However, the popularity of greenwashing has long limited the reliability of environmental, social, and governance (ESG) claims to be faithful representations of investment products. Finding solutions to mitigate greenwashing is critical to ensure the momentum behind ESG does not slow down, but instead speeds up.
Greenwashing has remained an issue for several decades, although it has grown exponentially as interest in sustainability-related products rapidly increases. Thus, it has only recently become a key concern for regulators, with the Australian Securities and Investments Commission (ASIC), the Financial Services Council (FSC), and the Australian Competition and Consumer Commission (ACCC) all recently releasing guidance.
In the context of investments, ASIC defines greenwashing as “the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical”. ASIC is cracking down on issuers of sustainability-related products, calling for them to:
- Use clear labels
- Define the sustainability terminology they use
- Clearly explain how sustainability considerations are factored into their investment strategy
Information Sheet 271 released by ASIC asks a range of questions for sellers of sustainability-related products to consider, from “Have you used vague terminology?” to “Do you have any influence over the benchmark index for your sustainability-related product?” Each question is accompanied by an explanation and example, aiming to inform fund managers, directors, and trustees of their potential obligations.
The FSC has issued advice (FSC Guidance Note No. 44) to its members regarding the use of certain terminology. This includes the suggestion that labelling a fund with the term ‘impact’ should be reconsidered “unless the impact can be directly measured, quantified, and reported”. The FSC presents specific criteria for a fund to be labelled ‘impact’ without exposure to high greenwashing risk.
Key features of an impact fund:
- There is an intent to solve/address a problem — for example, reduce carbon emissions
- The impact is measured — for example, the reduction in carbon emissions can be measured and disclosed
- That the impact is additional, this means that the reduction would not have occurred in the absence of the investment
ASIC commissioner Sean Hughes also warns consumers to remain vigilant, suggesting they “look out for vague or ambiguous language or exaggerated marketing claims that lack a reasonable basis to support them”.
Consumers are particularly susceptible to greenwashing, as investment and purchasing preferences continue to shift towards ESG-related products and offerings. According to an Australian Shareholders’ Association survey earlier this year, “Sixty-nine per cent of respondents avoid investment in certain industry sectors due to ethical or sustainability concerns”.
With the protection of consumers in mind, greenwashing landed on the top position of the ACCC’s 2022–23 priorities list. ACCC chair Rod Sims expressed that the government department is increasingly aware of “businesses … falsely promoting environmental or green credentials to capitalise on these consumer preferences”.
While the harmonisation of standards for sustainability-related disclosures is a step in the right direction, the management of greenwashing will continue to be a distinct challenge that needs to be monitored and managed.
