ASIC's new greenwashing guidance
The Australian Securities and Investments Commission (ASIC) has issued a new information sheet – INFO 271 How to avoid greenwashing when offering or promoting sustainability-related products – providing an overview of existing prohibitions against 'greenwashing' and clarifying the regulator's expectations around what issuers (ie responsible entities of managed funds, corporate directors of corporate collective investment vehicles (CCIVs), and trustees of registrable superannuation entities) should do to avoid it.
For clarity, ASIC defines greenwashing as 'the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical'.
A 'greenwashing review' conducted the regulator of a sample of superannuation and investment products identified three broad areas for improvement including a need for: 1) clearer labelling; 2) 'sustainability terminology' to be defined; and 3) issuers to explain how they factor sustainability considerations into their investment strategy.
The information sheet is being issued in order to assist issuers to address these improvement areas and to comply with their existing regulatory obligations.
ASIC comments that though the focus of the information provided is on sustainability-related products issued by funds, INFO 271 may have broader application for other entities that offer/promote financial products that take into account sustainability-related considerations such as listed companies or entities issuing green bonds.
Existing legal obligations not to 'greenwash'
The information sheet reminds issuers of the need to comply with existing prohibitions in the Corporations Act 2001 (Cth) and the Australian Securities and Investments Commission Act 2001 (Cth) against making misleading and deceptive statements/engaging in this conduct when promoting sustainability related products. ASIC cautions that:
'Particular risks of breaching the misleading statement prohibitions arise in relation to representations made about future matters that are not supported with reasonable grounds'.
The information sheet points to commitments by issuers to achieve a certain emissions reduction target within a specific timeframe (eg 'net zero by 2050' commitments) as one example of a statement that could be deemed to be misleading if the issuer does not have reasonable grounds for making it.
Issuers are also reminded that Product Disclosure Statements (PDS) for sustainability related products, must comply with existing disclosure obligations that apply to financial products including section 1013D(1)(l) of the Corporations Act and the guidelines in Regulatory Guide 65 Section 1013DA disclosure guidelines (RG 65).
ASIC further notes that even where sustainability related products are subject to the shorter PDS regime, issuers are still required to disclose 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. ASIC points issuers to INFO 155 Shorter PDSs: complying with requirements for superannuation products and simple managed investment schemes for more information on this point.
What not to do when promoting sustainability-related products: 9 questions for issuers to consider
The information sheet includes a list of nine questions (together with illustrative examples) that ASIC considers issuers should be taking into account when preparing communications about sustainability-related products. ASIC makes clear that its expectation is that issuers review their practices against the information sheet (including these questions). ASIC's suggested questions are as follows.
1. Is the product true to label?
ASIC states that in light of the current lack of standardised labelling for sustainability-related products, issuers need to exercise care to ensure that the product labels they use are not misleading. In particular, issuers are advised to 'think carefully about using absolute terms in a product label'. For example, ASIC suggests that labelling a product 'no gambling fund' when under its terms, the product may invest in companies that earn less than a certain percentage of their revenue from gambling-related activities may be misleading.
2. Does the disclosure/communication include 'vague terminology'?
ASIC cautions against using 'broad, unsubstantiated sustainability related statements or "jargon" without providing clarifying information'. ASIC suggest that this could include terms such as 'socially responsible', 'ethical investing' or 'impact investing'.
ASIC expects that where issuers use sustainability-related terminology (including in a product label), care should be taken to 'adequately explain such terminology in the PDS and other promotional material'.
To illustrate, ASIC considers that a claim made by an issuer on social media platforms that it is committed to making investments that 'contribute towards positive impacts for its investors and the world' would require further clarification, including both: a) clarification around what the issuer considers 'positive impacts for its investors and the world' to be; or b) how its investments contribute to these outcomes.
3. Are 'headline claims' potentially misleading?
ASIC cautions that where communications contain a 'headline claim' about sustainability-related matters, the headline claim itself (including claims made in promotional material) should not be misleading or inconsistent with information contained in a disclosure document. Further, ASIC considers that qualifications/exceptions 'should not be used to rectify an otherwise misleading impression'. On this point, ASIC comments that:
'We recognise that headline claims will not always include all necessary information. However, the more that a qualification is required to balance the information contained in the headline claim, the more prominently placed the qualification should be.
If exceptions and qualifications are required, they should not be inconsistent with other content in the disclosures, including any headline claims'.
To illustrate, ASIC suggests that a headline claim by an issuer that it 'does not invest in tobacco products' is likely to be misleading if the issuer is in fact permitted under its terms to invest in companies involved in the manufacture/sale and distribution of tobacco products if certain conditions are met.
