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Sustainable finance, governance and greenwashing: ASIC’s strategic priorities

The Australian Securities and Investment Commission (ASIC) has released its new Corporate Plan, outlining its plans for the next year, and strategic priorities for the next four.

These strategic priorities are:

  • Sustainable finance – to supervise and enforce governance, transparency and disclosure standards in relation to sustainable finance
  • Technology risks – to promote good cyber risk and resilience practices and address digital misconduct such as scams
  • Product design and distribution – to increase compliance with regulations and reduce the risk of harm to consumers of financial and credit products caused by poor product design and distribution practices
  • Retirement decision making – to protect consumers as they plan for retirement, focusing on relevant financial products and advice

We have previously addressed the rise in environmental litigation, and the increased focus on this area by Australian regulators. ASIC has now, by addressing sustainable finance in its Corporate Plan, made this a clear priority. While we focus on ASIC’s greenwashing and sustainable finance priority in this article, you can read more about its technology risks agenda in our article on Australia’s first test case brought by ASIC regarding the adequacy of cyber security measures in a company

The priority – sustainable finance

ASIC states in its Corporate Plan that there is a “rapid evolution” taking place in sustainable finance practices. This is likely connected to the growing expectation of the public for their investments to be managed in a socially responsible manner. As such, and as outlined in its Corporate Plan, ASIC has stated it will take action to ensure effective climate and sustainability governance and disclosures, and to prevent harm arising from inaccurate climate and sustainability disclosures. It plans to do this by, amongst other things:

  • taking enforcement action against misconduct, including misleading marketing and greenwashing by regulated entities;
  • overseeing sustainability-related disclosure and governance practices of regulated companies, funds and bonds; and
  • continuing to work with other regulators.

ASIC and greenwashing

Greenwashing, a negative aspect of some sustainable products which has drawn attention in recent years, is a focus for regulators, both within Australia and overseas. According to ASIC, greenwashing refers to the misrepresentation of products or investment strategies as environmentally friendly, sustainable, or ethical. Although ASIC has previously noted issues and developments relating to climate-related disclosures and greenwashing over the last few years, the explicit focus on greenwashing, and sustainable finance practices, in ASIC’s most recent Corporate Plan suggests a greater scrutiny of companies promoting ‘green’ products or services than there has been in the past. 

ASIC has highlighted that greenwashing impacts the ability of investors to make informed decisions, can reduce investor confidence, and can threaten a fair and efficient financial system. Preventing greenwashing is therefore crucial to promote informed decision-making and ensure companies are not able to unfairly benefit from ‘green’ credentials. 

Best practice

While not mandatory, ASIC encourages voluntary climate-related disclosures consistent with the Task Force on Climate-related Financial Disclosures (“TCFD”). The TCFD recommends organisations disclose: 

  • their governance around climate-related risks and opportunities;
  • the impacts of climate-related risk and opportunities on the organisation; and
  • how climate-related risks are identified, assessed, and managed, including the metrics and targets used in these assessments.

ASIC also recommends that organisations consider nine key questions when offering or promoting sustainability-related products:

  1. Is the product true to label? Sustainability-related labels should reflect the substance of the product. 
  2. Is the terminology vague? Broad, unsubstantiated statements or jargon should be avoided as it can mean different things to different people. Adequately explain any terminology used.
  3. Are headline claims potentially misleading? Draft headlines carefully. Exceptions and qualifications should not be used to rectify an otherwise misleading headline. 
  4. Have you explained how sustainability-related factors are incorporated into investment decisions and stewardship activities? Inform investors about what sustainability-related considerations are taken into account and incorporated into investment decisions and stewardship activities. 
  5. Have you explained your investment screening criteria? Avoid broad promotional statements and ensure disclosures enable investors to fully understand sustainability-related investment criteria and qualifications.
  6. Do you have any influence over the benchmark index for your sustainability-related product? Disclose your level of influence over the composition of any index that determines portfolio composition or measures performance.
  7. Have you explained how you use metrics related to sustainability? 
  8. Do you have reasonable grounds for a stated sustainability target and how that target will be measured and achieved?
  9. Is it easy for investors to locate and access relevant information? Information relevant to an investor’s investment decision should be readily available and easy to understand.

By considering these questions, an organisation is less likely to engage in misleading or deceptive practices and thus steer clear of ASIC’s gaze. More information can be found in ASIC’s Greenwashing Information Sheet (INFO 271).