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ASIC’s crackdown on greenwashing welcomed by specialists in responsible investing

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ASIC’s crackdown on greenwashing has been welcomed by certain superannuation funds and asset consultants specialising in responsible investing.

“We welcome greater rigour in the disclosure and labelling of investment products,” said Lou Capparelli, UniSuper’s senior manager, sustainable portfolios and governance.

UniSuper has more than $14 billion in funds across environmental, social and governance (ESG) principles. Capparelli said ASIC’s true to label guidelines will enable members to understand how their money is invested and make more informed choices about their superannuation.

Frontier’s Joey Alcock, principal consultant and chair of responsible investment group, said: “We view ASIC’s efforts and those of financial regulators more generally to drive improvement in transparency and understanding of ESG integration in financial products positively”.

ASIC has found an appropriate balance in bringing the market’s attention to the issue by providing guidance and a reminder of existing legal obligations, said JANA senior consultant David Scollon. “Product issuers will no doubt welcome the guidance to comply with requirements.”

Investors interested in investing along environmental, sustainable and governance lines want aggressive transparency about how their superannuation fund or fund manager invests. Increasingly they want to know details about greenhouse gas emissions, the fund’s proxy voting on issues, the extent of different screens alongside financial measures.

But greenwashing is seen as the biggest challenge for the responsible investment industry with 72 per cent of Australians concerned about it, according to the Responsible Investment Association Australasia (RIAA). Seventy-five per cent of Australians said they would consider moving to another provider if they found out their current fund was investing in companies engaged in activities inconsistent with their values.

It’s in everyone’s interests that greenwashing goes

“Greenwashing is a regulatory, litigation and reputational risk that is only increasing in importance,” Scollon said. “It is in everyone’s interests that the practice of greenwashing, misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical, be eliminated.”

Responsible investments grew in Australia by $298 billion to $1,281 billion in 2020, according to the Responsible Investment Association of Australasia.

Regulators around the globe are investigating financial products’ claims of using a green or ethical or ESG strategy, particularly where there is a lack of clarity about labels.

Scollon said the recent accusations by regulators of greenwashing by DWS and Goldman Sachs provides a further warning and reminder of the importance of ensuring products sustainability characteristics are appropriately represented.

“JANA believes that ASIC INFO 271 is timely and essential as the ongoing demand for such products expects to rise and accusations of greenwashing and how to avoid it are being issued by prosecutors and regulators around the globe with increasing regulator,” he said.

Often investment managers don’t dig deep into a company’s practices. While a company asked about its ESG credentials might tick the boxes that they are doing everything right, until someone drills down, investors can’t be sure. Also supply chains of materials can mean that the products being sold by the parent company are using businesses that violate labour rights.

Alcock said ASIC quite rightly highlights that sustainability means different things to different investors. He says that there are still many investors who assume ESG investing is a known, standard way of doing things.

“But Frontier’s view is that the universe of ESG integration approaches is varied and wide – and cannot be encapsulated solely through exclusions, underweights to particular industry sectors and ethical considerations. Investors should not expect a product labelled ESG to deliver on all the objectives anyone may want – this is unrealistic.”

Peak greenwashing for products has passed

Around 2019-2021, there was a surge of products being launched with sustainability labels attracting huge flows, with little or no regard to doing deep due diligence, Alcock said but added he believed that the peak greenwashing for investment products has passed.

Lonsec’s portfolio manager of multi assets Deanne Baker said the group’s research has seen “a notable increase in greenwashing by product providers in recent years as issuers have raced to launch ESG and Sustainable related funds in the local market”.

Some of the characteristics of shonky green products, she says, have been “confusing or inappropriate product labelling, product issuers exaggerating the materiality of their sustainability approach, a lack of clear and measurable sustainability targets.

Scollon said misrepresentation of products ultimately erodes confidence and fairness in the system, particularly when there is significant growing demand and supply for sustainability products. “Key to this, are engagement programs underpinned by clear objectives and communications aligned to industry and real-world outcomes.”

Baker said that while there are existing regulations in place for providing misleading and deceptive statements as well as disclosure obligations, the new ASIC guidelines give a clear and common-sense starting point for product issuers looking to promote their ESG and sustainability products.

“It sets out a range of questions product issuers should be asking themselves and provides examples of current practises that could be deemed to be greenwashing,” she said.

Baker says terms such as ethical, socially responsible investing, responsible investing and sustainability have been used interchangeably and without agreed definitions. “It’s not surprising that investors have been left confused.”

Tightening the language welcomed

She welcomed tightening up the language and removing vague impact statements that can’t be measured as well as disclosing the materiality of the approach to sustainability adopted. “You can no longer just say ‘we’re committing to net zero carbon emissions by 2050 across all our investment portfolios’ without providing some reasonable expectation as to how you plan to get there; how you are progressing towards your goals.”

Institutional investors such as superannuation funds can use asset consultants’ expertise and resources to look at ESG claims made in their product disclosure statements.

“We meet directly with the provider on several occasions including on-site visits, review documentation, undertake quantitative analysis and robustly debate pros and cons within our experienced team of researchers,” said Alcock.

“Our investment product research process is well-suited to identifying risks of greenwashing as it includes a specific framework addressing ESG considerations.”

But it isn’t the case for retail investors or those running their own self-managed superannuation funds who don’t have the skills or the access to carry out due diligence.

They are far more reliant on the representations being made by providers but now they will be helped by ASIC’s suggested principles to better protect their interests, said Alcock.

He would encourage all investors and advisors to clearly establish their specific needs and preferences on ESG, and only then examine whether a particular product’s sustainability approach meets those needs and preferences.

Alcock said while less sophisticated investors targeting a short term ESG performance were rewarded until early 2022, they aren’t happy with the performance particularly if they were underweight energy companies “In our view ESG is not a factor which permits a portfolio to outperform over any time period into perpetuity – and underperformance of ESG-labelled products over the short term is absolutely not proof that it doesn’t work or that providers are greenwashing.”