESG risks is constantly evolving and it is likely that further regulator guidance, as well as legislative change, will be needed in the future.

FOotnotes

¹ Corporations Act sections 769C, 1041E, 1041G, 1041H; ASIC Act sections 12BB, 12DA and 12 DB.

² Corporations Act section 1013D(1) and Corporations Regulations 2001 (Cth), regulation 7.9.14C

³ Corporations Regulations 2001 (Cth) Sch 10D(7), 10E(7) and 10F(7).

⁴ Corporations Act section 1013DA. See also ASIC Regulatory Guide 65

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.