Action on greenwashing steps up – Key insights for RIAA members
The focus on greenwashing continues to grow – what do we know, what have we learnt and what are the lessons for our sector?
Last week saw the most significant greenwashing action taken to date by regulators in Australasia. A court action was launched by Australian Securities and Investments Commission (ASIC) against Mercer Superannuation (Australia) Ltd alleging greenwashing conduct in a number of their superannuation investment options.
The goal of the regulators in our region – both ASIC and Aotearoa New Zealand’s FMA (Financial Markets Authority) has become abundantly clear: to protect consumers from the risks of greenwashing; a form of marketing that makes it hard for consumers to make a fully informed decision at a time of growing investor demand for responsible, sustainable and ethical financial products. Both regulators have issued guidance to the market, setting out their expectations of financial services product providers in relation to how they represent products in the marketplace. In both the Australian and Aotearoa New Zealand markets, regulators have moved to an enforcement stage in their activities to prevent greenwashing.
What have we learnt from actions so far?
Regulators want to ensure consumers are not at risk of being misled – intentionally or unintentionally – by statements or conduct that is misleading or deceptive. Both regulators have been clear that any claims made in relation to sustainable products must be clear, precise and substantiated and have reasonable grounds to ensure they can be delivered upon.
It is in all of our interests to ensure greenwashing is stamped out, to avoid undermining the trust in our industry by consumers who want to invest in line with their values and ethics and support sustainability through their financial decisions. The regulator guidance helps us better understand what is required to ensure we protect that trust.
Regulator expectations include:
Truth in labelling – the label of a product matters, and all claims must be reflected in the ESG or sustainable strategy of the product. Products with labels such as sustainable, impact, ethical, low carbon, transition etc. must provide the detailed processes, and disclosures, on how these products can deliver on these claims.
Substantiate claims – if claims are made, there must be appropriate processes, policies and disclosures to deliver upon the claims. For example, if you make a statement that the product aligns with the Sustainable Development Goals, there ought to be clear processes to deliver on this, and reporting on how the product is progressing towards achieving this.
Be precise and avoid using vague language – this is especially relevant where exclusions are applied in products – the scope and thresholds of these exclusions or negative screens must be precisely set and communicated in fund documentation. This is particularly important in defining industry segments being excluded (e.g. weapons – all weapons, controversial weapons, nuclear weapons, or civilian weapons?) and any revenue thresholds applied (e.g. tobacco is excluded, but has a 5% allowable revenue threshold). Carve outs from an exclusions policy present a heightened risk of misleading a consumer.
But equally, as the FMA states, the overall impression counts – taking a consumer lens is critical, and having a sustainable labelled fund that, whilst accurately and precisely describing its exclusions, in reality does little more than a non-sustainable labelled fund, risks leaving consumers open to being misled. Answering the question, “is this what a reasonable consumer would expect?”, is a useful guide here.
Products that are more sustainable and more complex have a higher risk of misleading, so require higher standards of evidence and substantiation of claims.
Ensure consistency across all public facing materials – PDS, SIPO, factsheets, websites, IM, policies, Other Material Information etc. – and ensure the information is easily accessible for consumers.
The role of RIAA Certification:
The Mercer Superannuation products that are the focus of the ASIC action are not certified by RIAA. But certain Mercer Investments Australia and New Zealand products have been certified under our Responsible Investment Certification Program.
RIAA’s Responsible Investment Certification Program currently has over 320 products certified across Australia and New Zealand, and is strongly focused on ensuring truth in labelling. This includes doing a deep dive due diligence on products to ensure they can substantiate claims made, have process in place to deliver on the claims, meet very high standards of disclosures and would not mislead the average consumer.
RIAA’s Responsible Investment Analysts assess products on a daily basis and frequently require applicants for the Certification Program to provide better disclosures, clearer language and more precision in claims and exclusions, as well as changes to legal documentation. Our Certification Team is actively working to ensure funds are aligning with the expectations of the regulators , and will continue to work hard on this objective.
The Program does a two-yearly review of certified products, and also reassesses products more frequently when new information comes to light or where there are material changes to those certified products.
RIAA will take action as and when regulator enforcement actions are initiated against a Certified provider to ensure their certified products continue to comply with the Responsible Investment Standard. Such steps can include revoking certification, imposing conditions upon products for corrective actions, or temporarily suspending products from being published on the Responsible Returns website, which is the source of up to date information on current certified products. The Certification Program also has core eligibility criteria that can come in to play, such as requiring that applicants to the program are not subject to legal proceedings or regulator investigation.
Standards of responsible investment in our markets are continuously evolving, thanks in a large part to RIAA’s efforts to lift those standards. RIAA has a process to review the Responsible Investment Standard (and associated Guidance Notes) against which products are assessed, in light of the elevating regulator expectations. RIAA is also taking into account the global focus on greenwashing and developments in sustainability fund classification that is occurring at great pace around the world, such as the EU’s Sustainable Finance Disclosure Regulation (SFDR), the US’s Securities and Exchange Commission (SEC) ESG disclosure rules and the UK’s Sustainability Disclosure Requirement (SDR).
What should RIAA members do next:
The regulators are clear as to their expectations and all members should review the way they market, disclose, and articulate their responsible investment strategies to ensure they are meeting the requirements of ASIC and FMA.
Third party verification is a sound means of ensuring alignment to the expectations of regulators. RIAA’s Certification Program is a way of having your products independently reviewed against a standard that is well-aligned to the regulators’ expectations, to lessen the risk that your products are greenwashing.
Finally, this won’t be the last action we see by regulators who are working to protect consumers from being misled. Our experience in Certification shows that there is still work to be done to lift the standards, precision, clarity and consistency of product disclosures in our markets. We are working hard to do just that.
Resources:
ASIC information sheet on greenwashing (June 2022)
FMA – disclosure frameworks for integrated financial products (Dec 2020)
FMA – Integrated financial products – review of managed fund documentation (July 2022)