Australian business conduct regulator issues guidance on greenwashing risks | Jones Day

In short

The situation: The Australian Securities and Investments Commission (“ASIC”) has issued guidelines for pension funds and managed funds on 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 all sustainability-related products or investment strategies to ensure that such materials accurately and completely disclose the true nature of the products or sustainability strategies. investment, including environmental or ESG characteristics, benefits or qualities. of these products or strategies.

Look forward: The ASIC guidelines signal the increased attention Australian regulators are giving to ESG and sustainability-related statements made by entities operating in Australia to protect investors and consumers from greenwashing.

ASIC released a Information sheet (INFO 271) to provide guidance to pension funds 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 on the basis of environmental or social criteria, among other factors.

While the factsheet is specifically aimed at the superannuation and managed investment fund industries, the level of detail contained in the guidance indicates that ASIC is more focused on green laundering claims by entities operating in all sectors in Australia. The factsheet provides useful advice across industries as to the indicia Australian regulators are likely to consider when assessing claims of greenwashing and demonstrates the heightened level of attention Australian regulators are giving to this risk.

Indeed, Australia’s competition regulator, the Australian Competition and Consumer Commission (“ACCC”), has also identified the risk of greenwashing as one of its top enforcement priorities. The ACCC recently indicated that it is proactively seeking out “problem areas” for greenwashing and, where the regulator sees the greatest potential for harm to consumers, it will seek to take legal action. The ACCC is looking closely at companies’ net zero goals and has welcomed private lawsuits against companies to verify that companies are doing what they do publicly. say they are doing. The lawsuit filed against Australian oil and gas producer, Santos Limited, last year…see our previous Jones Day Alert— illustrates this approach.

ASIC also asserted that, for now, voluntary climate-related disclosures by relevant entities in Australia should comply 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 Council (“ISSB”) in March 2022 of the Proposed International Standards on Climate and Sustainability-Related Disclosures and recently announced that the Sustainable Finance Working Group of the International Organization of Securities Commissions (“IOSCO”) (of which ASIC is a member) will consider possible IOSCO endorsement of the ISSB standards. While Australia’s climate disclosure requirements are currently less prescriptive than those in the United States and Europe (particularly, in the former case, in light of the SEC release stringent regulatory change projects climate risk disclosureincluding to the extent that it may apply to non-US issuers), Australian entities are advised by ASIC that they should familiarize themselves with the ISSB Exposure Draft and keep themselves informed of developments.

ASIC Guidelines Summary

The factsheet primarily discusses ASIC’s current views on the circumstances in which funds that issue sustainability-related financial products may engage in misleading or misleading conduct.

ASIC suggested that issuers consider nine questions when preparing communications and disclosures about sustainability-related financial products to ensure communications are adequate, accurate, and clear. These questions are set out below, along with our summary of ASIC’s focus on each question:

  1. Does your product comply with the label? Avoid labels that exaggerate the sustainability-related qualities of products or elements of the investment strategy, including, in particular, absolute terms. (For example, a product should not be promoted as a “non-gambling fund” if, under the terms of the product, the product may invest in businesses that derive a portion of their total revenue from gambling activities).
  1. Did you use vague terminology? Statements related to sustainability, such as ‘ethical investing’ or ‘positive impacts for the world’ can have a variety of meanings. Use sustainability “jargon” with care and adequately explain the intended meaning of such terminology.
  1. Are your general assertions potentially misleading? Likewise, titles that require exceptions and qualifications in order to correct a misleading impression should not be used. (For example, a product issuer should not make headline, promotional claims such as “we don’t invest in tobacco” if, in fact, the issuer’s proprietary investment screen allows investing in companies involved in the manufacture, sale and distribution of tobacco products when the company’s income from these activities is below a certain threshold).
  1. Have you explained how sustainability factors are incorporated into investment decisions and stewardship activities? Clearly explain the methodology or policy for integrating sustainability considerations into investment decisions and stewardship activities, including what sustainability considerations are taken into account and how investments are selected on this basis. The level of influence over the companies with which the funds engage should not be overstated in describing the stewardship approach. Similar reasoning could, for example, apply to energy companies that engage in their value chain with a view to reducing scope 3 emissions.
  1. Have you explained your investment selection criteria? Are any of the pre-selection criteria subject to exceptions or reservations? The extent to which selection criteria are applied (e.g. to the issuer as a whole, to a product category or to all or part of a portfolio) should be disclosed clearly and prominently, as well as all exceptions and reservations. (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 the supply of palm oil as an input ingredient” should clearly state what “revenue” means in this context, i.e. whether “turnover” refers to gross or net turnover, or turnover as declared by the company in its audited financial statements).
  1. Do you have an influence on the sustainability benchmark of your product? If so, is your level of influence accurately described? ASIC ensures that investors are properly informed of the influence of the issuer on the composition of an index against which portfolio composition is determined or performance measured. (For example, a sustainability-linked product that adopts a passive investment strategy by tracking a combination of sustainability-linked indices administered by third-party index providers must clearly state in its PDS whether the issuer of the product actively contributed to any negative value adjustments or exclusion filters applied to the underlying indices).
  1. Have you explained how you use sustainability metrics? Where sustainability-related metrics are used (e.g. ESG scores), these should be accurately described, including the source, application, underlying data and any risks or limitations arising from reliance in these measures.
  1. Do you have reasonable grounds for a stated sustainability goal? Have you explained how this objective will be measured and achieved? Sustainability goals should be clearly explained, including when and how a goal will be achieved, how progress will be measured, and any assumptions on which these assessments are based. General statements such as commitments to “make positive changes for the environment” provide investors with inadequate information about the issuer’s environmental strategy or objectives, or how such an objective will be achieved and should be avoided .
  1. Is it easy for investors to locate and access relevant information? Product information should be easily accessible to investors and consistent across all platforms and mediums. If the investment approach is guided by third-party frameworks, such as the United Nations Sustainable Development Goals, this should be disclosed.

The timing of ASIC’s release of the factsheet is notable in that it follows increased regulatory action in the managed fund space in the US and Europe.

Three takeaways

  1. The key message from ASIC and ACCC is that regulators are focusing on the risk that all market participants in Australia overestimate ESG or sustainability criteria or the qualities of the products they offer or strategies that they pursue.
  2. The principles set out in the factsheet should be considered by all entities operating in Australia that offer or promote “ESG” or “sustainable” products, as well as those that have made public commitments to sustainability objectives. sustainability or net zero. targets.
  3. Legal persons and issuers in Australia should take steps to familiarize themselves with the TCFD framework and the ISSB Exposure Draft (if they have not already done so) to ensure that they are well placed to report against these future international standards, should they become mandatory in the future.

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