The greenwashing of financial products: the fine line between marketing and misleading - Consumer Law

Since November 2022, the Australian Securities and Investments Commission (ASIC) has targeted several financial services firms for misrepresenting their green investment strategies. For some time, ASIC has highlighted its increased scrutiny of environmental, social and governance (ESG) related financial products, and the Federal Government has recently announced a further $4.2 million injection for ASIC to tackle greenwashing and other sustainable finance misconduct. How can financial services businesses avoid a greenwashing claim, and prepare for the future of ESG regulation?

"Naysayers don't join together and move nearly $400 million out of fossil fuels."

A superannuation fund promoter posted this phrase to its Facebook page, which subsequently cost it over $13,000 which was payable to the Commonwealth under an infringement notice. In addition, there was some reputational damage to the fund when ASIC publicised its enforcement activity alleging that the promoter "overstated the positive environmental impact of the Fund". ASIC found that at the time of the Facebook post, the promoter had no basis to represent that nearly $400 million of the fund's assets had been "move[d]... out of fossil fuels".¹

In late 2022, ASIC also issued greenwashing infringement notices to an investment manager and a superannuation fund trustee; and in February 2023, ASIC commenced its first ever greenwashing court action against another superannuation fund trustee.

This Insight explores:

Lessons learnt from ASIC's recent greenwashing enforcement actions;
How financial services businesses can avoid a greenwashing claim; and
What the future of Australia's ESG regulation may look like, leaning on global ESG regulatory developments.

Lessons learnt from ASIC's greenwashing enforcement actions

Whilst there is no express law against the 'greenwashing' of financial products, there are laws against making false or misleading representations, or engaging in misleading or deceptive conduct.² ASIC has made it an enforcement priority to stop businesses misrepresenting "the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical".³

There are a number of actions open to ASIC when it is concerned about potential misrepresentations in relation to financial products:

ASIC may request a corrective disclosure. If ASIC determines that a statement in relation to a financial product is unclear, not true to label, or ambiguous, then ASIC may request that:

the relevant name of the product be changed; or
information in relation to that product be amended and/or information be clarified in disclosures, on the website, or in market announcements to address the misrepresentation.⁴

ASIC may issue an infringement notice. If ASIC reasonably believes that there has been greenwashing conduct, it can issue an infringement notice requiring payment of a penalty (eg if ESG investment exclusions are overstated).⁵ For example, an investment manager's product disclosure statement (PDS) stated that its index funds "...exclude[d] securities involved in the production, manufacturing, or significant sales of tobacco". ASIC claimed that while the funds excluded securities involved in the production and manufacturing of tobacco products, the funds did not exclude companies involved in the sale of tobacco products. The investment manager paid a penalty of almost $40,000 to the Commonwealth under the infringement notices.⁶
ASIC may commence civil or criminal proceedings. If an infringement notice penalty is not paid, or if ASIC chooses to prosecute greenwashing conduct, an organisation may face a civil penalty or criminal proceedings. In February 2023, ASIC commenced its first ever civil penalty proceeding alleging greenwashing against a superannuation fund trustee. Relevantly, the trustee allegedly made statements on its website (including through the use of a video) that seven investment options in its fund excluded investments in companies involved in carbon intensive fossil fuels, alcohol production, and gambling. ASIC claims that the relevant fund did in fact invest in carbon intensive fossil fuels (15 companies), alcohol production (15 companies), and gambling (19 companies).⁷

In relation to greenwashing, ASIC reports that between 1 July 2022 and 31 March 2023, it has:

requested 23 corrective disclosures;
issued 11 infringement notices; and
commenced one civil penalty proceeding.

ASIC is also currently:

conducting greenwashing surveillance on the superannuation, managed fund and corporate sectors, as well as the wholesale green bond market; and
investigating several entities in relation to suspected greenwashing and anticipates further enforcement action.⁸

It seems likely more greenwashing enforcement will be undertaken, given the Government's recent $4.3 million Budget injection for ASIC to crack down on greenwashing and other sustainable finance misconduct (detailed in the 2023-24 Federal Budget).⁹

At the crux of it, disclosure and marketing materials must be 'true to label', and investors should clearly be able to identify the ESG investment screening criteria, the percentage of investments that are screened, and what qualifications and assumptions have been relied on in making the representations.

How the risk of a greenwashing claim can be mitigated

To mitigate the risk of a greenwashing claim, ensure that disclosure documents (such as a PDS), and other promotional materials enable investors to fully understand the product's ESG considerations. To this end, consider the overall impression created for the investor.

