Australia has long-standing requirements that deal with how investments can be offered when they follow environmentally friendly, sustainable or ethical strategies. However, initiatives are being undertaken internationally to impose greater transparency and consistency around how these types of investments are brought to market. More generally, there is a monumental and arguably irreversible shift among institutional investors globally towards sustainable finance objectives. This includes Australian institutional allocators of capital, such as the large superannuation funds, a number of whom have committed to net zero emissions targets for their portfolios. As a result, Australian issuers and asset managers are on notice that regulatory standards as well as investor expectations here too are set to rise. In particular, the risks associated with “greenwashing” investments are increasing.
“Greenwashing” refers to the approach of misrepresenting or over-emphasising the extent to which an investment, strategy or other type of product takes into account environmentally friendly, sustainable or ethical factors. With the surge in interest in these types of strategies and investments, global bodies including the International Organization of Securities Commissions (IOSCO) have been focusing on what intervention may be needed in relation to financial markets and participants to ensure capital flows are appropriately targeted. In its Work Program for 2021-2022, published on 26 February 2021, IOSCO reaffirmed its stance on greenwashing and a commitment to furthering its core objectives of protecting investors, maintaining fair, efficient and transparent markets, and addressing systemic risks. In relation to sustainability issues in capital markets, IOSCO emphasised that the Work Program would entail a re-doubling of efforts to pursue the goal of improving the completeness, consistency, and comparability of sustainable reporting under the remit of its Sustainable Finance Task Force. It would be the Task Force’s responsibility to progress initiatives relating to asset managers and greenwashing as well as on ESG ratings and ESG data providers.
IOSCO’s announcement as to its Work Program followed just a couple of days after its Task Force update on 24 February 2021. In a statement released in conjunction with its board meeting, IOSCO observed that since the publication of its report Sustainable Finance and the Role of Securities Regulators and IOSCO in April 2020, the Task Force had been progressing its work in relation to securities issuers’ sustainability disclosures, asset managers’ disclosures and investor protection, and the role of ESG data and ratings providers. In IOSCO’s view, investor demand for sustainability related information is not currently being satisfied and often in an inconsistent manner when it is being made available. The board identified 3 priority areas for improvement in sustainability disclosures by companies and asset managers: (1) encouragement of globally consistent standards; (2) promotion of comparable metrics and narratives; and (3) coordination across approaches.
Substantive research findings
It is worth reflecting in this context on some of the substantive research findings of the April 2020 report, particularly as it relates to greenwashing and international legal settings. The report noted that 64% of the regulators surveyed indicated that there were no rules in place specifically directed to greenwashing and that these cases were covered under the general mis-selling provisions or, more specifically, under rules of misrepresentation and wrongful disclosure on listed and unlisted capital market products. The introduction of the Sustainable Finance Disclosure Regulation in the EU on 10 March 2021 is part of a movement towards more specific obligations. Regulation (EU) 2019/2088 on sustainability-related disclosures sets out sustainability disclosure obligations for manufacturers of financial products and financial advisers. While it has been the subject of delays, the Regulation is notably accompanied by a separate taxonomy Regulation and signals the type of measures which may follow closer to home in Australia.
Longstanding feature of the Australian disclosure framework
While international trends and increasing investor appetite for sustainable finance options has been gathering pace more recently, the concept of the greenwash is certainly not novel. In the Australian context it has been a long standing and key feature of the disclosure framework that for investment products offered to retail markets, mandated statements have been required. Under the Corporations Act in s1013D(1)(l), if a product has an investment component, the offering document (i.e. the product disclosure statement (PDS)) must include disclosure about the extent to which labour standards or environmental, social or ethical considerations are taken into account in the selection, retention or realisation of the investment. In addition, Regulation 7.9.14C of the Corporations Regulations requires actual disclosure to be made in the PDS, whether or not the environmental, social, ethical or governance matters are taken into account. As a result, where these considerations are not taken into account in selecting, retaining or realising investments for a product, the PDS must include a clear corresponding negative statement that this is the case. The Corporations Regulations also require that the product issuer make it clear which labour standards or environmental, social or ethical considerations are taken into account, and the extent to which (how far) they are taken into account in selecting, retaining or realising an investment. The manner in which issuers are to approach the disclosure and more detailed guidance on the content is also set out in the Australian Securities and Investments Commission’s (ASIC) Regulatory Guide 65: Section 1013DA Disclosure Guidelines.
While the 1013D(1)(l) requirements specifically cover retail market products, the implications for greenwashing in wholesale markets is arguably signalled by IOSCO’s report and its observations that the broader legal requirements are more commonly found under the mis-selling and misrepresentation prohibitions in statutory frameworks. This is also true in Australia. Issuers, asset managers and other market participants in institutional and wholesale markets would be well-advised to keep in mind the obligations under the Corporations Act, related statutes and general law not to engage in misleading and deceptive conduct and that these prohibitions can apply to their dealings with wholesale or institutional investors. The manner of presentation of investments and strategies will accordingly be assessed against these legal requirements. Mismatch between the actual position and that which is presented to investors cotaken into account in uld then give rise to civil or regulatory actions, including from ASIC.
It remains to be seen how far Australia’s rules against greenwashing will be enhanced and whether there will be an industry-led push to further enhance voluntary transparency and consistency. It does, though, appear that the appetite for investment in this space is producing an irreversible trend among institutional investors towards sustainable finance objectives. This is a trend that for companies, issuers and asset managers presents both an opportunity and a challenge, as well as a space to watch with care.