ASIC points issuers to the information in Regulatory Guide 234 Advertising financial products and services (including credit): Good practice guidance (RG 234) for further information.
4. Is it clear how sustainability-related factors are incorporated into investment decisions and stewardship activities?
ASIC expects issuers specify what sustainability-related considerations are taken into account and how they are incorporated into investment decisions and stewardship activities (eg exclusionary or negative screening).
Where a weighting system is used to evaluate certain sustainability-related considerations and/or to prioritise certain sustainability-related considerations over others, ASIC expects issuers to consider whether to provide a description of the weighting system, including how it is applied by investment managements.
When describing their stewardship approach, ASIC cautions issuers against overstating the level of influence they have over the companies targeted for engagement.
5. Is a clear explanation of investment screening criteria (and any exceptions/qualifications) clearly explained?
ASIC cautions issuers against the use of 'broad promotional statements to describe investment screens'. ASIC's expectation is that disclosures are sufficiently detailed to enable investor to understand the product's sustainability related investment screening criteria and how this is applied, including whether the particular investment screen applies only to a certain product or to the issuer as a whole.
Where a screen is applied only to a proportion of the portfolio, ASIC expects the percentage of the portfolio covered by the screen to be disclosed.
As flagged above, ASIC again expects that any 'vague' or ambiguous terms used are clearly defined.
ASIC further expects issuers to provide enough information to enable investors to understand any screen exceptions or qualifications.
6. Is the issuer's level of influence over the benchmark index for the sustainability-related product clearly and accurately explained?
ASIC expects that if issuers are able to influence the composition of an index against which portfolio composition is determined or performance is measured, they should disclose their level of influence eg whether they have any influence over the investment screens applied by the index provider when constructing the index.
7. Are sustainability metrics and how they are used clearly explained?
ASIC expects that where issuers rely on sustainability-related metrics (such as ESG scores) to assess whether an investment aligns with their products stated objective/strategy they should disclose: a) the extent to which the metrics are used; b) the sources of the metrics used; c) a 'description of the underlying data used to calculate your sustainability-related metrics, as well as the calculation methodologies for those metrics'; and d) any risks/limitations arising from your reliance on the metrics (where applicable)'.
8. Are there 'reasonable grounds' for stated sustainability targets?
ASIC expects that where products have a certain sustainability target attached, issuers should explain: a) what the target is b) how and when it is expected to be reached; c) how progress will be measured; and d) any assumptions relied on when setting the target/measuring progress against it.
Where an issuer has adopted a stewardship investment approach to achieve their target ASIC expects the issuer to both: a) explain the rationale for engaging with particular companies to push for changes in their behaviour; and b) provide regular updates on the progress made with these companies including updates on stewardship activities/outcomes (eg voting and engagement activities).
9. Is relevant information readily accessible for investors?
ASIC states that investors should have ready access to 'adequate information that is concise and clear enough for investors to understand the sustainability-related considerations incorporated into the product being offered'. ASIC also emphasises the need for this information to be 'consistent across all mediums', including regulatory documentation, voluntary disclosures (eg sustainability reports by the issuer) and social media platforms.
ASIC expects that where an issuer's approach to investing is guided by third-party frameworks (eg UN Sustainable Development Goals or the UN Principles for Responsible Investment), issuers to disclose the fact.
ASIC comments that issuers should bear in mind that providing voluminous amounts of information is not necessarily useful from an investor perspective. ASIC states:
'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 your sustainability-related product'.
Greenwashing will remain a focus area for ASIC, issuers are urged to review their practices against INFO 271
ASIC Commissioner Sean Hughes stated that greenwashing will 'remain a priority area of focus' for the regulator and that ASIC will continue to monitor the market for potential greenwashing. ASIC plans to update INFO 271 as required to ensure it remains 'relevant, contemporaneous and useful' based on insights from its monitoring activities.
Mr Hughes added that ASIC is 'appealing to industry and investors to alert us if you see suspected greenwashing in financial products.'
New information to assist investors
Separately, ASIC has also published new information aimed at helping investors to assess whether 'their values and goals align with a sustainability-related or ESG product' on the MoneySmart website.
[Sources: ASIC media release 14/06/2022; INFO 271: How to avoid greenwashing when offering or promoting sustainability-related products; Moneysmart website: Environmental Social Governance (ESG) investing, Investing that supports your values]
Interested in this topic?
You may also be interested these articles: How to prepare for financial reporting sustainability requirements and Why financial services needs a holistic approach to managing ESG
You can subscribe to weekly Governance News updates tracking key ESG, financial services, risk and regulatory developments here