Ensure that the statement or conduct is:

Clear and 'true to label'. A product will not be 'true to label' if its name includes an ESG-related term that is inconsistent with its investment or investment criteria. Further, think carefully about using absolute terms when labelling a product and do not make a statement that cannot be verified.
Not ambiguous. Otherwise consider defining ESG terminology to make the language clearer. For example, one of ASIC's 'corrective disclosure outcomes' resulted in a responsible entity of a managed fund replacing vague terms such as 'influence change' and 'poor sustainability characteristics' on its website with more detailed explanations.¹⁰
Supported by reasonable grounds. Make sure that claims are supported by evidence. Be wary of making future ESG representations if they do not have a reasonable basis when they are made. This likely requires more than a 'belief' or positive intent about the future, and organisations should have credible evidence that the future representation can be achieved and a plan to do so. For example, ASIC reported in May 2023 that entities were making representations relating to their net zero or decarbonisation commitments, or labelling their operations, projects or products as 'carbon neutral', 'clean' or 'green', when those statements did not appear to have a reasonable basis or were factually incorrect.¹¹

Further, a PDS must include the extent to which labour standards or ESG considerations are considered in selecting, retaining or realising an investment. If ESG or labour standards are considered, then the extent to which they are considered must be included and ensure compliance with ASIC's disclosure guidelines ( ASIC Regulatory Guide 65). Also consider compliance with ASIC's 'good practice guidance' on advertising financial products ( ASIC Regulatory Guide RG 234).

We encourage financial services firms with ESG products to review and amend their disclosure and other promotional and website materials, to ensure their consistency with ASIC's expectations. This kind of review should be undertaken periodically to ensure that they remain accurate and it is particularly important to revisit these statements if ASIC refreshes its guidance (such as through publishing the outcome of enforcement action).

What the future of Australia's ESG regulation may look like

Australia's ESG developments

The Federal Government is currently:

Conducting a parliamentary inquiry into greenwashing. Late submission will be accepted until 22 June 2023, with the final report expected by December 2023. Its terms of reference are directed to the impact of greenwashing on consumers and include environmental and sustainability advertising standards, domestic and global examples of regulating companies' environmental and sustainability claims, and legislative options to protect consumers from greenwashing in Australia.
Consulting on a climate-related financial disclosure framework. Submissions closed on 17 February 2023 and 194 submissions were received. The consultation paper sought feedback on the phased implementation of climate-related disclosure standards. Submissions suggested that mandatory climate risk disclosures should first apply to larger entities and financial institutions, with later application to smaller entities and included a push for coherence with international standards. The Government has indicated it intends to design the disclosure framework to enable it to be expanded to other sustainability issues (such as biodiversity) over time.
Establishing a sustainable finance taxonomy. The Government is injecting $1.6 million in 2023–24 to support the Council of Australian regulators and the Australian Sustainable Finance Institute (ASFI) to develop an Australian taxonomy. Through standardised criteria, the taxonomy will assist investors to target particular sustainability objectives¹² when allocating capital. ASFI has indicated that key design features of an Australian taxonomy will be similar to those in place or under development in the Asia-Pacific region, EU, Canada and the UK and will include prioritisation of sectors, science-based screening criteria, useability and international interoperability, as well as the principles of 'do no significant harm' and 'minimum social safeguards'.
Establishing a sovereign bond program. The Government is planning to launch its own sovereign green bond in mid-2024, in a bid to increase the "transparency around climate outcomes and the scale of green investments available". This initiative supports Australia's commitment to achieve net zero emissions by 2050 and should see investments from superannuation funds (and other wholesale investors) in line with the Treasurer's proposed legislative objective for superannuation. Australia does not currently regulate green bonds, however businesses (e.g. bank issuers) can voluntarily commit themselves to a global framework, such as the ICMA Green Bond Principles. The Government is injecting $8.3 million over four years from 2023–24 (and $1.3 million per year ongoing) to establish this Program (detailed in the 2023-24 Federal Budget).¹³

Predicted Australian ESG regulation

ASIC encourages firms to keep up to date with global ESG regulatory developments, so they are best placed to transition to any future ESG standard. Following global ESG trends, we may see the Australian Government mandate:

Annual sustainability reporting. Currently ESG reporting is voluntary although international standards are commonly used in Australia, and this approach is encouraged by ASIC. The EU, UK, New Zealand, and Singapore have all either passed laws, or provided businesses with sustainability reporting policies and guidance, and it seems likely that Australia may follow suit. We also note that the US is close to finalising its rules to enhance and standardise climate-related disclosures. In the meantime, and in the absence of formal climate change or sustainability reporting regulation in Australia, ASIC recommends aligning disclosures with the 'Task Force on Climate-related Financial Disclosures' (TCFD) reporting framework, and the International Sustainability Standards Board's (ISSB) sustainability disclosure, and climate-related disclosure standards (once issued in Q2 2023, although the previous exposure draft is publicly available).The establishment of the ISSB was announced in late 2021 at COP26 in Glasgow and builds on the work of global ESG reporting initiatives, including the TCFD reporting framework. The ISSB standards prescribe disclosure and reporting requirements about sustainability-related risks and opportunities,¹⁴ which would be subject to an annual assurance process akin to financial statements. The ISSB is also currently consulting on priorities beyond these initial standards, including its 'Consultation on Agenda Priorities' (with submissions closing 1 September 2023). In this consultation, ISSB seeks investor feedback on four projects:

biodiversity, ecosystems and ecosystem services;
human capital;
human rights; and
connectivity in reporting (a potential joint project with the International Accounting Standards Board (IASB)).

