How to avoid greenwashing: New sustainability disclosure guidance for managed funds and super

As we have previously reported (see here), the law on sustainability-related disclosures is an evolving area and increasingly a topic of concern in the face of regulatory enforcement and class action risk. Significant international developments have included the establishment of the International Sustainability Standards Board and the recent proposal by the US SEC for new environment social and governance-related (ESG) disclosure rules for investment funds and advisers (read our article here). Hot on the heels of this announcement, ASIC has released a new Information Sheet (INFO 271: How to avoid greenwashing when offering or promoting sustainability-related products) to help superannuation and managed funds avoid “greenwashing” in promoting or offering sustainability related products. See here for the Information Sheet.

Broadly, ASIC describes greenwashing as the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical. It has emerged as a consequence of an increase in investor demand for sustainability related investments and ASIC’s Information Sheet is its latest response to the inherent risks. While the Information Sheet is intended to explain existing obligations under the law as opposed to mandating new requirements, issuers would be well advised to focus on ASIC’s areas of emphasis. In addition, the principles outlined are relevant not only to funds but other financial products that incorporate sustainability-related considerations.

The Information Sheet reminds issuers that “greenwashing” can trigger the general prohibitions against misleading and deceptive conduct contained in the Corporations Act and ASIC Act. Particular risks arise in relation to representations made about future matters that are not supported with reasonable grounds. The example given is where an entity states that a carbon emission target will be reached by a certain date. This type of future-looking statement may be deemed misleading if there are no reasonable grounds for the representation.

Issuers are also reminded as to their disclosure obligations when preparing a product disclosure statement (PDS). These obligations include:

• section 1013D(1)(l) of the Corporations Act, which provides that where a financial product has an investment component, the PDS must explain the extent to which labour standards or environmental, social or ethical considerations are taken into account in selecting, retaining or realising an investment. Equivalent provisions apply for shorter PDSs; and
• the guidelines in ASIC’s Regulatory Guide 65: Section 1013DA disclosure guidelines

The Information Sheet sets out nine questions for issuers to self-assess their sustainability related representations:

• Is your product true to label?
• Have you used vague terminology?
• Are your headline claims potentially misleading?
• Have you explained how sustainability-related factors are incorporated into investment decisions and stewardship activities?
• Have you explained your investment screening criteria? Are any of the screening criteria subject to any exceptions or qualifications?
• Do you have any influence over the benchmark index for your sustainability-related product? If you do, is your level of influence accurately described?
• Have you explained how you use metrics related to sustainability?
• Do you have reasonable grounds for a stated sustainability target? Have you explained how this target will be measured and achieved?
• Is it easy for investors to locate and access relevant information?

Key takeaways for superannuation and managed funds include:

• ASIC has emphasised that sustainability terminology (for example; “socially responsible”, “ethical investing” or “impact investing”) is capable of meaning different things to different people. As consequence, ASIC requires issuers to carefully explain the meaning of their use of “sustainability” terminology in their PDSs or promotional disclosure materials.
• “Greenwashing” extends beyond climate-related representations. It is clear that ASIC is reviewing representations in relation to all environmental, social and ethical matters. All expressions of opinion in relation to these sustainability issues need to be supported by reasonable grounds.
• If an issuer has committed to a sustainability target, explanation should be given as to what their target is, how and when they expect to meet their target, how they will measure their progress and milestones, and any assumptions they have relied on when setting their target and milestones.
• ASIC has stated that issuers cannot avoid liability for misleading representations where their exceptions and qualifications are inconsistent with the disclosures contained in their headline claim. ASIC has specifically cautioned issuers to carefully consider their use of absolute terms.

Issuers will be well-advised to consider carefully their disclosure and marketing practices in connection with the new Information Sheet. In particular and in advance of the coming months where many PDSs will be updated as part of an annual cycle, this could be the time for a health check on sustainability disclosures in case any uplift is needed to meet ASIC’s areas of focus. In the meantime, Australia awaits further laws in this space as international developments continue.