The big change needed to reduce greenwashing
A new global guidance on terms used in responsible investing will help to avoid greenwashing by investment product providers by promoting greater consistency between responsible investment products globally, at a time when the Australian corporate regulator is cracking down on the misleading practice.
Since late 2022, the Australian Securities and Investments Commission (ASIC) has targeted several financial services firms for misrepresenting their green investment strategies.
ASIC has increased its supervision of environmental, social and governance (ESG) investment products to tackle greenwashing and other sustainable finance misconduct.
This year alone, ASIC has commenced three court proceedings against superannuation funds for alleged greenwashing and it is actively pursuing investment product providers that make their products sound more environmentally friendly than they really are.
The problem with greenwashing
This is important action. Greenwashing - whether intentional or not - can damage consumers' trust and confidence in the investment industry, leading to fund outflows from ESG and other responsible investment (RI) funds, and it can undermine investment firms' broader sustainability credentials.
Comprehension of the sustainability characteristics of a fund is challenging when there are inconsistent disclosures, omissions of key information regarding the sustainability goals or strategy, unsubstantiated sustainability claims, or undue emphasis of certain features that could appear to exaggerate the fund's sustainability characteristics.
Greenwashing can result in investors misallocating assets to products or strategies that do not align with their investment goals.
How to reduce greenwashing
To reduce the likelihood of consumers being misled, the local and global investment industry has joined together to define what is responsible investment.
Recently, three global organizations, the CFA Institute, the Global Sustainable Investment Alliance (GSIA), and Principles for Responsible Investment (PRI), have issued the Definitions for Responsible Investment Approaches guidance.
The collaboration responds to calls from regulators and investor groups for common terms and definitions for the global asset and wealth management industries to develop common RI terms and definitions to give consistency in the investment management industry.
One of the main goals of the new global guidance is to reduce the risk of greenwashing, which has been exacerbated because terms such as ESG and 'sustainable,' or 'responsible' are largely unregulated by governments not only in Australia, but around the globe.
As a result, sometimes these terms have been applied in different ways by different investment product providers, creating confusion amongst consumers.
Recent research by the CFA Institute has found, for example, problematic disclosures by product providers in the European Union and North America related to fund names, screening criteria, fund reporting, ESG terminology, and ESG-related impact claims and developed recommendations to address these issues.
In a separate global 2020 CFA Institute member survey, 78% of investment professional respondents believed that there was a need for improved standards around ESG products to diminish greenwashing.
Why we need standardised terminology
Other global organisations have long called for greater standardisation on responsible investment terms.
In its report Sustainable Finance and the Role of Securities Regulators and IOSCO, the International Organisation of Securities Commissions (IOSCO) found that the majority of the market participants it consulted suggested greenwashing was an important issue.
One of the challenges identified by IOSCO was the lack of standardisation and clear guidance on disclosures, taxonomies, and differing regulatory approaches to sustainable finance.
Importantly, this new guidance, Definitions for Responsible Investment Approaches, clarifies existing terms and definitions but does not create new terms.
It also recognises important shifts that have taken place in responsible investment, with strategies now being applied to a wide range of investment styles and asset classes in both public and private markets. Prior versions of RI definitions were, in some cases, limited to investments in listed companies.
This new guidance provides clear definitions to the investment industry so that there is a common understanding of RI terms across jurisdictions and across different asset classes, which is a significant step forward in boosting market integrity and transparency for investors globally.
This will help to create a consistent foundation for the continued professionalisation of the responsible investment industry in particular, helping to give greater clarity to consumers.
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