ASIC puts Australian businesses on notice about ‘greenwashing’ risk

According to ASIC, a rise in demand among investors for sustainability-linked products has led to a higher risk of greenwashing practices. The new guidance outlines how greenwashing can occur and the steps businesses should take to ensure they do not mislead potential investors about the environmental, social and governance (ESG) considerations of the financial product or investment strategy being offered.

Businesses issuing sustainability-linked products should ensure they comply with regulations set out in the Corporations Act 2001 (Corporations Act) and the Australian Securities and Investments Commission Act 2001 (ASIC Act) which include prohibitions against misleading and deceptive statements and conduct, and disclosure obligations.

To avoid the risk of engaging in greenwashing practices, businesses should always use clear labels and definitions of sustainability-related terms and clearly explain the extent to which sustainability has been factored into their investment strategies.

How greenwashing can occur

Misleading and deceptive conduct

Under the Corporations Act and the ASIC Act, businesses offering financial products and services - including sustainability-related products - in Australia are prohibited from making false or misleading statements and engaging in dishonest or misleading conduct in relation to those products and services.

In the context of sustainability-related financial products, greenwashing can occur where a business misrepresents or misleads an investor regarding the extent to which a financial product is sustainable or ethical. For example, businesses that make statements about future events – such as reaching a net-zero target by a certain date - without having reasonable grounds to support their claims run the risk of breaching the misleading statement prohibitions.

Failure to meet disclosure obligations

When preparing a product disclosure statement (PDS) for a sustainability-related product, businesses must follow the same disclosure rules as for other financial products. This includes section 1013D(1)(l) of the Corporations Act, which requires issuers of financial products that have an investment component to state the extent to which labour standards and ESG factors are considered when making investment decisions.

Avoiding greenwashing practices

To avoid the risk of engaging in greenwashing activity, ASIC encourages “truth in promotion” – that is, using clear labels and definitions of sustainability-related terms. Businesses should avoid ambiguous definitions or unexplained jargon, and clearly explain potentially vague terms like ‘socially responsible’, ‘ethical investing’ or ‘impact investing’ in any PDS or other promotional material.

ASIC also encourages “clarity in communication” – that is, clearly explaining how sustainability has been factored into investment strategies. Businesses should disclose their methodology or policy for integrating sustainability considerations, provide information on the sustainability factors they consider and the extent to which these influence investment decisions, and explain their investment screening criteria and any exceptions or qualifications. Businesses should also avoid making broad or vague promotional statements and ensure disclosures help investors understand the screening criteria for any sustainability-related financial product or investment strategy. In addition, businesses should clarify if the investment screen or methodology applies to all products or just specific ones, and disclose the percentage of the portfolio covered by the screen or methodology.

Businesses that use sustainability metrics like ESG scores to evaluate investments should disclose how heavily they rely on these metrics for new and existing investments, the sources of their metrics, the data and methods used to calculate these metrics, and any risks or limitations of using these metrics.  Businesses that set sustainability targets for their products should ensure they have reasonable grounds for their target and clearly state what the target is, how and when they plan to meet their target, how progress will be measured and any assumptions made.

Co-written by Migo Sanchez of Pinsent Masons.