Australian Corporate Conduct Regulator Releases Guidance on Greenwashing Risks
The Situation: The Australian Securities and Investments Commission ("ASIC") has released guidance to superannuation and managed funds as to how to avoid the risk of greenwashing when promoting sustainability-related products.
The Result: Product issuers should carefully review their promotional and disclosure materials for any sustainability-related products or investment strategies to ensure that those materials accurately and fulsomely disclose the true nature of the products or investment strategies, including any environmental or other ESG features, benefits, or qualities of those products or strategies.
Looking Ahead: ASIC's guidance signals the heightened attention that Australian regulators are paying ESG and sustainability-related claims made by entities operating within Australia in order to protect investors and consumers from greenwashing.
ASIC has released an Information Sheet (INFO 271) to provide guidance to superannuation and managed funds on how to avoid greenwashing when offering or promoting sustainability-related products, e.g., funds and other financial products where investments are made based on environmental or social criteria, amongst other factors.
Whilst the Information Sheet is specifically directed at the superannuation and managed investment fund industries, the level of detail contained within the guidance signals that ASIC is sharpening its focus on greenwashing claims by entities operating across all industries within Australia. The Information Sheet provides useful guidance across all sectors as to the indicia that Australian regulators are likely to consider in assessing claims of greenwashing and speaks to the heightened level of attention that Australian regulators are paying to this risk.
Indeed, Australia's competition regulator, the Australian Competition and Consumer Commission ("ACCC"), has also identified greenwashing risk as one of its key enforcement priorities. The ACCC indicated recently that it is proactively looking for 'problem sectors' for greenwashing and, where the regulator sees the greatest potential for harm to consumers, it will look to litigate. The ACCC is closely scrutinising corporate net zero targets and has welcomed private actions being brought against corporates to test that companies are doing what they publicly say they are doing. The claim brought against Australian oil and gas producer, Santos Limited, last year—see our previous Jones Day Alert—illustrates this approach.
ASIC has also affirmed that, for now, voluntary climate disclosures by relevant entities in Australia should be in line with the Financial Stability Board's Task Force on Climate-related Financial Disclosures ("TCFD framework"). Importantly, ASIC refers to the publication by the International Sustainability Standards Board ("ISSB") in March 2022 of proposed international standards on climate and sustainability-related disclosures and recently foreshadowed that the Sustainable Finance Taskforce of the International Organisation of Securities Commissions ("IOSCO") (of which ASIC is a member) will consider possible IOSCO endorsement of the ISSB standards. While climate disclosure requirements in Australia are currently less prescriptive than those in the United States and Europe (particularly, in the former case, in light of the SEC's release of stringent draft regulatory amendments to climate risk disclosure, including as it may apply to non-U.S. issuers), Australian entities are on notice by ASIC that they should familiarise themselves with the ISSB exposure draft and keep apprised of developments.
Summary of ASIC's Guidance
The Information Sheet primarily addresses ASIC's current views as to the circumstances in which funds that issue sustainability-related financial products may engage in misleading or deceptive conduct.
ASIC has suggested that issuers consider nine questions when preparing communications and disclosures in relation to sustainability-related financial products in order to test that the communications are adequate, accurate and clear. These questions are set out below, together with our summary of ASIC's focus in respect of each question:
- Is your product true to label? Avoid labels which overstate the sustainability-related qualities of the products or elements of the investment strategy including, in particular, absolute terms. (For example, a product should not be promoted as a "No Gambling Fund" if, according to the product's terms, the product may invest in companies that earn a portion of their total revenue from gambling activities).
- Have you used vague terminology? Sustainability-related statements, such as "ethical investing" or "positive impacts for the world" can have a variety of meanings. Use sustainability-related 'jargon' with care and adequately explain the intended meaning of terminology of this kind.
- Are your headline claims potentially misleading? Similarly, headline claims that require exceptions and qualifications in order to rectify a misleading impression should not be used. (For example, a product issuer should not make headline, promotional claims such as "we do not invest in tobacco" if, in fact, the issuer's exclusionary investment screen permits investment in companies involved in the manufacture, sale, and distribution of tobacco products where the company's revenue earned from those activities is below a particular threshold level).
- Have you explained how sustainability-related factors are incorporated into investment decisions and stewardship activities? Clearly explain the methodology or policy for integrating sustainability-related considerations into investment decisions and stewardship activities, including which sustainability-related considerations are taken into account and how investments are screened on this basis. The level of influence over companies with which funds engage should not be overstated in describing the stewardship approach. Similar reasoning could, for example, apply to energy companies that are engaging with their value chain with a view to reducing Scope 3 emissions.
- Have you explained your investment screening criteria? Are any of the screening criteria subject to any exceptions or qualifications? The extent to which screening criteria are applied (e.g., to the issuer as a whole, to a product class, or to whole or part of a portfolio) should be clearly and prominently disclosed, along with any exceptions and qualifications. (For example, the Product Disclosure Statement ("PDS") for a fund marketed as not investing in companies that derive "more than 10% of their revenue from providing palm oil as an input ingredient" should clearly disclose what 'revenue' means in this context, i.e., whether "revenue" refers to gross or net revenue, or revenue as reported by the company in its audited financial statements).
- Do you have any influence over the benchmark index for your sustainability-related product? If you do, is your level of influence accurately described? ASIC is concerned to ensure that investors are accurately informed as to whether the issuer has any influence over the composition of an index against which the portfolio composition is determined or performance measured. (For example, a sustainability-related product that adopts a passive investment strategy by tracking a combination of sustainability-related indexes administered by third-party index providers should accurately disclose in its PDS whether the product issuer has active input in any adjustments to the negative or exclusionary screens applied to the underlying indices).
- Have you explained how you use metrics related to sustainability? Where sustainability-related metrics are utilised (e.g., ESG scores), these should be accurately described, including the source, the application, the underlying data and any risks or limitations arising from the reliance on such metrics.
- Do you have reasonable grounds for a stated sustainability target? Have you explained how this target will be measured and achieved? Sustainability targets should be clearly explained, including when and how a target will be met, how progress will be measured, and any assumptions relied on in making these assessments. Broad claims such as commitments to "driving positive change for the environment" provide investors with inadequate information as to the issuer's strategy or environmental goals, or how such an objective will be achieved, and should be avoided.
- Is it easy for investors to locate and access relevant information? Product information should be readily accessible to investors and consistent across all platforms and mediums. If the approach to investing is guided by third-party frameworks, such as the UN Sustainable Development Goals, this should be disclosed.
The timing of ASIC's issuance of the Information Sheet is notable in that it follows on the heels of heightened regulatory action in the managed funds space in the United States and Europe.
Three Key Takeaways
- The key message from ASIC and the ACCC is that the regulators are zeroing in on the risk of the full spectrum of market actors in Australia overstating ESG or sustainability criteria or qualities in the products they are offering or strategies that they are pursuing.
- The principles set out in the Information Sheet should be taken into account by all entities with a presence in Australia which offer or promote 'ESG' or 'sustainable' products, as well as those that have made public commitments as to sustainability goals or net zero targets.
- Corporate entities and issuers in Australia should take steps to familiarize themselves with the TCFD framework and the ISSB exposure draft (if they have not done so already) to ensure that they are well positioned to report against these and any future international standards, should they become compulsory in the future.
Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our “Contact Us” form, which can be found on our website at www.jonesday.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.