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Australia’s recent federal election has been dubbed “the climate election” and community appetite for climate leadership has never been stronger. In this context investors should feel empowered not just to “avoid greenwashing” but to raise ambition and lead in the rapid transition to a low-carbon regenerative economy that Australians need to thrive.
Greenwashing is a regulatory, litigation and reputational risk that is only increasing in importance. Accusations of greenwashing, and guidance on how to avoid it, are being issued by prosecutors and regulators around the globe with increasing regularity. This is in direct correlation with the massive expansion of the sustainable finance market and claims made by it. This article will first cover ASIC’s information sheet 271 on how to avoid greenwashing and take a look at why DWS and Goldman Sachs were recently left vulnerable to accusations that they misled their investors in relation to green products. Yet, perhaps the biggest claim of all is the $132 trillion of capital now “committed” to net zero. Given that, the second half of this article will explore what actions leading investors could take to minimise the risk of being accused of greenwashing in a net zero context.
In May 2022 German prosecutors raided asset manager DWS (majority owned by Deutche Bank). This was in response to a whistle-blower allegation that DWS had mislead investors when it overstated the degree of ESG integration it undertook in a prospectus. Specifically, the prosecutors said they had evidence that ESG factors were only taken into account in a minority of investments.
In June 2022 the US Securities and Exchange Commission (SEC) announced an investigation into Goldman Sachs asset management over claims it made in relation to its ESG funds. Specific details of Goldman Sachs ESG investment processes that are under investigation are not yet known. This comes after the SEC announced a proposed update to rules for clarity in naming ESG funds to mitigate against investors being misled.
Claire LaBouchardiere, a senior executive from ASIC, stated at the Investor Group on Climate Change (IGCC) conference on 16 June 2022 that ASIC is “very focussed” on the DWS and Goldman Sachs actions and that “ASIC would consider taking enforcement action in Australia where the conduct is egregious”. However she also stated that investors had been cooperative with ASIC to-date and that enforcement is “only one of the options in ASIC’s toolkit”.
Ms LaBouchardiere went on to explain that the ASIC Information note 271 (released [two] days ago at the time of writing) entitled “How to avoid greenwashing when offering or promoting sustainability-related products” does not contain any new law. It draws on existing policy around good disclosure and is intended to “help navigate the existing regulatory landscape” around greenwashing.
Greenwashing is another one of those sustainability terms that has been ill-defined and can mean different things depending on the context. In this regard the ASIC information note 271 provides welcome clarity to local investors looking to avoid the accusations levelled at DWS and Goldman Sachs. ASIC’s information note recommends that entities ask themselves 9 questions when issuing a product or service to avoid greenwashing:
The process of working through the above questions are intended by ASIC to help an entity clarify that it has a “reasonable basis” for making a sustainability claim and to clearly communicate this to end investors so that they are not misled.
Consistent with the ASIC information note, we find greenwashing typically occurring in one of the following circumstances:
Ultimately, if an investor uses its own answers to the nine ASIC questions to be clear that it has not mislabelled a product or service; has followed through on all its promises with adequate resources and expertise; and has not made exaggerated or deceptive claims it cannot support, the risk of being accused of greenwashing is minimised.
This article is written against the backdrop of USD$132 trillion of assets now committed to “net zero”. ASIC have stated that in relation to net zero claims “making clear what is a reasonable basis for the net zero claim is really important”. So what does that net zero commitment entail? What are the actions available to an institutional investor to make good on this commitment and avoid the litigation, regulatory and reputational risk of greenwashing? I recently joined a group of leading European and American asset owners at the Sustainability in Practice conference held by Conexus at Cambridge University to discuss exactly this question. The rest of this article sets out what approaches those asset owners agreed were best practice and, if taken, are a good start at providing a “reasonable basis” for making a net zero claim in 2022.
It is important to note that best practice was expected by all in the room to continue to rapidly evolve so will need to be regularly revisited and reviewed by entities who have made net zero claims.
ASIC’s latest guidance on how to avoid greenwashing echos sentiment of its regulatory peers internationally. Australia’s recent federal election has been dubbed “the climate election” and community appetite for climate leadership has never been stronger. In this context investors should feel empowered not just to “avoid greenwashing” but to raise ambition and lead in the rapid transition to a low-carbon regenerative economy that Australians need to thrive.
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