Global regulators’ focus on greenwashing has prompted the responsible investment sector to look closely at how we’re communicating about responsible investment products.

Australia’s recent 2023-24 Federal Budget included $4.3 million in additional funding for ASIC’s greenwashing surveillance and enforcement work. The Australian Government has also indicated that law reform may be on the cards as part of its National Sustainable Finance Agenda.

So how can we ensure products are meeting or exceeding the expectations of clients and consumers? And how do you substantiate green claims to the satisfaction of regulators?

The ‘greenwashing trilogy’ at RI Australia 2023 unpacked the how-tos of product labelling, and how funds, advisers and regulators are grappling with the challenges.

What is greenwashing?

Greenwashing is essentially ‘misleading and deceptive conduct’ under the consumer law (Australian Securities and Investments Commission Act).At RI Australia 2023, Mark Bland, Partner at law firm Mills Oakley, opened the panel discussion What’s on the label? Industry efforts to combat greenwashing by saying that we’re now seeing the challenges of ASIC applying established law to a new and fast-changing area. Product claims must have a reasonable basis but greenwashing can be accidental – there’s no legal requirement of an intention to mislead clients or consumers. Bland pinpointed some of the areas where funds can trip up, including descriptions of screening, errors in documentation, and not sticking to the promises made in product disclosures or marketing.

In mid-2022, ASIC released guidance for industry, INFO 271: How to avoid greenwashing when offering or promoting sustainability-related products, which identified questions that financial product issuers should ask themselves when designing and describing products.

During ASIC Deputy Chair Karen Chester’s keynote at RI Australia 2023, ASIC released REP 763 ASIC’s recent greenwashing interventions. Chester called this season 2 of How to avoid greenwashing, and it details examples of how ASIC has intervened on unsubstantiated green claims.

Why are regulators eyeing off green claims?

In her keynote address, ASIC Deputy Chair Chester spelled out why ASIC is committed to cracking down on greenwashing:

‘Market transparency and integrity are essential. Their absence runs counter to fair and efficient markets. Their absence also runs counter to confident and informed investors supporting this transition. All of which is needed for the efficient deployment of this transition capital.’

Hari Balkrishna, London-based Portfolio Manager of T. Rowe Price’s Global Equities Impact Strategy was equally clear on why regulators worldwide are focused on funds’ green claims:

‘All the regulators are trying to do is ensure that what is said on the tin is what retail investors and other investors get. And I think we should applaud that and frankly welcome that.’

How are we combatting greenwashing?

Regulators, fund managers and others in the responsible investment sector are taking responsibility for being part of the solution when it comes to integrity and clarity in product claims.

The regulators’ viewpoint

ASIC Deputy Chair Chester spelled out three ‘antidotes’ to greenwashing, being:

1. transparency through disclosures that comply with today’s law and ultimately a quality, global baseline for sustainability-related disclosure standards, that is, the International Sustainability Standards Board
2. policy installed ‘bright lines’ to support that disclosure, such as the emerging Australian sustainable finance taxonomy, which was provided with $1.6 million in funding in the recent Federal Budget, and
3. regulators doing their job and working together in doing so.

Questioned about whether ASIC should slow down its enforcement activity until clear policy settings are in place, Chester responded that greenwashing is happening now, that it’s a ‘corrosive agent’ in the market, and that stopping the current trajectory would be out of step with other regulators.

Kuldeep Yadav, MSCI’s Vice President ESG Sector & Thematic Research, APAC, explained that while funds had limited regulatory guidance globally for the past decade, that is now changing ‘everywhere’. For example, the European Union’s Sustainable Finance Disclosure Regulation has become a de facto product classification or labelling regime. Regulators want to ensure stability in the system and level the playing field, which is important for asset managers. Clear product labelling is essential in that goal. As Yadav said, ‘Regulators have acknowledged that naming a fund is a commitment, is a promise that you make’.

