In June 2022, the Australian Securities and Investment Commission (ASIC) released guidance (INFO 271) for entities offering sustainability-related financial products to avoid making misrepresentations in promotional material, disclosure statements, and offerings that could be considered "greenwashing."
The guidance is timely given the sea change in market expectations in climate change and environmental, social and governance (ESG) measurement and reporting, and greenwashing disputes continuing in the Australian courts.
1. Background
INFO 271 describes greenwashing as "the practice of misrepresenting, overstating, or falsely relating the extent to which a financial product or service is environmentally friendly, sustainable, or ethical." It encompasses situations where statements or information produced or disseminated by a company creates a misleading impression about its environmental and social performance.
While INFO 271 responds to key legal obligations under Australian company and competition law, its practical guidance and suggestions form a helpful starting point for any organisation undertaking voluntary ESG reporting.
2. Existing Regulatory Standards Addressing Greenwashing in Australia
There are two primary legal obligations that relate to potential greenwashing under Australian law:
a. Misleading and Deceptive Conduct:
In Australia, there are general prohibitions on making statements or disseminating information about a financial product or service that are misleading, dishonest, or deceptive. In INFO 271, ASIC states that these prohibitions apply to information about the sustainability of financial products, in particular to statements of company goals or future matters that remain unsubstantiated. For example, when a company makes a statement that it will achieve a certain greenhouse gas emissions reduction target by a particular date, this may be captured by the prohibition on misleading and deceptive conduct if there are no reasonable grounds for making the statement. However, all conduct and statements are considered in the context of all the circumstances of the particular case.
b. Disclosure Obligations:
Sustainability-related financial products are required to submit Product Disclosure Statements (PDS) according to the same criteria as other financial products. In doing so, it is a requirement that a PDS identify what labour standards or environmental, social or ethical considerations are considered. In particular, companies engaged in financial products involving investing must disclose which of these matters it considers when making investment decisions.
Guidance on Avoiding Greenwashing
In accordance with ASIC's Regulatory Guide 65 (RG 65),1 the guidance contained in INFO 271 is designed to facilitate truth in promotion and clarity in communication. In practice, this means ensuring that all of the relevant information that an investor may rely on when making decisions about a sustainability-related financial product is clearly and transparently communicated so as not to mislead. The following are specific examples covered by ASIC:
a. Labelling: Labelling should reflect the substance of the product, and companies should be particularly careful to ensure that product labels are not misleading. This means being cautious of using absolute terms, branding or product naming that implies that there is a sustainability focus when sustainability does not make up a significant part of the product or investment selection process.
b. Terminology: Avoid using broad, unsubstantial sustainability statements or jargon without also providing clarifying information. Where using sustainability terms to describe a product, explain the terminology used in the PDS and promotional material, as terms may be considered information that investors may reasonably rely on when making investment decisions.
c. Headlines: Headline claims, even when they are subsequently qualified, should not be misleading. Depending on the extent of the qualifications and exceptions to a headline statement, they should be displayed prominently. Referring investors to other documentation may not be enough to correct misleading headlines and information.
d. Sustainability Factors in Investment Decisions: The methodology or policy for integrating sustainability considerations into investment decisions and stewardship activities should be clearly disclosed. This is particularly relevant in relation to disclosure requirements that mandate disclosure of labour standards or environmental, social or ethical considerations. Companies should be careful not to overstate the degree of influence that sustainability factors have over decision-making, and any description as to weighting or other relevant information relevant to investors should be explained.
e. Investment Screening: Broad statements describing investment screening without the nuances of where and how screening is applied should be avoided. It should be clear to investors what investment screens are in place, whether they are limited to particular markets or revenue thresholds, and these explanations should be displayed prominently wherever screening is referred to.
f. Benchmarks: Companies should disclose the level of influence they have over the composition of an index that is used to determine portfolio composition or performance. This is particularly true for statements that a sustainable-related financial product is passively managed when there is a degree of active management of the investment decision-making process.
g. Sustainability Metrics: The use of metrics should be fully disclosed and explained, including which metrics are used, the source of these metrics (whether from a third party or using the company's proprietary methodology), what data has been used, and any risks or limitations arising from the use of those metrics.
h. Targets: To avoid breaching misleading statement prohibitions, sustainability targets should be clearly explained. This includes a description of what the target is, how and when the target is expected to be set, how progress will be measured, and what assumptions underpin the target.
i. Further Information: Information provided to investors or customers of sustainable-related financial products should be clear and concise enough for them to understand that may be relevant to their decision-making. All relevant information should be readily available, easy to locate and consistent across all mediums including advertising, social media, and voluntary disclosures.
The goal of these principles, which can be applied beyond just sustainability-related financial products, is to ensure that consumers can remain confident in the information provided to them. While sustainability products and reporting continue to evolve, ASIC indicated that voluntary reporting frameworks such as the Financial Stability Board's Task Force on Climate-related Financial Disclosures Recommendations,2 and the emerging standards such as the International Sustainability Standards Board's proposed standards on climate-related disclosures and general sustainability-related disclosures,3 provide opportunities for companies to improve disclosures in a way that is well-placed to transition to future standards.
1 See, Regulatory Guide 65 – Section 1013DA Disclosure Guidelines.
2 See, Financial Stability Board’s Task Force on Climate-related Financial Disclosures Recommendations.
3 See, International Sustainability Standards Board's Proposed Standards on Climate-Related Disclosures; International Sustainability Standards Board's Proposed Standards on General Requirements for Disclosure of Sustainability-related Financial Information.
Mikaylie Page (White & Case, Graduate, Melbourne) contributed to the development of this publication.
White & Case means the international legal practice comprising White & Case LLP, a New York State registered limited liability partnership, White & Case LLP, a limited liability partnership incorporated under English law and all other affiliated partnerships, companies and entities.
This article is prepared for the general information of interested persons. It is not, and does not attempt to be, comprehensive in nature. Due to the general nature of its content, it should not be regarded as legal advice.
© 2022 White & Case LLP
