On 14 June 2022, ASIC published guidance in relation to claims about sustainability-related products (Guidance). The Guidance:

  • defines greenwashing and the issues it creates;
  • current regulation in relation to claims about sustainability-related products; and
  • key issues to consider when offering or promoting sustainability-related products. 

The Guidance is directed towards funds, however its principles apply more broadly to entities who offer or promote financial products, such as companies listed on a securities exchange.

Key terms

What is 'ESG matters'?

ESG matters refer to environmental, social and governance matters.

What is 'Greenwashing'? 

Greenwashing, in relation to investments, is defined by the Guidance as ‘the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical.’ 

What is a 'sustainability-related product'? 

A sustainability-related product is a ‘financial product where the issuer has incorporated sustainability-related considerations – such as [ESG] matters – into its investment strategies and decision making.’

Australia's regulation of sustainability-related products 

With focus on the clean energy transition increasing, companies are eager to promote their operations and products as clean and green. Environmentally friendly products are more attractive to customers and investors and making green claims can improve a company’s market position relative to competitors that are making weaker or no comparable environmental claims. In this environment, regulators are alive to the risk of parties engaging in “greenwashing”, which is the practice of providing misleading information about a product or an entity’s ESG credentials, which may influence the market and thereby impact upon an investor’s ability to make informed investment decisions.  Greenwashing can result in decreased investor confidence and undermine the financial system working fairly and efficiently.

In addition to the Guidance from ASIC, the Australian Competition and Consumer Commission (ACCC) announced earlier this year that potentially misleading claims relating to environmental claims and sustainability are its top consumer protection priority for 2022/23.  The ACCC has emphasised that it will look to take a pro-active approach in enforcing consumer laws relating to greenwashing, with Commissioner Delia Rickard recently reported as saying

“We’re really going to proactively say ‘well, what are the problem sectors’, and go looking for the best cases to bring. And where we see the greatest harm, the greatest detriment, we will be looking at going to court.”

Interestingly, this approach contrasts somewhat with the approach of ASIC in relation to the Guidance.  ASIC Commissioner Sean Hughes has been reported as saying that it is still in the process of “educating” the market in the context of big shifts in the investment landscape rather than pro-actively enforcing the rules, at least at this stage.

Regardless of any potential difference in the approach of the ACCC in relation to enforcing consumer protection laws more broadly or the ASIC in relation to financial laws. In the current regulatory environment, it is more important than ever that all companies ensure that that claims relating to the green characteristics of their investment or other products are well backed up. Current regulation in Australia in relation to claims about sustainability-related products. 

The Australian market is experiencing increased demand for sustainability-related financial products, which gives rise to an enhanced risk of greenwashing.

Issuers are subject to certain requirements when promoting or offering sustainability-related products, such as prohibitions against misleading and / or deceptive conduct under the Corporations Act 2001 (Cth) and Australian Securities and Investments Commission Act 2001 (Cth), as well as disclosure obligations under the Corporations Act 2001 (Cth), ASIC Regulatory Guide 65 and the Corporations Regulations 2001 (Cth).

In relation specifically to climate change and clean energy, ASIC expressly recognises the recommendations by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) in relation to climate-related disclosures.  However, compliance is, for the time being, voluntary.  ASIC suggests that entities who report voluntarily under the TCFD framework will be well-placed to transition to any future standards which may be imposed.

Overall, ASIC notes that regulatory developments in this area are developing; entities should remain up-to-date and consider how disclosure may be improved in light of these developments.

9 key issues to consider when offering or promoting sustainability-related products

In order to avoid or reduce the risk of greenwashing, ASIC has provided some key questions that entities should consider prior to disclosing information around sustainability-related products. The questions are designed to facilitate ‘truth in promotion’ and ‘clarity in communication’.

Is your product true to label?

Labels play an important role in guiding investors about what they will be investing in and as such, investors expect that the label will align with the product’s underlying investment strategy.  There is currently no standardised labelling for sustainability-related products. Entities should therefore ensure that their label is not misleading and accurately reflects the substance of the product itself.

Have you used vague terminology?

Broad, unsubstantiated sustainability-related statements without clarifying information should be avoided.  Examples include terms such as ‘socially responsible’, ‘ethical investing’ and ‘impact investing’.  Such statements can be subjective, and therefore entities should explain the terminology if used in product disclosure statements or other promotional material. 

Are your headline claims potentially misleading?

Headline sustainability-related claims should not of themselves be misleading, and exceptions or qualifications should not be used to clarify the claim.  If exceptions or qualifications are required, they should be placed in a way that draws obvious attention to them and they should be consistent with other disclosure content, including the headline claims. 