Linking design and outcomes to labelling and disclosure

Product design is the foundation of a product’s label. And good product disclosure means clear descriptions of investment strategies, processes, goals and outcomes.

Susheela Peres da Costa, Principal at The Stewardship Centre, is a member of the new international Collaboration to Align and Refine ESG Terminology (CARET) project, an initiative of the CFA Institute, the PRI, and RIAA and its UK and Canadian equivalents. The project’s goal is not to define what is ‘sustainable’ or ‘ethical’, but to establish agreed terminology, such as ‘screening’ and ‘ESG integration’. In terms of how to shape product’s claims for the market, Peres da Costa said:

‘It’s incumbent on us to make things simple. To make sure that the disclosure that we’re providing and anything that we’re communicating to consumers is minimal in the jargon that it uses, and is factual and basic, rather than using adjectives or labelling. In the CARET process, we’re discouraging the use of the word “screening” or adjectives around screening that you’ve heard… What we’d really like to see is just a plain, simple description of what the criteria are, what any thresholds are, and what happens if those thresholds are met in a securities portfolio. Because there’s no ambiguity once that’s happened.’

Balkrishna described good disclosure as going hand-in-hand with good product outcomes:

'People want to know, if I’m putting dollars into this fund, what is the actual outcome of that? Reporting and measuring that outcome is another way to force you to have that link between the intentionality of the impact, and the outcome.’

The importance of due diligence

It is incumbent on investors and financial advisers to understand products, and to ensure they’re delivering for clients and consumers.

In Balkrishna’s view, the authenticity of what a fund does is very important. Regulators can introduce laws, but it’s on investors to do ‘heavy due diligence’ to ensure that they do what they say.

In a panel discussion of financial advisers on navigating financial product labels and claims, adviser and RIAA board member Farren Williams stepped through how she ensures a good handle on funds and fund managers, in order to best meet her clients’ wants and needs:

‘We can get to know managers well, understand their approach in this space, their responsible investment policy, how robust it is and how it’s integrated into their process… all of those things to get a sense of what’s happening and whether it’s the right fit for a client.’

Fellow RIAA board member Dave Rae pointed to the importance of various tools available to advisers, such as RIAA’s Responsible Investment Certification, Ethical Advisers’ Co-Operative’s Ethical Fund Ratings or ‘leaf ratings’ and Lonsec’s investment product ratings. But Rae emphasised, ‘there’s an onus on the adviser to understand what that methodology is and isn’t’.

For example, Williams said that in the RIAA Certification process, ‘the focus is less on holdings and more on process. Holdings will change over time, the process should be adhered to over a longer period.’

Rachel Alembakis, FS Sustainability Managing Editor, said it’s ‘not inconceivable’ that ASIC may focus its attentions on financial advisers in future. Rae agreed:

‘ASIC is looking at funds but it’s relevant here too… What are you saying on your website? Are you matching client preferences in your portfolio? There has been an evolution in this for advisers… I question if it’s actually happening.’

A timely reminder that every part of the sector has a part to play in combatting greenwashing.

So what are the key takeaways from the ‘greenwashing trilogy’?

• Design robust products: Clear investment strategies, processes and governance, and outcomes measurement are the foundations of clear product labelling.
• Support product claims with evidence: Disclosure should be specific about what a product aims to do and how, in order to back up headline claims in product labels.
• Go beyond face value: Rigorous due diligence is a necessary part of the work of asset owners, asset managers, advisers and others, to meet client, consumer and regulator expectations.
• Regulation will continue to grow: Australia is lagging internationally on regulation and enforcement, but ASIC will continue to focus on greenwashing and the law may be heading in a similar direction to other markets.

If you attended the conference, please check your email for a link to view session recordings, to continue taking valuable learnings from RI Australia 2023, year-round.

Panels referred to:

• Greenwashing in Australia: A view from the regulator – Keynote from ASIC Deputy Chair Karen Chester
• What’s on the label? Industry and regulator efforts to combat greenwashing
• What’s in a name? Product labelling – Adviser session