KEY POINTS
- While the shift to sustainable finance may constitute a once-in-a-generation transformation, the fundamental underlying principles of accuracy and transparency are not new.
- Combating greenwashing is critical to supporting trust in sustainable finance-related financial products and services.
- ASIC’s greenwashing interventions are founded on enforcing well-established legal obligations that prohibit misleading and deceptive conduct, and our focus is on entities that we consider carelessly give inaccurate or misleading statements.
In 2002, the word ‘greenwashing’ was first added to the Oxford English dictionary.[1] This would suggest it’s a relatively recent development – but it’s not. Many trace the word back to the 1980s[2] – indeed the Oxford English dictionary itself cites its earliest appearance as being in 1987[3] - but it’s not the word, it’s the concept that I want to talk about today.
And what is that concept? In simple terms, ASIC considers greenwashing to be ‘the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical.’[4]
So to be clear, misleading and deceptive conduct has never been acceptable – and has long been the subject of prohibitions under the law. Greenwashing is simply a recent manifestation of this.
Yet it’s a practice that is increasingly in the spotlight – against a background of the biggest changes to financial reporting and disclosure standards in a generation.
So today I’d like to make some observations about ASIC’s perspective and approach – how we’re addressing the issues we see, and what we expect of industry[5].
Along the way, I’ll also address the far too common – but wrong – idea that compliance is bad for business.
Greenwashing in a changing regulatory context
At the outset, it’s perhaps worth restating the obvious – that good quality, reliable information is essential to market integrity, and to confident and informed decision-making by investors. And so when companies make misleading statements about ESG issues, it erodes trust in the market – and can lead to the misallocation of capital.
Combating greenwashing is therefore critical to supporting trust. And ASIC’s role is to help shore up that trust, by finding the right balance between guidance, surveillance and enforcement.
The scaffolding provided by ASIC’s regulatory guidance is one element of the overall picture. Our ongoing enforcement action is another.
At each stage and in each case, we aim for a proportionate regulatory response. As more sustainability claims are made, we adjust our oversight and prioritisation to reflect that. That is why we’ve had a focus on greenwashing, for the last two years.
In essence, sustainability-related claims – like any other information provided to investors – must be founded on reasonable grounds. They must be accurate. And, in particular, they must be able to be substantiated. Investors rely on this information, so that the decisions they make have a solid footing.
This is also why we support the introduction of internationally aligned, mandatory climate-related financial disclosure requirements here in Australia. Why? Because such a regime improves transparency. It provides the ‘information architecture’ – if you will – to support growth in sustainability-related products and services and facilitate efficient allocation of capital.
Yet climate-related reporting is only one element in a broader landscape.
Yes, introducing a climate reporting regime can be expected to reduce greenwashing – through more standardised, consistent, and comparable climate-related information.
But other initiatives proposed under the Government’s draft sustainable finance strategy will also contribute – such as the development of an Australian sustainable finance taxonomy, and a labelling system for investment products marketed as ‘sustainable’. These are other important parts of the whole picture.
ASIC supports these measures; and will work with the Government, and our partner agencies in the Council of Financial Regulators, as the strategy is implemented.
We also regularly engage with other agencies, such as the ACCC and the clean energy regulator, to share insights about potential greenwashing misconduct.
I’ve spoken previously about ASIC’s approach to the new climate reporting regime. And as I’ve said – it’s simply not an option for industry to put off preparations, and then scramble to comply. Reporting entitles have to be doing the work now – marshalling the data, embedding the capabilities, and keeping the necessary records.
As with any new regime, ASIC will take a pragmatic approach to enforcement – we will continue to focus on what support and practical guidance we can give, to help entities meet their obligations.
Compliance equals good business
I want to say a few words about the view that compliance by business with the new reporting regime will inevitably equal an increase in cost, with little more to show than a pat on the back for complying.
This is wrong. To equate compliance with loss of profit is effectively to say that the best business is a dishonest one. But this doesn’t hold water.
The best business is a business that has the trust of its investors and its consumers. And since compliance builds trust – and greenwashing erodes it – it is in everyone’s best interests to be compliant. Let me say it plainly: a compliant business is a profitable business.
But there’s another benefit. The companies themselves benefit from greater visibility of physical and transitional risks. They can benefit from climate-related opportunities of other entities in their value chain, and more visibility on these issues across the entire economy.
This helps companies manage their own climate-related risks and opportunities over the short, medium and long term – in the best interests of the entity and its shareholders.
So – more effective reporting means more awareness, and better decisions – which makes for better business. A virtuous cycle that benefits companies and investors.
Thus, we acknowledge the step up in capability required. We acknowledge the complexity in some aspects of the proposed standards – such as setting net zero targets, undertaking scenario analysis, and creating transition plans.
But it’s important to consider the benefits that will also accrue from more transparency – right across capital markets.
ASIC’s enforcement approach to greenwashing
I’d like to make a few observations about ASIC’s approach to greenwashing.
