How to avoid greenwashing in financial services advertising

Greenwashing of ESG policies is a key enforcement focus of the Financial Markets Authority (FMA), the NZX and regulators worldwide, including the Australian Securities and Investments Commission (ASIC). It is also a source of major climate litigation brought by shareholders and stakeholder groups.

Given this very high level of regulatory risk, and the associated potential for reputational damage, financial sector participants should stay abreast of developments in this area.

It is in this spirit that we bring to your attention a recent ASIC information sheet for managed funds, corporate collective investment vehicles and superannuation schemes on advertising sustainability-related financial products.

ASIC states that the guidance may also apply to other entities that offer or promote financial products which take into account sustainability-related considerations, such as companies listed on a securities exchange or entities issuing green bonds.

The guidance sets out practical examples that are relevant on this side of the Tasman, given that we have similar laws prohibiting misleading and deceptive conduct and unsubstantiated claims. We expect that the FMA would take a similar approach when considering such matters.

We set out a brief summary of the ASIC guidance, and recommend reading the original for further details.

Key questions to avoid greenwashing

ASIC sets out a series of questions entities should ask themselves to ensure that their advertising claims are solid and not susceptible to challenge.

Is your product true to label? (An important issue given the absence of agreed terms across markets)
Have you used vague terminology? (Broad claims without clarification or substantiation can lead to trouble)
Are your headline claims potentially misleading? (Headlines often cannot be saved by later exceptions, qualifications or fine-print)
Have you explained how sustainability-related factors are incorporated into investment decisions and stewardship activities? (Set out your methodology and decision-making considerations)
Have you explained your investment screening criteria? Are any of the screening criteria subject to any exceptions or qualifications? (References to screens can be tricky if the screen is only applied to certain thresholds, a percentage of a portfolio or only some of an issuer’s product offering)
Do you have any influence over the benchmark index for your sustainability-related product? If you do, is your level of influence accurately described? (It should be clear how active or passive you are in investment decisions)
Have you explained how you use metrics related to sustainability? (Which metrics are used and how they are comprised matters)
Do you have reasonable grounds for a stated sustainability target? Have you explained how this target will be measured and achieved? (“Net-zero by date” claims have already been challenged for lacking sufficient substantiation or evidence that measures are in place to ensure the stated goal is achievable)
Is it easy for investors to locate and access relevant information? (Investors shouldn’t have to hunt across multiple sources to gather what they need).

Two examples

An issuer’s disclosure states that it ‘considers’, ‘integrates’, or ‘takes into account’ sustainability-related factors when assessing new and existing investments, but does not explain how. ASIC’s view is that the issuer should explain clearly what these terms mean in specific language.

The investment manager for a ‘Social Investing Fund’ assigns more importance to traditional financial metrics than to social factors when making investment decisions. ASIC’s view is that such an approach is not “true to label”.

FMA approach

The ASIC guidance provides a useful complement to the guidance released by FMA in December 2020 on claims regarding integrated financial products (being financial products which contain some form of “non-financial” element).

The FMA’s guidance set out key principles for assessing ESG claims and marketing “green bonds”. In particular:

the overall impression matters: the claim does not actually have to be misleading or confusing for liability to follow, it just needs to be “likely to mislead”. A statement that is true in isolation, or once you read the fine print, can still leave a misleading impression
omissions can be confusing or misleading: always consider what you have left out of an ESG claim, and
substantiation is needed: you need to have a reasonable basis for the claim at the time that it is made (regardless of whether the claim is later proved true).

Additional considerations

When advertising ESG products beware:

language unsupported by action: token references to climate change without real action, or joining emissions reduction initiatives with no real impact, can be misleading
overstating action or understating risk that goals won’t be reached: disclosure of risks should be transparent, and
claims without substantiated evidence: have the basis for your claims documented at the time the claim is made.