The Australian Securities and Investments Commission has released guidance for investment and super funds making ESG claims, along with a clear warning that it is monitoring the market for false claims about sustainability.
The corporate watchdog has outlined its expectations to investment managers and funds offering sustainability-related products in a new information sheet.
The increased scrutiny comes at a time of rapid growth for the sector. As of July last year, retail assets invested in sustainable funds in Australia and New Zealand topped $33.4 billion, according to a report from global financial services company, Morningstar.
The amount represents an 18 per cent increase compared with 31 March 2021 and a 66 per cent increase compared with 30 June 2020.
However, this rapid growth in the sector has led to questions over where, and how, funds are being invested.
Under the Corporations Act and the ASIC Act, funds are prohibited from making claims that are false or misleading, or engaging in deceptive conduct in relation to financial products or services.
In its 2020-21 Corporate Plan, ASIC indicated it would undertake a review to assess whether product issuers were making misleading claims that harm investors.
The regulator also warns that misleading claims about sustainability can erode investor confidence in the market for sustainability-related products and poses a threat to a fair and efficient financial system.
Nine key questions from ASIC
In its guidance, ASIC set out nine key questions that firms should ask before offering ESG-related products to investors:
- 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?
For example, a sustainability-related product that is labelled a “no gambling fund” would breach the requirements for clear labelling if the terms of the product say it “may invest in companies that earn less than 30 per cent of their total revenue from gambling activities”.
Transparency needed for growth
ASIC deputy chair Karen Chester said transparency and trust are paramount as the market for green investments grows.
“Our information sheet is simply about helping issuers comply with their existing regulatory obligations. Labels or headline statements about a product’s green credentials should not be misleading.
“Being ‘true to label’ is not a nice-to-have, it’s a regulatory must-have. It’s also a must-have for investor confidence and trust. And a must-have for both fair and efficient market outcomes here. Misdirected investment here will inevitably be at great economic cost.
“We have set out nine important questions for issuers to ask themselves. We would hope and indeed expect issuers to review their practices against our information sheet.”
However, for funds failing to live up to the new guidelines, ASIC commissioner Sean Hughes warned that greenwashing “is and will remain a priority area of focus” for the regulator. It is appealing to people to notify it if they see any greenwashing in financial products.
The Responsible Investment Association Australasia chief executive Simon O’Connor welcomed the new guidelines.
“Our 2021 research shows that while the majority (89 per cent) of the Australian investment market claims to be responsible, it is just 40 per cent of managers that are engaged in leading practice responsible investing” Mr O’Connor said in a media statement.
“We welcome the focus on greenwashing by ASIC which reinforces that, by law, any investor making a sustainability claim must be able to substantiate this and provide supporting evidence.”