This post was co-authored with Abhirami Ravishankar.
On 10 May 2023, following the Federal Treasurer’s Budget announcement of additional funding for ASIC’s greenwashing surveillance and enforcement work, ASIC issued two noteworthy publications providing guidance for market participants on how, and how not to, display their green credentials.
The first release was the ASIC Report 763 ‘ASIC’s recent greenwashing interventions’ (the Report) and the second was the speech by ASIC Deputy Chair Karen Chester ‘ASIC and greenwashing antidotes’.
The Deputy Chair’s speech provides useful insights into ASIC’s current surveillance and enforcement approach, based on Information Sheet 271 ‘How to avoid greenwashing’, as well as interesting observations that may indicate ASIC’s future direction in this space.
The Deputy Chair stated the Report “…outlines how and why we intervened, alongside the corrective outcomes of our actions. In doing so, it is akin to Season 2 of ‘How to avoid greenwashing.’”
Her speech clarified the three ‘must haves’ for fair and efficient sustainable finance markets which in the Deputy Chair’s words, should collectively prove an ‘effective antidote to greenwashing’, namely:
- “transparency, through disclosures that comply with today’s law and ultimately a quality, global baseline for sustainability-related disclosure standards,
- policy-installed ‘bright lines’ to support that disclosure, and
- regulators doing their job and working together in doing so.”
The Deputy Chair revealed what some may see as a widening of ASIC’s current surveillance activities beyond the managed fund and corporate sectors, into the superannuation fund sector and the wholesale green bond market.
The Deputy Chair’s speech elaborated on ASIC’s ‘bright lines’ disclosure expectations, embodied in Information Sheet 271. In the context of the speech and Report, it is worth recapping on ASIC’s nine disclosure questions at the core of Information Sheet 271:
- Is your product true to label?
- Have you used vague terminology?
- Are your headline claims potentially misleading?
- Have you explained how sustainability-related factors are incorporated into investment decisions and stewardship activities?
- Have you explained your investment screening criteria? Are any of the screening criteria subject to any exceptions or qualifications?
- Do you have any influence over the benchmark index for your sustainability-related product? If you do, is your level of influence accurately described?
- Have you explained how you use metrics related to sustainability?
- Do you have reasonable grounds for a stated sustainability target? Have you explained how this target will be measured and achieved?
- Is it easy for investors to locate and access relevant information?
In the Report, ASIC addressed the 35 interventions between 1 July 2022 and 31 March 2023, and highlighted the following themes:
- Net zero statements and targets without a reasonable factual basis;
- ‘Carbon neutral’, ‘clean’, ‘green’ and like terminology without a reasonable underpinning;
- Descriptions of screened investments that overstate, mislead or are applied inconsistently; and
- Vague unexplained terminology and the inaccurate labelling of funds.
Concisely reporting on ESG-related processes, practices and policies in line with Information Sheet 271 requirements can be challenging. ESG disclosure is emerging as that section of the PDS and website that contains the most drilled-down, detailed summaries of business operations, processes and values. Organisations with highly integrated business units, strong culture and investment processes are best placed to most effectively disclose their ESG credentials. Product, marketing, middle office, compliance and investments are some of the business units that need to be aligned with a common understanding of ESG practices to achieve an optimal disclosure outcome.
For product issuers, confirming the detail of the ‘how’ and the ‘what’ in relation to their ESG practices and then concisely explaining it in a PDS requires high performing teamwork across business units, and a shared appreciation of the significant reputational risks at stake in getting disclosure wrong in the ESG space.
This challenge can be increased when an outsourced investment model is used, with external fund managers appointed under both mandates and underlying collective investment vehicles.
Looking to possible disclosure trends in the ESG space, the Deputy Chair noted that the International Sustainability Standards Board (ISSB), under the auspices of the International Financial Reporting Standards (IFRS) Foundation, is expected to finalise and release its first two standards by the end of June 2023:
- IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information; and
- IFRS S2 Climate-related Disclosures.
The Deputy Chair highlighted that, on target statements, the draft standards propose the disclosure of information such as:
- how progress towards reaching the target is measured,
- the specific target and type (for example, absolute or intensity),
- what is the target objective (for example, mitigation, adaptation),
- how a target compares to the latest international agreement and whether it has been validated by a third party,
- any milestones or interim targets, and
- the period the target applies to and the base period to measure progress.
On the intended use of carbon offsets, the draft standards are expected to address the disclosure of:
- the extent the target relies on carbon offsets,
- whether offsets are subject to third-party verification and if so by whom,
- the type of carbon offset used (for example, carbon removal or emission avoidance), and
- any other significant factors to understand the credibility and integrity of the offsets, such as permanence.
The Deputy Chair indicated that ASIC supports mandatory disclosure and developing the global baseline to do so under the ISSB. We will watch with interest the release of ISSB standards and whether it influences the future shape of Information Sheet 271 and the targets of ASIC’s surveillance and enforcement actions.