There is increasing demand for environmentally friendly, sustainable or ethical investment options from investors in Australia, particularly those belonging to a younger demographic.
In its recent consumer research report, the Responsible Investment Association Australasia (RIAA) revealed that 86 per cent of Australians expect their superannuation or other investments to be invested responsibly and ethically. These investors are not only motivated by their personal values but also, increasingly, by financial returns – 62 per cent of Australians surveyed believe ethical or responsible super funds perform better in the long term (up from only 29 per cent in 2017).
To meet this demand, managed funds and superannuation funds (referred to here collectively as “funds”) are responding by offering investment products focused on environmental, social and corporate governance (ESG) considerations.
The Australian Securities and Investments Commission (ASIC) is currently conducting a review to establish whether the practices of funds that offer these products align with their promotion of these products; in other words, whether the financial product or investment strategy is as “green” or ESG-focused as claimed.
The potential for funds to overrepresent the extent to which their practices are environmentally friendly, sustainable or ethical is referred to in the market as “greenwashing”.
There is growing global unease about the risks of greenwashing of financial products – partly driven by a lack of clarity about labelling or a single generally accepted taxonomy in this area. This issue has been recognised by international regulators as well as the International Organization of Securities Commissions, which has established a Sustainable Finance Task Force that covers greenwashing and other investor protection concerns. ASIC is participating in this task force and a consultation paper on this topic was published on 30 June 2021.
The European Union has adopted a legal framework introducing a taxonomy that seeks to define which investments or economic activities can be considered sustainable or climate friendly. The US Securities and Exchange Commission (SEC) Asset Management Advisory Committee has made a number of recommendations to improve the data and disclosure used for ESG investing. The UK Financial Conduct Authority has similarly set out their expectations on the design, delivery and disclosure of ESG and sustainable investment funds.
For example, the potential to mislead can arise as a result of the product issuer being unclear on what standards they use to assess the product as environmentally or socially responsible; or overstating green credentials that are not sufficiently reflected in their operations.
Misrepresentation of such products poses a threat to a fair and efficient financial system. Essentially, this misrepresentation distorts relevant information that a current or prospective investor might require in order to make informed investment decisions driven by ESG considerations. Addressing this threat will improve governance and accountability in the market.
ASIC’s review of the extent to which greenwashing may be evident in the funds management space follows on from our review of climate risk disclosures by large listed companies. That review found improved standards of climate- related disclosure compared to our review a few years ago, including significant voluntary uptake by listed companies of the recommendations of the Financial Stability Board’s Task Force on Climate-related Financial Disclosures. However, it also found instances where sustainability-related disclosure by a number of companies carried a “marketing” feel.
Boards should be mindful that prohibitions in the Corporations Act 2001 (Cth) on misleading and deceptive conduct and false or misleading statements apply in relation to financial products such as securities or interests in funds. Accordingly, we encourage boards to look out for any greenwashing – and to ask whether their company’s disclosure around environmental risks and opportunities or their fund’s promotion of ESG-focused investment products accurately reflects their practices in this area.
This article was first published in AICD's Company Director magazine in July 2021.