Each of Australia's securities, consumer and prudential regulators has made it clear that climate related claims are at the forefront of their regulatory priorities and have outlined their next steps.

In a week that saw the Commonwealth Government commit Australia to reducing greenhouse gas emissions by 43% below 2005 levels by 2030 and commit to establishing new standardised and internationally-aligned reporting requirements for climate risks for large businesses, ASIC, APRA and ACCC leaders shared their views on ESG regulations, disclosure and oversight.

The regulators are watching

On 15 June 2022, in a rare panel discussion between representatives of the corporate, competition and prudential regulators at The Australian Financial Review's ESG Summit, we were given an insight into the key climate-related regulatory focuses of ASIC, APRA and ACCC.

Three messages were clear:

  • action against “greenwashing” and the assessment of climate change risks remain key focus areas, and regulators will not hesitate to use existing enforcement regimes;
  • businesses need to take proactive steps towards improving their ESG reporting practices, and are encouraged to adopt the Financial Stability Board's Task Force on Climate-related Financial Disclosures (TCFD) framework; and
  • we can expect increased regulatory engagement across all industries on these matters.

These messages are unsurprising, given these regulators’ previous statements about their strategic focus on greenwashing and climate change risks. However, the panel discussion provided further insight into what we can expect from each regulator, as outlined below.

ASIC

The risks associated with sustainable investment offerings will remain a priority for ASIC. Importantly, it was noted that:

  • ASIC has been conducting a sample review of fund managers and superannuation fund providing sustainable investment offerings across the market
  • It has identified areas for improvement, including:
    • ensuring that "sustainable" labels are clear and ensuring headline claims are not potentially misleading;
    • defining sustainability language and avoiding the use of vague terminology as well as having a reasonable basis for a sustainability target, including how that target is measured and will be achieved; and
    • explaining how sustainability factors are included in the company's key risk strategy and investment strategy.
  • The current prohibitions against misleading or deceptive representations and conduct, as well as disclosure obligations, under the ASIC Act and the Corporations Act have not changed and these legal parameters remain the touchstone for statements and disclosures made about ESG and sustainability.
  • ASIC supports the trend towards greater standardisation of mandatory reporting as we have seen in Europe, US, UK and New Zealand and considers that all users of financial reporting would benefit from those standards.
  • If companies are looking for recommended guidance, they should turn to the TCFD framework.

These comments follow ASIC’s release of Information Sheet INFO 271 "How to avoid greenwashing when offering or promoting sustainability-related products" on 14 June 2022 which echoes these sentiments.

ACCC

Earlier this year, the ACCC announced it would be closely scrutinising businesses that make environmental and sustainability claims as part of its compliance and enforcement priorities for 2022-23.

During the AFR panel discussion, a Deputy Chair of the ACCC indicated the regulator would:

  • from July this year, have a clear focus on greenwashing and sustainability – including data collection, surveys and reviews of public statements as well as developing new guidance for consumers and businesses;
  • proactively review problem sectors and pursue litigation where the greatest harm to consumers is being done.Notably, the ACCC will look for "quick administrative fixes" where a "mild mistake" has been made;
  • be reviewing "corporate claims" where a company is claiming to be acting sustainably - ensuring such claims are being implemented and are captured and/or measured in the company's finances and auditing processes; and
  • continue to welcome private action where a company is making misleading or deceptive statements about sustainability, emphasising that it is not able to pursue every instance of non-compliance.

APRA

Following the release of its Prudential Practice Guide on Climate Change Financial Risks (CPG 229) in November 2021, APRA has conducted a self-assessment survey of APRA-regulated entities to identify potential gaps between the management of climate change financial risk by these entities and the guidance contained within CPG 229.

The purpose of the survey was to provide insight into risk management by APRA-regulated entities, including their approaches to identifying, assessing and managing climate-related risks. It is intended that these approaches will be incorporated into APRA's supervisory assessments and will facilitate transparency to allow comparison and benchmarking across the industry.

An Executive Director of APRA shared the early outcomes of this self-assessment survey across 64 banks, insurers and superannuation funds, which APRA will publish over the coming months. Notably:

  • the larger institutions are more advanced in their practices than smaller institutions;
  • two-thirds of surveyed entities were incorporating climate change into their strategic planning (noting that most of the entities surveyed were larger sized institutions);
  • more than two-thirds of surveyed entities publicly disclose their approach to measuring and managing climate risks (in some form), with about half of those aligning their disclosures to the TCFD framework;
  • an area for improvement was risk assessment metrics - most superannuation funds (over 80%) are assessing climate risk in relation to their investment portfolios but just over half of the surveyed banks and a third of the insurers are not doing any assessment of climate risk in their investment portfolios; and
  • a lack of data quality emerged as a strong theme, which APRA notes is a challenge but not an excuse to do nothing.

APRA is considering running the survey again in future and expanding it to include all APRA-regulated entities in order to monitor how the industry approaches management of climate-related financial risks and how the approach to risk management evolves over time

What to expect in future

  • Investors and stakeholders are increasingly demanding climate-related risk disclosures, in Australia and overseas.
  • ASIC, ACCC and APRA will continue to closely monitor the market with increased industry engagement to educate market participants, and we can expect increased monitoring as industry standards (formal or informal) are developed.
  • ASIC and ACCC have said they will use existing misleading and deceptive laws under the Corporations Act and Australian Consumer Law to combat greenwashing. Super trustees, fund managers, banks and other corporations need to make sure that they use clear and accurate language in disclosure and product labelling and have reasonable grounds for any representations on ESG/climate-related commitments to avoid 'greenwashing' and associated regulatory and litigation risk.
  • Regulators in Australia are looking internationally for guidance and are encouraging the use of standards like the TCFD framework to “future-proof” their businesses and incorporate uniform ESG or climate risk reporting standards.
  • Entities that do not meet investor or stakeholder demand for adequate ESG reporting are increasingly exposed to future enforcement action from regulators and litigation risk from shareholders and customers.