The questions to ask when offering or promoting sustainability-related products 10 min read
Greenwashing in the promotion of managed investment and superannuation funds is one of ASIC's current corporate governance priorities as it continues to 'monitor the market … looking for misleading claims about ESG and sustainability'. This, combined with the rise in greenwashing claims from environmental NGOs and class action plaintiffs, makes it critical that funds and financial product promoters understand how best to comply with their regulatory obligations when responding to market demand for sustainability-related products. ASIC's new Information Sheet 271: 'How to avoid greenwashing when offering or promoting sustainability-related products' provides some timely and clear guidance on this important topic.
- ASIC has released Information Sheet 271 'How to avoid greenwashing when offering or promoting sustainability-related products'.
- It follows ASIC's 'greenwashing' review of a sample of superannuation and investment products, in which it identified 'some areas of improvement', such as the need to use clear labels, define sustainability terminology, and clearly explain how sustainability considerations are factored into investment strategies.
- Information Sheet 271 defines greenwashing, and sets out the existing regulatory obligations that apply to disclosure and promotion of sustainability-related products, including prohibitions against misleading and deceptive statements, and conduct and disclosure obligations.
- ASIC's guidance also sets out nine questions to consider when offering or promoting sustainability-related products. Consistent with Regulatory Guide 65: 'Section 1013DA Disclosure Guidelines', these questions are designed to facilitate truth in promotion and clarity in communication.
- Regulatory scrutiny of sustainability-related product disclosure is increasing globally. Legal risk is also on the rise. Superannuation and managed funds must understand how their existing regulatory obligations apply to sustainability-related products.
Information Sheet 271 is for responsible entities of managed funds, corporate directors of corporate collective investment vehicles and trustees of registrable superannuation entities. It also says its principles may apply to other entities that offer or promote financial products that take into account sustainability-related considerations.
Send this to your legal, compliance and marketing teams, particularly anyone who is drafting and verifying disclosure documents and/or responsible for the promotion of sustainability-related products (including on social media).
ESG assets more than doubled between 2019 and 2022, and are projected to exceed US$53 trillion by 2025.1 Much of the asset flow has come from retail investors wanting to make 'a positive difference to the planet and society'.2
Accordingly, the impetus for 'greenwashing' is coming from increased regulatory focus and increased awareness of and concern for the environment, and sustainable or ethical practices (particularly after COP 26 and the ongoing findings of the Intergovernmental Panel on Climate Change).3
So, what is 'greenwashing'? In relation to investment products, ASIC defines it to mean: 'the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical'.4
ASIC considers greenwashing a concern because:
- it distorts relevant information that a current or prospective investor might require in order to make informed investment decisions;
- it can erode investor confidence in the market for sustainability-related products; and
- it poses a threat to a fair and efficient financial system.5
The law has not changed — existing regulatory obligations apply.
Prohibitions against misleading or deceptive statements and conduct
Under the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth), superannuation and managed funds are prohibited from making statements that are false or misleading, or from engaging in dishonest, misleading or deceptive conduct in relation to a financial product or financial services.6
Particular risks arise in relation to representations about future matters that aren't supported by reasonable grounds. Such a representation may be deemed to be misleading if a fund doesn't have reasonable grounds for making it.7
'If you stated that you will achieve a certain carbon emissions target (such as net zero carbon emissions) by a particular date, this may amount to a representation about a future matter. Such a representation may be deemed to be misleading if you do not have reasonable grounds for making the representation.'
– ASIC Information Sheet 271
When preparing a product disclosure statement for a sustainability-related product, superannuation and managed funds must comply with the general disclosure obligations that apply to financial products, including sustainability-related products. These obligations include:
- s1013D(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. Some sustainability-related products may be subject to the shorter PDS regime; however, they must still describe, in summary, the extent to which labour standards or environmental or ethical considerations are taken into account;8 and
- the guidelines in Regulatory Guide 65.
After COP 26, ASIC announced that it welcomed 'the establishment of the International Sustainability Standards Board [the ISSB] and is supportive of its objectives', saying that it supports the ISSB giving priority to a standard on climate-related disclosures.9
Information Sheet 271 notes that, in March 2022, the ISSB published proposed standards on climate-related disclosures and general sustainability-related disclosures.10
Information Sheet 271 sets out nine questions superannuation and managed funds should consider when preparing communications and disclosures about sustainability-related products. ASIC's guidance (summarised below) also includes several hypothetical examples of misleading ESG claims in connection with investment products.
- Is your product true to its label?
The sustainability-related label of a product must reflect the substance of the product itself. You risk being misleading if your product's name includes sustainability-related terminology but sustainability-related factors aren't significant in the investment selection process. You should also think carefully about using absolute terms in a product label.
- Have you used vague terminology?
Avoid using broad, unsubstantiated sustainability-related statements or 'jargon' without providing clarifying information. When using sustainability-related terminology to describe a product (including in a sustainability-related product label), take care to adequately explain such terminology in the PDS and other promotional material.
- Are your headline claims potentially misleading?
Any headline claim about sustainability-related matters 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.
- Have you explained how sustainability-related factors are incorporated into investment decisions and stewardship activities?
Your methodology or policy for integrating sustainability-related considerations into investment decisions and stewardship activities should be disclosed and clearly explained. You should also be mindful of the content requirements under s1013D (or equivalent provisions under the shorter PDS regime). When describing your stewardship approach, you should be careful not to overstate the degree of influence you could reasonably have in relation to the companies you have selected for engagement.
- Have you explained your investment screening criteria? Are any of the screening criteria subject to any exceptions or qualifications?
