PFA IRC Update: Funds warned about “greenwashing”

ASIC has warned fund managers about “greenwashing”, which occurs when an entity or a fund overstates or misrepresents their green credentials. ASIC’s warning is timely as more financial products jump on the ESG bandwagon, and is a reminder that even funds with sound ESG credentials could breach ASIC’s “true to label” requirements if they use exaggerated claims or vague terminology.

An information sheet was recently released by the regulator, offering some guidance for product issuers to ensure they provide accurate information when promoting sustainability-related products.

ASIC says greenwashing is “…the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical”.

Funds must watch for any terminology which could be read as vague or misleading, understanding that terms such as “socially responsible” or “ethical investing” can mean different things to different people, according to ASIC’s information sheet.

The greenwashing warning comes amid surging demand for environmentally friendly, sustainable and ethical products by investors: During a greenwashing review in 2021, ASIC cited a Responsible Investment Association Australasia (RIAA) consumer report, which showed 86 per cent of Australians expect their super and other investments to be invested responsibly and ethically; and 62 per cent believe ethical/responsible super funds outperform over the long term – by contrast, only 29 per cent of respondents believed this in 2017.

More advisors are also advising on ESG, according to a recent report by Australian Ethical and Investment Trends, which revealed almost half of all financial advisors are now providing ESG advice – a major increase considering only one in five advisors were covering ESG in 2016, according to the report. It also found 68% of advisors agree that it’s their responsibility to ensure clients’ investments align with their values.

Speaking at the Australian Financial Review’s ESG Summit, ASIC Commissioner Sean Hughes said stamping out greenwashing “is and will remain a priority area of focus” for ASIC.

The same article points out that money flows to funds marketed as “sustainable” more than doubled in Asia between 2019 and 2021; it also reports that global ESG assets are set to top $US53 trillion by 2025.

Little wonder more investment funds are making more of their ethical, environmental and sustainable credentials. But ASIC wishes to remind the investment industry that prohibitions in the Corporations Act 2001 (Cth) on misleading and deceptive conduct and false or misleading statements apply in relation to financial products.

All investment funds need to ensure their disclosures and marketing materials reflect the actual practice in their funds, or face the potential for penalties and enforcement action in the courts, practice in their funds, or face the potential for penalties and enforcement action in the courts.