ESG, Investments

ESG credentials to be scrutinised

Zenith Greenwashing

Regulators are tightening their grip on greenwashing, with even accurate details used to promote a financial product's ESG credentials coming under examination.

Investment funds seeking to disclose a financial product’s environmental, social and governance (ESG) credentials in their marketing materials, even if accurate, might still expose the vehicle to potential greenwashing claims, according to an investment sustainability specialist.

Zenith Investment Partners head of responsible investment and sustainability Dugald Higgins noted the rising popularity of ESG financial products has drawn the attention of the Australian Securities and Investments Commission (ASIC) to claims made by providers promoting their offerings and scrutiny in this domain has intensified.

“Disclosure requirements on ESG and sustainability issues are rising exponentially, with regulators doubling down and reminding product providers that claims around environmental and sustainability-related issues are being scrutinised,” Higgins said.

“We have seen the release of ASIC’s information sheet on avoiding greenwashing in June 2022, followed by the Australian Competition and Consumer Commission’s July 2023 release of comprehensive draft guidelines on environmental and sustainability claims, noting that financial services are not exempt from Australian consumer law.”

To that end, he cautioned any claims made about the sustainability of a particular product by investment funds need to be substantiated.

“Financial products are complex by nature, but when you add ESG or sustainability factors into a fund’s design, the complexity and subjectivity increase. This creates problems when dealing with clients who have varying levels of financial sophistication,” he noted.

“While there is a fine line between being accurate enough to be correct and being succinct enough to be understandable, the message is clear. Managers and promoters of any products featuring environmental or sustainability claims need to be prepared to defend their claims.”

He suggested additional regulatory scrutiny may have led to the emergence of ‘greenhushing’, where companies deliberately remain silent about their sustainability efforts, even if genuine and reasonable, due to concerns about being accused of greenwashing.

“Clearly, going dark on disclosures is not an option. This was echoed in a recent speech by ASIC chair Joe Longo, who stated: ‘Greenhushing is in our view just another form of greenwashing and risks misleading by omission. Silence from firms and failing to engage isn’t the answer,’” he said.

“If you sell a fund on the basis of its sustainability attributes and then withdraw the claims or remove evidence supporting them, you’re denying your clients the full picture.

“Clients may rely on certain claims at the time of purchase and removing that information should raise legitimate concerns. Adopting a code of silence does a disservice to the end investor.”

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