ASIC’s newly released guidance on how to avoid greenwashing poses nine questions that should be considered when offering or promoting sustainability-related financial products.
It comes at a time where there is increasing focus by all regulators on greenwashing. At the Australian Financial Review’s Environmental, Social and Governance (ESG) Summit this week, a panel of ASIC, APRA and ACCC representatives each confirmed that greenwashing is a high priority. The ACCC has already announced it is an enforcement priority for the coming financial year, and, at the Summit, Deputy Chair Delia Rickard confirmed the ACCC is in the planning phase for this focus, conducting surveys, seeking to understand the problem sectors and researching the approach in the UK, Netherlands and other jurisdictions and that it proposes to release guidance material in due course.
ASIC’s information sheet (INFO 271) has come on the heels of the European Union Sustainable Finance Disclosure Regulation (SFDR), which was introduced in March this year. The SFDR targets puffery and meaningless labels, with provisions that require fund managers to substantiate their ESG claims against regulatory taxonomies (still being developed).
The reference system on which the SFDR is based is intended to create a common ESG language for investors in the EU. It also integrates (or is intended to integrate) with other pieces of financial legislation, to legally oblige fund managers to meet the sustainability expectations they have promised investors. Navigating the EU system of regulation is extremely complex. As a consequence, we understand extravagant ESG credentials are being stripped out of investment fund disclosure materials to avoid potential legal risks.
The ASIC approach, on the other hand, is remarkably straightforward in principle, endorsing full and frank disclosure as a solution where ESG-related factors are considered in making investment decisions. While there is a recognition that certain language can mean different things to different investors, ASIC requires that ESG terms be explained or defined, vague terms not be used, and any ESG claims be sheeted back to real information that describes the sustainability factor, or the screening process, or other relevant and verifiable ESG criteria.
Questions to consider
Here are the nine questions contained in the ASIC information sheet, with our comments.
1. Is your product true to label?
Given the lack of standardised labelling for sustainability-related products, product labels must not mislead.
2. Have you used vague terminology?
Terms such as ‘socially responsible’, ‘ethical investing’, and ‘impact investing’ can mean different things to different people and, accordingly, it is important to explain and clarify what you mean if you use these terms.
3. Are headline claims potentially misleading?
While headline claims may not include all necessary information, a headline claim should not be misleading, and qualifications cannot be used to rectify a misleading headline claim. Qualifications contained in another document or website may not be sufficient to correct a misleading or deceptive impression.
4. Have you explained how sustainability-related factors are incorporated into investment decisions and stewardship activities?
For example, stating that a product ‘takes into account sustainability factors’ without saying how, is inadequate. This is because it is unlikely to help investors understand the product’s sustainability-related investment strategy. If you use a weighting system, you should provide a description of how the weighting approach is determined and applied.
5. Have you explained investment screening criteria? Are any criteria subject to exceptions or qualifications?
Disclosures should enable investors to fully understand the product’s sustainability-related investment screening criteria. It should be clear whether the particular investment screen applies only to a certain product offering or to the issuer as a whole.
Where a screen applies to part of the portfolio, the percentage covered by the screen should be disclosed. Any screening exceptions or qualifications, including thresholds, should also be disclosed.
6. Do you have any influence over the benchmark index? If so, is your influence accurately described?
Otherwise the investor may be misled into wrongly estimating the issuer’s actual influence.
7. Have you explained how you use any metrics related to sustainability?
You should disclose the following:
- the extent to which the metrics are used to evaluate new and existing investments in implementing your investment objective or strategy;
- the sources of your sustainability-related metrics, including whether these are based on your own proprietary methodologies or from certain third-party providers;
- a description of the underlying data used to calculate your sustainability-related metrics, as well as the calculation methodologies for those metrics; and
- limitations arising from your reliance on the metrics (where applicable).
8. Do you have reasonable grounds for a stated sustainability target? Have you explained how this target will be measured and achieved?
To avoid breaching the misleading statement prohibitions you should clearly explain:
- what your target is;
- how and when you expect to meet your target;
- how you will measure your progress or milestones; and
- any assumptions you have relied on when setting that target or when measuring your progress.
If you have adopted a stewardship investment approach* to achieve your sustainability-related targets, you should:
- explain to investors the rationale for engaging with particular companies to influence changes in their corporate behaviour; and
- provide regular updates on your progress with those companies, including stewardship activities and outcomes, such as voting and engagement activities.
*This is where investors use their influence over current or potential investees/issuers, policy makers, service providers and other stakeholders – often collaboratively.
9. Is it easy for investors to locate and access relevant information?
Particularly where information is made available through a website, information that is relevant to an investor’s investment decision should be easy to locate and readily available. Information should be consistent across all mediums, including regulated documentation, voluntary disclosures, and social media. Information dispersed across various platforms may not be helpful to investors.