You won’t be surprised to hear me say that not one greenwashing case we’ve taken on has been unwarranted or marginal. ASIC is not in the business of pursuing entities that honestly and accurately disclose their activities – we pursue those who we consider carelessly give inaccurate or misleading statements. Any entity which is clear, accurate and transparent in its disclosures has nothing to fear.
For example – in cases where entities publish environmental positions that have a sound basis and are demonstrably supported by business plans and investments that substantiate those aims, we are unlikely to be concerned. By contrast, where statements are made in marketing and promotional campaigns, with little or no substance to back them up, we will ask questions.
We will want to know the what, how, why and when – the facts behind the marketing.
And when we select matters for enforcement action, we also consider which of them are most likely to have a broad reach – that is, a deterrent effect beyond the specific issue we are prosecuting, that will send a wider compliance message to the market.
I think it’s also worth pausing to remember that ASIC’s greenwashing interventions are founded on enforcing what are long-standing and well-established legal obligations – those that prohibit misleading and deceptive conduct.
The idea that it is not acceptable to engage in conduct liable to mislead the public is not new – and the courts are no stranger to considering that concept.
It is, in each case, a question of fact, to be determined objectively; and – to paraphrase the case law – the courts’ attention is directed to what ordinary and reasonable people are left thinking, after they read what has been disclosed[6].
Sustainability-related claims, like any other information, must be founded on reasonable grounds. And indeed, omitting material sustainability-related information – that is, ‘greenhushing’ – can also be misleading and deceptive, depending on the nature and significance of the omission.
ASIC has been active in enforcing the law in this area. So far, we have issued 17 infringement notices, totalling more than $230,000. We won our first greenwashing civil penalty action, against Vanguard Investments, and have two other civil penalty proceedings underway in the Federal Court.
The main types of conduct that have caused ASIC to intervene can be summarised into a few categories:
- Net zero statements and targets, that were either made without a reasonable basis or that were factually incorrect
- The use of terms such as ‘carbon neutral’, ‘clean’ or ‘green’, that weren’t founded on reasonable grounds
- The overstatement or inconsistent application of sustainability-related investment screens, and
- The use of inaccurate labelling or vague terms in sustainability-related funds.
A recent development in our greenwashing work, that we foreshadowed in our latest Corporate Plan, is a focus on the governance around sustainable representations made to investors. This is a logical extension of our focus on whether sustainable representations are misleading or deceptive.
For example, in the investment management sector, we’re looking to ensure that responsible entities deliver on the representations they make about their funds’ sustainable investment strategies and objectives.
An early observation we can make from this work is that we’ve seen instances of investments made by delegated portfolio managers that do not align with the responsible entities’ representations to investors. This falls short of our expectations that responsible entities exercise care and diligence in monitoring trading done on behalf of their members[7].
Responsible entities – and other gatekeepers in the financial services sector – have an important role to play in the fight against the kinds of misrepresentations we called out in ASIC’s Information Sheet 271 two years ago. Investors look to these gatekeepers to take an active part in identifying and stopping greenwashing. So do we.
Conclusion
In conclusion, while the shift to sustainable finance may constitute a once-in-a-generation transformation, the fundamental underlying principles are as old as regulation itself: the principles of accuracy and transparency.
Introducing a new reporting regime clarifies how to apply those principles to new areas in a standardised way, and thus helps build greater trust – which ultimately leads to better business.
And as I’ve said, a lack of transparency has never been acceptable. Nor has misleading consumers and investors.
And that’s why greenwashing is in our sights.
[1] Greenwashing, n. meanings, etymology and more | Oxford English Dictionary (oed.com)
[2] https://thesustainableagency.com/blog/the-history-of-greenwashing/ ; https://www.theguardian.com/sustainable-business/2016/aug/20/greenwashing-environmentalism-lies-companies; https://www.countryandtownhouse.com/culture/a-history-of-greenwashing-how-did-we-get-here/
[3] Greenwashing, n. meanings, etymology and more | Oxford English Dictionary (oed.com)
[4] See Information Sheet 271 How to avoid greenwashing when offering or promoting sustainability-related products
[5] See also other relevant speeches by the Chair:
ASIC Chair’s AFR ESG Summit speech (5 June 2023)
[6] See Self Care IP Holdings v Allergan Australia [2023] HCA 8; 97 ALJR 388 and ASIC v Vanguard Investments Australia Ltd (2024) FCA 308. See also Beech J in Comite Interprofessionnel du Vin de Champagne v Powell: [2015] FCA 1110; 330 ALR 67, who states “As explained by the High Court in Campomar Sociedad, Limitada v Nike International Ltd (2000) 202 CLR 45 … the Court must consider the likely characteristics of the persons who comprise the relevant class of persons to whom the conduct is directed and consider the likely effect of the conduct on ordinary or reasonable members of the class, disregarding reactions that might be regarded as extreme or fanciful (at [101]-[105]).”
[7] On RE responsibility to oversee service providers, see RG 259 Risk management systems of fund operators paras 23 and 81; RG 132: Funds Management: Compliance and oversight, para 126.