The ASX also encourages its listed companies to undertake TCFD reporting through the ASX Corporate Governance Council's Principles and Recommendations.

An ESG classification and labelling system. Australia may consider going a step further, to introduce a system of labelling for ESG / sustainable financial products. For example, the UK is close to finalising its classification and labelling system. Under this system UK investment firms can only label their product one of three proposed labels ('sustainable focus', 'sustainable improvers' and 'sustainable impact') if that product satisfies specified criteria. Firms that do not meet the criteria cannot use those labels, or sustainability-related terms such as 'ESG', 'climate', and 'green' in naming and marketing their product. Similarly, the:

EU Sustainable Finance Disclosure Regulation (SFDR) requires EU-marketed funds to be categorised as either 'light green', 'dark green', or a fund that does not have any specific ESG-related objectives, depending on the fund's ESG objective; and
US issued draft rules in May 2022 that aims, among other things, to "deter funds from making exaggerated claims by requiring funds that market themselves as, for example, 'ESG', 'green', 'sustainable', or 'socially conscious' to provide specific information in their prospectuses to substantiate such claims.¹⁵

Firms marketing these products globally should also pay close attention to these requirements and future developments in this area, given the rapid pace of change.

We also suggest that financial services businesses consider arranging a periodic ESG data review. We recommend having an organisation's ESG data annually reviewed and verified by an independent third party, or more regularly if required (for example, due to the launch of a new ESG product). The third party should report on the validity of, and be able to substantiate or provide assurances for, the relevant ESG claims.

Conclusion

ASIC's recent greenwashing enforcement action against fund managers, superannuation fund trustees and promoters is likely to be just the beginning of a period of increased enforcement activity in this area, and increased regulation addressing greenwashing risks for financial products and services seems inevitable.

To prepare for the future of Australian ESG regulation, we recommend organisations consider:

complying with the soon-to-be-issued ISSB standards (which may become the standard for mandatory reporting following the Government's current Climate-related Financial Disclosure consultation);
having any relevant ESG data independently verified;
routinely revisiting sustainability-focused representations to ensure they remain accurate; and
keeping abreast of any reform and recommendations stemming from the Greenwashing Inquiry, Sustainable Finance Taxonomy, global ESG developments, and if relevant, the Sovereign Bond Program.

A financial services business must also ensure that its financial product is true to label, clear, unambiguous and that any statement or claim is based on reasonable grounds.

Adopting all of these measures, albeit in the ever-changing financial services regulatory landscape in Australia, will go some way towards mitigating the risk of a greenwashing claim.

Footnotes

¹ ASIC Infringement Notice S02515914 (April 2023). See also ASIC 23-110MR (May 2023).

² ASIC Act, ss 12DA-12DC, and 12DF. See also the Corporations Act, ss 1041E and 1041H, and the Competition and Consumer Act 2010 (Cth), Sch 2, s 18.

³ ASIC Information Sheet 271 (June 2022). See also the ASIC 2022-26 Corporate Plan and 2023 Enforcement Priorities.

⁴ ASIC Report REP 763 (May 2023), pages 3 and 7.

⁵ ASIC Act, s 12GX.

⁶ ASIC Infringement Notices S02553190, S02553191, and S02553192 (November 2022). See also ASIC 22-336MR (December 2022).

⁷ ASIC 23-043MR (February 2023).

⁸ ASIC Report REP 763, pages 3 and 4.

⁹ Treasury Media Release, 'Investor Roundtable aligns efforts to deliver cleaner, cheaper energy' (21 April 2023); and 2023-34 Budget Paper No. 2: Budget Measures, page 209.

¹⁰ ASIC Report REP 763, page 8.

¹¹ ASIC Report REP 763, page 5.

¹² For example, climate change mitigation, climate change adaptation, protection and restoration of biodiversity, pollution prevention and control, sustainable use and protection of water and marine resources.

¹³ 2023-34 Budget Paper No. 2: Budget Measures, page 209.

¹⁴ The climate-related ISSB standard refers to disclosure and reporting about climate-related risks and opportunities and also requires disclosure of information about climate-related material physical and transition risks, as well as transition planning, climate resilience and Scope 1, 2 and 3 emissions.

¹⁵ US SEC 'Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices' https://www.sec.gov/rules/proposed/2022/ia-6034.pdf, page 34.

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