Australia's greenwashing regulations don't go far enough

You may be aware of the rising incidence of greenwashing, when investment managers make misleading claims about the environmental credentials of their investment products.

Greenwashing risks becoming more common in Australia as the level of funds flowing into sustainable and responsible investment products grows quickly in response to greater investor awareness about climate change and socially responsible investing.

Yet regulators around the globe have been slow to regulate the labelling of environmental, social and governance (ESG) products and how they are marketed. This is partly due to a lack of agreement on what 'sustainable', 'ethical' or 'environmentally friendly', or even what greenwashing is. And despite its rising incidence, the Australian corporate regulator, the Australian Securities and Investments Commission (ASIC), has issued few penalties for greenwashing, and, where it has, the fines have been very light.

Earlier this month, ASIC fined superannuation trustee Diversa Trustees just $13,320 for greenwashing.

ASIC was concerned that Diversa, the issuer of superannuation product Cruelty Free Super, made statements on its website that "may have been false or misleading by overstating exclusions, otherwise known as investment screens". ASIC says that while Cruelty Free Super applied some investment screens, they were "more specific and implemented on a more limited basis than [Cruelty Free Super]'s website had suggested".

So, ASIC is on the lookout, but still, local regulations aren't enough or are thin on the ground. Some asset managers are still overstating just how green or socially responsible their products are. Product labels too can be confusing and misleading to investors.

That's because asset managers can use more than one investment strategy for a single sustainable investment product and approaches to environmental, social, and governance (ESG) investment products can vary widely among investment product providers.

For example, some asset managers establish explicit ESG objectives for their funds that are pursued alongside financial returns, or they use screening criteria to exclude or include certain types of investments in a fund, such as excluding tobacco or fossil fuel production or only including companies with high ESG ratings.

Those ratings may be issued by any number of ESG research houses or third-party consultants or the ratings may be determined in-house. Rules will differ between service and product providers.

Some critics of the industry believe investment managers are being intentionally vague or misleading in order to take advantage of investors' interest in ESG factors.

But more likely, the cause is that asset managers' investment product disclosures are not meeting consumers' expectations for transparent, informative and reliable information. Or the expectation among consumers that information provided is consistent among product providers.

Only by being fully transparent and supplying investors with information that is complete, reliable and consistent can asset managers can avoid misleading consumers of the green credentials of their product. Asset managers need to be upfront, honest and transparent about their protects and how they can help the climate, or avoid social injustice, or better explain how a product is sustainable or meets ESG guidelines.

Without clear governing standards, voluntary global standards like the CFA Institute's Global ESG Disclosure Standards for Investment Products provide clear guidelines to asset managers on ESG product disclosures. The standards provide guidance to asset managers on how to communicate with investors and they play an important role in building and maintaining trust in financial services by better allowing investors to understand and compare investment products that incorporate one or more ESG approaches.

The standards provide asset managers with a model set of disclosure requirements which identify key information that should be disclosed to investors regarding ESG investment products, helping to avoid greenwashing and align consumers' expectations with that of investment product providers.

The standards apply to all types of investment vehicles, including actively managed and exchange traded funds and all asset classes, including shares and fixed income, private equity, private debt, infrastructure, and property investments.

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