INFO 271 is for responsible entities of managed funds, corporate directors of corporate collective investment vehicles, and trustees of registrable superannuation entities. ASIC also considers that its principles may apply to other entities that take into account sustainability-related considerations, such as listed companies or issuers of green bonds.
Trustees of superannuation funds are facing increasing pressure to address ESG-related issues and to be seen to be addressing them.
Neither the law relating to the statutory and equitable obligations of trustees in this regard has fundamentally changed – noting that ‘Your Future Your Super’ legislation dropped the word ‘financial’ into the trustee covenant obliging trustees to act in the best (financial) interests of beneficiaries didn’t change the settled law.
Nor has the law relating to disclosure changed – a product disclosure statement (PDS) is still generally required to disclose information that an investor reasonably needs to make an informed decision to invest, and the Corporations Act 2001 (Cth) section 1013D(1)(l) still requires an issuer to disclose 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.
APRA’s CPG 229 (its prudential practice guide on climate change financial risks) sets out certain information to assist superannuation trustees and other APRA-regulated entities to manage their climate change financial risks in a way that was appropriate to their business and their particular circumstances, and within their existing risk management framework.
Finalised in November 2021, the prudential practice guide (PPG) identified three main heads of climate risk:
- physical risk – resulting in direct damage to assets or property, and consequently lower asset values, increased insurance claims and supply chain disruption;
- transition risk- resulting in economic adjustments, with impacts such as changed pricing and demand for goods and services, stranded assets and loan defaults; and
- liability risk – with consequences such as stakeholder litigation and regulatory enforcement action.
APRA made clear in the PPG that Trustee boards must add climate risk management to its oversight duties. Prudent trustees will document their oversight activities in their risk management policies, management information and Board risk reports, and undertake scenario analysis and stress testing for climate risks, as for other risks.
It is clear that although the APRA CPG sets out a risk-based approach that each trustee will customise for its own purposes, environmental factors need to be considered as part of the overall risk management process undertaken by the Trustee. The other side of this coin is that a failure to do so may constitute a breach of trustee duties.
At the AFR ESG Summit this week, APRA Executive Director of Insurance, Sean Carmody, said the regulator is currently analysing data from a large-scale sales assessment survey against the PPG.
The findings will be published in a few months’ time. In the meantime, here are several high-level themes:
- size is a factor – the larger institutions tend to be more advanced, more mature, in the work they are doing;
- there is strong board engagement;
- about two thirds of the firms surveyed are incorporating climate change into their strategic planning over various timeframes, typically the 1-10-year timeframe;
- about one third of the firms surveyed are aligned to the recommendations of the Task Force on Climate-Related Financial Disclosures (TCFD).
An essential – and self-identified – area where improvement is needed is in developing better metrics and data to analyse these risks.
There was a degree of difference across industries. About 80% of superannuation funds were assessing emissions in their investment portfolios, but about half of the banks surveyed and about a third of the insurers were not doing any assessment of emissions in their investment portfolios at this stage. So, more work is needed.
What about social or governance factors?
APRA hasn’t specifically addressed social and governance risks since the publication of its November 2019 Information Paper, which explained APRA’s intensified approach to supervision of governance, culture, remuneration and accountability practices. Why not? The community’s risk appetite has changed.
A failure to identify risks to a fund’s social licence, to understand risks which may arise from poor organisational culture, and to implement quality governance practices to mitigate these and other governance risks can undermine financial and operational resilience, as well as pose some direct financial costs. Trustee boards need to oversee these risks too, in the context of their management and operation of the fund in the best financial interests of beneficiaries.
APRA’s failure to publish means trustees have no prudential regulator guidance or input to assist them to manage certain tensions in analysing these kinds of risks, or in application of resources to manage these risks, since ‘best financial interests’ may not always be consistent with ‘best social outcomes’.
Admittedly, trustees have been juggling with this issue for a while, with many trustees taking the view that the support of other social-good factors does not prejudice the financial outcome interests of beneficiaries. The key here to enable trustees to actively consider and weigh ESG risks in making investment decisions may be scenario analysis and stress testing in a way that quantifies (and documents) the costs of failing to mitigate social and governance risks.
Given that a prudent trustee will be considering ESG in making investment decisions, in selecting managers of underlying investments, and in operating the superannuation fund, it is clear that full and authentic ESG disclosures (informed by ASIC’s information sheet) need to be included in product disclosure statements and other fund communication material.
The ASIC information sheet doesn’t consider other questions that we think may also relevant for superannuation fund trustees to consider. For example, whether the disclosure for a choice option should differ if the investment decisions are being made for members. What relevant information is available or desirable to trustees to seek from underlying investment managers? Where investments are through interposed vehicles, how should ‘layers of ESG considerations’ be communicated to super fund members?