There has been a marked increase in investor demand for, and the availability of, sustainability-related investment products the design of which takes into account environmental, social and governance (ESG) considerations. ASIC is concerned to ensure that issuers’ ESG claims match the reality.
The growth of ESG investing and greenwashing
A 2022 consumer study by Responsible Investment Association Australasia found that 83 per cent of Australians expect their superannuation or other investment products to be invested responsibly and ethically.1
However, the enthusiasm for responsible and ethical investment opportunities is accompanied by a healthy dose of skepticism concerning ESG claims that are made, with 72 per cent of Australians worried about the ‘greenwashing’ of investment products and 79 per cent of Australians demanding more transparency about the impacts of their investments.2
This has now attracted formal guidance from Australia’s securities regulator.
INFO 271: ASIC’s guidance on avoiding greenwashing
Following its review of a sample of superannuation and investment products, on 14 June 2022 the Australian Securities & Investments Commission (ASIC) issued an information sheet (INFO 271) aimed at responsible entities of managed funds, corporate directors of corporate collective investment vehicles, and trustees of registrable superannuation entities (Issuers) on how to avoid ‘greenwashing’.
Consistent with existing legislation and ASIC regulatory guidance, INFO 271 is designed to facilitate:3
- the use of clear labels;
- the defining of sustainability terminology used when offering and promoting sustainability-related products; and
- clear explanations of how sustainability considerations are factored into investment strategies.
ASIC defines ‘greenwashing’ as:
‘the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical.’4
INFO 271 comes in response to ASIC’s concerns about the disparity between ESG claims about financial products and the grounds on which those claims are based, and the threat this represents to investor confidence and trust in a fair and efficient financial system.
Misleading and deceptive statements and conduct
INFO 271 provides Issuers with a reminder of existing prohibitions against making a statement or disseminating information that is false or misleading, or engaging in dishonest, misleading or deceptive conduct, in relation to a financial product or financial service.
These prohibitions, found in the Corporations Act 2001 (Cth) (Corporations Act) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act), must be observed when preparing and making communications about sustainability-related products.
ASIC has warned that particular risks of breaching the prohibitions arise where representations are made about future matters without reasonable grounds.
INFO 271 gives examples of misleading or deceptive conduct, including:
- a fund name including sustainability-related terminology, despite sustainability-related factors not being significant in investment decision-making for that fund; and
- making a statement about achieving a certain carbon emissions target without reasonable grounds for making that statement.
Existing disclosure obligations
In addition to avoiding misleading or deceptive statements or conduct, Issuers have positive obligations with respect to the preparation and content of Product Disclosure Statements (PDS) for a sustainability-related product, which include the requirement under section 1013D(1) of the Corporations Act that a PDS must state the extent to which labour standards or environmental, social or ethical considerations are taken into account in the selection, retention or realisation of an investment.5 ASIC’s Regulatory Guide 65 Section 1013DA Disclosure Guidelines (RG 65) provides guidance on these obligations.
Examples of inadequate disclosure given by ASIC include where an Issuer:
- claims it is committed to making investments which have ‘positive impacts for its investors and the world’ and fails to disclose how it defines and achieves those ‘positive impacts’; and
- makes a statement that the Issuer does not invest in companies which earn a specified level of revenue from ‘non-ESG friendly’ sources but failing to disclose whether the ‘revenue’ referred to is the relevant companies’ gross or net revenue.
ASIC’s questions for Issuers when offering or promoting sustainability-related products
In INFO 271, ASIC outlines nine questions for Issuers to consider when preparing disclosures or communications in respect of sustainability-related products:6
1. Is your product true to label? The sustainability-related label of a product should reflect the substance of the product itself, including how sustainability-related factors impact the investment selection, retention or realisation process.
2. Have you used vague terminology? Broad, unsubstantiated statements and terms which are ambiguous or have different accepted meanings should be avoided unless clarifying information is provided. Sustainability-related terminology should be adequately explained.
3. Are your headline claims potentially misleading? Exceptions and qualifications should not be used to rectify a headline which would otherwise be misleading or be inconsistent with other content in a disclosure or communication. Referring investors to a website, webpage or document may not be sufficient to correct a misleading or deceiving impression created by a headline claim. The prominence of qualifications in a communication should reflect their importance.
4. Have you explained how sustainability-related factors are incorporated into investment decisions and stewardship activities? Has the methodology or policy for integrating sustainability-related considerations into investment decisions and stewardship activities been disclosed and clearly explained? Consider the content requirements for a PDS and under RG 65.
5. Have you explained your investment screening criteria? Are any of the screening criteria subject to any exceptions or qualifications? It should be clear whether a particular investment screening criterion applies only to certain product offerings and the proportion of the portfolio covered by the investment screen, or if it applies to the Issuer as a whole (that is, whether the criterion applies to both sustainability-related and non-sustainability-related products). Exceptions and qualifications should be prominently displayed and clearly explained.
6. Do you have any influence over the benchmark index for your sustainability-related product? If you do, is your level of influence accurately described? Issuers should disclose their level of influence over the composition of an index against which portfolio composition is determined or performance is measured, and their involvement in the development of an index’s underlying investment screens.
7. Have you explained how you use metrics related to sustainability? Issuers should disclose:
- the extent to which metrics are used to evaluate new or existing investments;
- the party who the metrics were developed by or sourced from;
- a description of the data and methodologies on which the metrics are based; and
- any risks or limitations from 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? Issuers should provide a clear explanation of any sustainability targets, how and when they will be met, how they will be measured, and any assumptions relied on when setting targets or measuring progress.
9. Is it easy for investors to locate and access relevant information? Investors must be provided with adequate, concise and clear information which is relevant, easy to locate, readily available, and consistent across all mediums (for example, social media platforms, annual financial reports and sustainability reports by the Issuer).
INFO 271 is not the end of ASIC’s work in respect of greenwashing. With the increasing frequency and importance of ESG-related claims, ASIC is continuing to monitor sustainability-related claims and disclosure practices in financial markets.7 Issuers should carefully consider the nine questions posed in INFO 271 to assess the overall impression of any sustainability-related representations and ensure they are not overstating the ESG impacts of their superannuation and investment products in contravention of relevant prohibitions. Issuers should also regularly check for regulatory developments, changes to disclosure obligations and standards and updates to INFO 271.
The days of “gilding the lily” with respect to ESG matters are well and truly over. ASIC’s new guidance calls for specific and substantiated disclosure with respect to ESG matters. It represents an opportunity for businesses to review and improve their current practices, and ensure their communications can be relied upon by consumers.
1 Banhalmi-Zakar, Z & Parker, E., Responsible Investment Association Australasia, ‘From Values to Riches 2022: Charting consumer demand for responsible investing in Australia’, 2022, page 8.
2 Banhalmi-Zakar, Z & Parker, E., Responsible Investment Association Australasia, ‘From Values to Riches 2022: Charting consumer demand for responsible investing in Australia’, 2022, page 11.
3 ASIC Media Release ‘22-141MR How to avoid ‘greenwashing’ for superannuation and managed funds’, 14 June 2022.
4 ASIC Information Sheet ‘INFO 271’, June 2022.
5 Corporations Act 2001 (Cth) section 1013D(1); Corporations Regulations 2001 (Cth) Schedules 10D(7), 10E(7) and 10F(7).
6 ASIC Information Sheet ‘INFO 271’, June 2022.
7 ASIC Media Release ‘22-141MR How to avoid ‘greenwashing’ for superannuation and managed funds’, 14 June 2022.