ASIC and Greenwashing: The Regulator Focusses its Attention on the Rapidly Growing ESG Sector

Greenwashing has become a focus point for the Australian Securities and Investment Commission (ASIC) due to soaring investor demand for financial products which refer to environmental, social and corporate governance (ESG) and sustainability considerations (Sustainability-Related Products). Given the regulatory scrutiny, entities dealing with Sustainability-Related Products should be mindful of their disclosure obligations and how information relating to the product is presented.

What is “greenwashing”?

In relation to investments, ASIC defines greenwashing as

ASIC’s primary concern is that firms are unfairly capitalising on investor demand for these products to the investors’ detriment.

Regulatory implications for greenwashing

The current regulatory landscape around greenwashing is centred around:

• prohibitions against misleading and / or deceptive conduct – capturing any vague terminology or statement that cannot be readily understood or reasonably substantiated; and
• disclosure obligations in respect of labour standards, ESG and ethical considerations for financial products with an investment component.
  While these requirements are not new, what is new is the level of focus and therefore corresponding guidance.

How to avoid greenwashing

To avoid greenwashing, entities should consider the following when disclosing information relating to Sustainability-Related Products:

1. Is your product true to label?
2. Have you used vague terminology?
3. Are your headline claims potentially misleading?
4. Have you explained how sustainability-related factors are incorporated into investment decisions and stewardship activities?
5. Have you explained your investment screening criteria? Are any of the screening criteria subject to any exceptions or qualifications?
6. Do you have any influence over the benchmark index for your sustainability-related product? If you do, is your level of influence accurately described?
7. Have you explained how you use metrics related to sustainability?
8. Do you have reasonable grounds for a stated sustainability target? Have you explained how this target will be measured and achieved?
9. Is it easy for investors to locate and access relevant information?

Conclusion

Noting ASIC’s focus on Sustainability-Related Products, entities should give due consideration to the nine questions set out above to manage their risk and exposure to greenwashing. Any negative finding of greenwashing, whether arising from misleading and deceptive conduct or non-compliance with disclosure requirements, could have severe legal and reputational consequences for an entity.

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