Investors’ growing appetite for environmentally and socially conscious companies and products has been met with increased concern about the many ESG claims made by companies. Regulators the world over are simultaneously raising red flags about “greenwashing”, the practice of misrepresenting the extent to which a product, policy or purpose is environmental, ethical and/or sustainable.
Below we provide a snapshot of some of the recent regulator activity occurring in the greenwashing space in recent months, both internationally and within Australia. With consumers, investors, activists, NGOs and regulators increasingly focused on this area as a way to ensure companies are in fact bringing about real change for the environment through their operations rather than just representing that they are doing so, we can expect to see more investigations, regulatory action and litigation going forward.
International Regulatory Action
Internationally, regulators have been cracking down on alleged greenwashing, particularly in the context of purportedly ESG ‘friendly’ investments by fund managers.
On 31 May 2022, German prosecutors raided asset manager DWS and the headquarters of its majority owner Deutsche Bank in Frankfurt over allegations of a number of greenwashed investments, contrary to DWS sales prospectuses.
A week earlier, the United States’ Securities and Exchange Commission (SEC) announced a USD$1.5 million settlement of greenwashing allegations against BNY Mellon Investment Adviser relating to misrepresentations it had made that all investments in certain mutual funds had undergone an ESG quality review.
The SEC Climate and ESG Task Force launched an investigation in June into certain funds of Goldman Sachs Group Inc. that use ‘clean energy’ or ‘ESG’ in their names. It follows the release of two SEC proposals seeking to address greenwashing by amending:
- the Investment Company Act ‘Names Rule’ to prevent misleading or deceptive fund names; and
- rules and reporting forms to enhance disclosures by certain investment advisers and investment companies about ESG investment practices.
If adopted, funds labelled as ‘clean’ or ‘ESG’ would need to invest at least 80% of their assets in line with their name and investment policies.
New ASIC Guidance
On Australian soil, each of the regulators, ASIC, ACCC and the ASX are preparing for their own greenwashing blitz.
On 12 June, ASIC released Information Sheet 271 (INFO 271), providing increased clarity to funds and other relevant entities in avoiding misrepresentation of environmental, sustainable or ethical practices. INFO 271 reflects the current regulatory setting in terms of general prohibitions against misleading and deceptive statements and conduct, as well as disclosure obligations. However INFO 271 then expands on the existing regulatory scheme, posing nine questions that form the basis of ASIC’s guidance material. These guiding questions are for consideration by entities when making disclosures to investors, with the purpose of promoting greater transparency in communications about products associated with sustainable, ethical or environmental practices. They are:
- True to label: the label should reflect the substance of the product, avoiding absolute terms and not using sustainability-related terminology if those factors are not significant in the underlying investment strategy or asset holdings.
- Vague terminology: broad, unsubstantiated sustainability-related statements or ‘jargon’ should be avoided if no clarifying information can be provided. Terms such as ‘socially responsible’, ‘ethical investing’ or ‘impact investing’ requires explanatory material.
- Potentially misleading headlines: exceptions and qualifications should not be used to rectify an otherwise misleading impression. Where a headline requires qualifying information, that information cannot be presented elsewhere (i.e. on another website or webpage).
- Incorporation of sustainability-related factors into investment decisions and stewardship activities: methodologies or policies for integrating sustainability-related considerations into investment decisions and stewardship activities should be disclosed and clearly explained.
- Screening criteria: a detailed explanation of screening criteria is required, and not just broad promotional statements to describe the screening. Adequate information should be provided so that investors can understand any screening exceptions or qualifications.
- Influence over benchmark index: entities are expected to disclose any level of influence they may have on the composition of an index against which the portfolio composition is determined or performance is measured.
- Use of metrics: the use of sustainability-related metrics (i.e. ESG scores) should be disclosed, including the extent to which they are used, the sources of the metrics, a description of underlying data, and any risk or limitations arising from reliance on them.
- Sustainability targets: if the product has a sustainability target, there should be a clear explanation of what the target is, how and when the target it is expected to be met, how progress will be measured, and any assumptions relied on when setting that target or measuring progress.
- Access to additional information: all information that is relevant to investors’ or advisors’ decision making in relation to the sustainability-related product should be easily accessible, sufficiently adequate in detail and consistent across all mediums.
ASIC has made a clear commitment to pursuing transparency and disclosure obligations when it comes to misleading statements or conduct in the rising proliferation of ESG-conscious products.
The ASX has endorsed ASIC’s approach and committed to only listing funds that comply with ASIC’s naming requirements, and is prepared to refer any breaches to ASIC. Outgoing chairman Rod Sims also made clear in the ACCC’s 2022/2023 enforcement priorities in March that green-washers would be soon fall into the crosshairs of the regulator.
ISSB Disclosure Standards
The International Sustainability Standards Board (ISSB) was established at COP26 to develop a global baseline of sustainability financial disclosures for capital markets. ASIC has indicated its support for the ISSB and its objectives, and has encouraged Australian businesses and stakeholders to provide feedback on two draft Disclosure Standards (Exposure Drafts):
- IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information; and
- IFRS S2 Climate-related Disclosures.
ASIC’s Deputy Chair commented that if the Exposure Drafts are adopted internationally, the standards will “inevitably impact Australia’s capital markets and participants, as investors continue to demand comparable sustainability and climate-related corporate disclosures.”
The Exposure Drafts propose that entities should provide disclosures about:
- governance processes, controls and procedures used to monitor and manage sustainability-related and climate-related risks and opportunities;
- the entity’s strategy, and the resilience of that strategy, to address climate-related risks and opportunities;
- the effects of significant climate-related risks and opportunities on the entity’s financial position, cash flow and financial performance;
- the entity’s approach to address sustainability-related risks and opportunities that could affect its business model and strategy;
- processes it uses to identify, assess and manage sustainability-related and climate-related risks; and
- information it uses to assess, manage and monitor its performance over time.
While ASIC continues to be involved in the consultation process and take a keen interest in these standards, the ISSB standards provide valuable insight into the standards that ASIC are likely to adopt in future.