Avoid the use of broad promotional statements to describe investment screens. Disclosures should enable investors to fully understand the product's sustainability-related investment screening criteria. Adequate relevant information should be provided so that investors can understand any screening exceptions or qualifications (including threshold-based screens). This includes explaining any terms used in the screens or thresholds that may be vague, ambiguous or have different accepted definitions.
- Do you have any influence over the benchmark index for your sustainability-related product? If you do, is your level of influence accurately described?
Where you can influence the composition of an index against which portfolio composition is determined or performance is measured, you should disclose your level of influence. An issuer of sustainability-related products shouldn't state that it is passively managed when, in substance, it has a degree of active management over the investment decision-making process.
- Have you explained how you use metrics related to sustainability?
You may rely on sustainability-related metrics (such as ESG scores) to evaluate whether a new or existing investment aligns with a particular product's investment objective or strategy. Where metrics are used, you should disclose their source and provide a description of the underlying data used to calculate them, as well as the calculation methodologies for those metrics. You should also consider if you need to disclose any risks or limitations arising from your reliance on the metrics.
- Do you have reasonable grounds for a stated sustainability target? Have you explained how this target will be measured and achieved?
Where your product has set a certain sustainability target, you should clearly explain what that target is, how and when you expect to meet it, and how you will measure your progress or milestones. Any assumptions you have relied on when setting that target or when measuring your progress should also be disclosed.
- Is it easy for investors to locate and access relevant information?
You should ensure that all information you 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 your website. You should also be conscious of ensuring the information you provide is consistent across all mediums, including regulatory documentation (eg the product's PDS or the fund's annual financial reports), voluntary disclosure frameworks or publications (eg sustainability reports by the issuer) and social media platforms (eg Facebook, Instagram and YouTube).
Overseas, we have started to see regulators take enforcement action in relation to climate-related disclosures. For example, the Securities and Exchange Commission in the United States and BaFin in Germany are investigating various corporate issuers and funds in relation to ESG disclosures. We expect to see similar investigations in Australia in the near future.
The increased regulatory scrutiny in relation to ESG-related disclosure coincides with increased legal risk arising from environmental and other ESG-focused NGOs and class action plaintiffs. We have seen several recent climate-related claims in relation to consumer products:
- In May 2022, the Australian company behind the popular Bondi Sands sunscreen brand was one of several sunscreen brands to have class action proceedings brought against it in the US. Bondi Sands is accused of 'greenwashing' its sunscreens by falsely marketing them to US consumers as 'reef friendly' and safe for the environment.
- In September 2021, the Australasian Centre for Corporate Responsibility brought a consumer law action against Santos, accusing the company of engaging in misleading or deceptive conduct by claiming that it produces clean energy and has a pathway to reach net zero emissions. This was the first action of its kind in Australia, with a private entity using consumer law to pursue a corporation in relation to its environmental claims.
- In December 2019, the Federal Court ordered Volkswagen to pay civil penalties $125 million for misleading consumers about its compliance with Australia’s diesel emissions standards. This was the highest-ever civil penalty imposed for breaches of the Australian Consumer Law, and in imposing such a significant penalty, the court said one of the aggravating factors was that the objective of the emissions standards was to reduce harm to humans and to the environment from excessive NOx emissions. Volkswagen settled a related class action with a final settlement amount in excess of $100 million.
We expect to see a continuing trend over the coming years of claims of this nature, including in relation to financial services products, as well as a rise in legal actions relating to companies' implementation of their public human rights commitments (so-called 'bluewashing').
- As ASIC recommends, review your fund's existing promotion and disclosure practices against Information Sheet 271.
- Consider integrating the nine questions set out in Information Sheet 271 into your fund's disclosure document verification processes.
- Review your fund's use of disclaimers in the promotion of these products and, in particular, ensure they are sufficiently prominent and specific both to improve investors' understanding of the nature of the investments and to mitigate the funds legal risks.
- As this is an evolving space, keep up to date with developments in relation to ESG disclosure.
Laurence Fletcher and Joshua Oliver, 'Green Investing: The Risk of a New Mis-Selling Scandal', Financial Times (online, 20 February 2022) <https://www.ft.com/content/ae78c05a-0481-4774-8f9b-d3f02e4f2c6f>, citing Morningstar; Australian Securities and Investments Commission, 'How to Avoid 'Greenwashing' for Superannuation and Managed Funds' (media release, 22-141MR, 14 June 2022).
Laurence Fletcher and Joshua Oliver, 'Green Investing: The Risk of a New Mis-Selling Scandal', Financial Times (online, 20 February 2022) <https://www.ft.com/content/ae78c05a-0481-4774-8f9b-d3f02e4f2c6f>
Deborah Tarrant, 'Beware the Risking Risk of Greenwashing'(June 2022) Company Director 17; Joe Longo, 'ASIC's Corporate Governance Priorities and the Year Ahead (speech, AICD Australian Governance Summit, 3 March 2022).
Australian Securities and Investments Commission, 'Information Sheet 271: How to Avoid Greenwashing When Offering or Promoting Sustainability-Related Products' (14 June 2022) <https://asic.gov.au/regulatory-resources/financial-services/how-to-avoid-greenwashing-when-offering-or-promoting-sustainability-related-products/>
Corporations Act 2001 (Cth) ss 1041E, 1041G, 1041H; Australian Securities and Investments Commission Act 2001 (Cth) ss 12DA and 12DB.
Corporations Act s 769C; Australian Securities and Investments Commission Act s 12BB.
Corporations Regulations 2001 (Cth) schs 10D(7), 10E(7), 10F(7).
Australian Securities and Investments Commission, 'ASIC Welcomes New International Sustainability Standards Board and Updated Climate-Related Disclosure Guidance'.