Have you explained how sustainability-related factors are incorporated into investment decisions and stewardship activities?

Methodology or policy informing sustainability-related considerations and investment decisions should be clearly disclosed and explained.  The minimum expectation is that investors are made aware of the relevant considerations and how they are incorporated into investment decisions.  If sustainability-related factors are given a weight in relation to decision-making, an explanation of this weighting approach may be beneficial. 

Have you explained your investment screening criteria? Are any of the screening criteria subject to any exceptions or qualifications?

Disclosure should be sufficient to enable investors to fully understand the product’s sustainability-related screening criteria and process.  It should be clear whether the screen applies to all products offered by the issuer or, if only some are covered, the percentage of the portfolio covered should be disclosed.  Screening exceptions and qualifications should also be clear to investors and displayed prominently alongside all references to investment screens.

Do you have any influence over the benchmark index for your sustainability-related product? If you do, is your level of influence accurately described?

Any influence over the composition of an index against which portfolio composition is determined should be disclosed.  Where an issuer actively manages an investment decision-making process to any degree, it should not state that the process is passively managed.

Have you explained how you use metrics related to sustainability?

To the extent sustainability-related metrics (for instance, ESG factor scores) are used to evaluate whether an investment fits with a product’s investment strategy, the following should be disclosed:

  • the extent to which the metrics are used to evaluate new and existing investments in implementing the investment strategy;
  • the sources of the sustainability-related metrics, including whether they are based on proprietary methodologies or from third-party providers;
  • a description of the underlying data used to calculate the metrics, as well as the calculation methodologies; and
  • any risks or limitations arising from reliance on the metrics.

Do you have reasonable grounds for a stated sustainability target? Have you explained how this target will be measured and achieved?

If the product has set a certain sustainability target, the target should be explained, including what it is, how it will be met and by when, the method for measuring progress towards the target and any assumptions underpinning this information.

If a stewardship investment approach is adopted, investors should be informed of the rationale for engaging with certain companies to influence their corporate behaviour and also be provided with regular updates on progress with the companies.

Is it easy for investors to locate and access relevant information?

Information provided to investors should be clear and concise to allow investors to understand the sustainability-related considerations informing the product being offered.  All published information should be relevant to an investor’s decision-making and should be easy to locate and access.  Information should be consistent across all platforms with which an entity engages, from regulatory documentation to social media platforms.

Globally regulatory action is being taken to prevent greenwashing

There is no doubt that regulators in multiple domains consider investor and consumer risks arising from greenwashing to be very serious. 

In late May, 50 German police officers raided the Frankfurt offices of Deutsche Bank’s asset management arm, DWS Group (DWS) in response to allegations made by a former executive at DWS that the funds arm was engaging in greenwashing.  In 2020, DWS claimed that half of the US$900 billion worth of assets it managed were invested under ESG criteria.  The former executive claimed that this was false and misleading.  The police raid marked the first major milestone in the investigation into DWS and made global news.  The CEO of DWS resigned in response to the allegations and public pressure.

Meanwhile, in the USA, the Securities Exchange Commission (SEC) has initiated an investigation into Goldman Sachs Group Inc’s asset-management division, and particularly its funds which are claimed to meet particular ESG standards.  The firm manages at least four funds which have ESG or clean-energy claims in their names and the SEC is seeking to get to the heart of whether these claims are true.  This is the latest major investigation carried out by the SEC following a US$1 million settlement being paid last month by the investment advisory arm of Bank of New York Mellon to settle an investigation by the SEC into allegations it had engaged in greenwashing and misled about the relevance of ESG criteria when assessing investments. The prevention of greenwashing has been identified as a top priority by the SEC under the guidance of Chair Gary Gensler and similar investigations can be expected in the coming months.

We can expect to see continued growth in the frequency and seriousness of actions taken by global regulators to prevent greenwashing, as the gains to be made by promoting ‘clean’ and ‘green’ products continues to increase.  This represents a heightened risk to fund and asset managers, who must ensure they are not misrepresenting the importance of sustainability-related factors in decision-making relating to financial products.  Notwithstanding the legal consequences that may arise should any negative finding result from such investigations, asset and fund managers should be aware of the reputational damage they may sustain if their name becomes headline news around the world on the basis of ESG and greenwashing concerns. Investors are demanding investments that are ethical, sustainable and environmentally friendly, and mere rumours of misleading and deceptive conduct can create a sceptical and cautious market.



Partner Jeremy Jose discusses electricity regulation and environmental claims with Moya Dodd on The Competitive Edge podcast: