How to avoid greenwashing when offering or promoting sustainability-related products
This information sheet (INFO 271) is for responsible entities of managed funds, corporate directors of corporate collective investment vehicles (CCIVs), and trustees of registrable superannuation entities (issuers).
- what greenwashing is and why it's a concern
- the current regulatory setting for communications about sustainability-related products
- questions to consider when offering or promoting sustainability-related products.
Note: A sustainability-related product is a financial product where the issuer has incorporated sustainability-related considerations – such as environmental, social and governance (ESG) matters – into its investment strategies and decision making.
While this information sheet focuses on sustainability-related products issued by funds, its principles may apply to other entities that offer or promote financial products that take into account sustainability-related considerations. Examples include companies listed on a securities exchange or entities issuing green bonds.
In relation to investments, 'greenwashing' is the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical.
Greenwashing distorts relevant information that a current or prospective investor might require in order to make informed investment decisions. It can erode investor confidence in the market for sustainability-related products and poses a threat to a fair and efficient financial system.
There has been an increase in investor demand for, and the availability of, sustainability-related financial products in the Australian market. With this comes a growing risk of greenwashing and, as a result, investors being confused or misled.
It is therefore important that issuers comply with existing requirements when promoting or offering sustainability-related products. Such requirements include the prohibitions against misleading and deceptive statements and conduct, as well as disclosure obligations.
To help improve the quality of disclosure, ASIC recognises the recommendations by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD) and encourages voluntary disclosure that is in accordance with the TCFD framework. If you report climate-related information under the TCFD framework, we expect that you will be well placed to transition to any future standard.
This is an evolving space and there have been significant developments recently in relation to disclosure standards for sustainability-related products. For example, in March 2022, the International Sustainability Standards Board published proposed standards on climate-related disclosures and general sustainability-related disclosures.
You should keep up to date with developments in the regulatory setting and consider how you can improve your disclosures in light of those developments.
The Corporations Act 2001 (Corporations Act) and the Australian Securities and Investments Commission Act 2001 (ASIC Act) contain general prohibitions against a person making statements (or disseminating information) that are false or misleading, or engaging in dishonest, misleading or deceptive conduct in relation to a financial product or financial service (e.g. sections 1041E, 1041G and 1041H of the Corporations Act, and sections 12DA and 12DB of the ASIC Act). You must comply with these prohibitions when offering or promoting sustainability-related products.
Particular risks of breaching the misleading statement prohibitions arise in relation to representations made about future matters that are not supported with reasonable grounds. For example, if you stated that you will achieve a certain carbon emissions target (such as net zero carbon emissions) by a particular date, this may amount to a representation about a future matter. Such a representation may be deemed to be misleading if you do not have reasonable grounds for making the representation (see section 769C of the Corporations Act and section 12BB of the ASIC Act).
Note that whether a particular statement or conduct is misleading or deceptive will depend on all of the circumstances of the particular case, and the overall impression created for an investor.
When preparing a Product Disclosure Statement (PDS) for a sustainability-related product, you must comply with the disclosure obligations that apply to financial products, including sustainability-related products.
These obligations include:
- section 1013D(1)(l) of the Corporations Act, which states that where a financial product has an investment component, its issuer must include in the PDS the extent to which labour standards or environmental, social or ethical considerations are taken into account in selecting, retaining or realising an investment
- the guidelines in Regulatory Guide 65 Section 1013DA disclosure guidelines (RG 65).
Some sustainability-related products may be subject to the shorter PDS regime. While there are reduced content requirements for PDSs under this regime, shorter PDSs must describe, in summary, the extent to which labour standards or environmental or ethical considerations are taken into account in selecting, retaining or realising investments relating to the product: see Schedules 10D(7), 10E(7) and 10F(7) of the Corporations Regulations 2001 (Corporations Regulations).
For more information about the shorter PDS regime, see Information Sheet 155 Shorter PDSs: Complying with requirements for superannuation products and simple managed investment schemes (INFO 155).
Note: This information sheet does not provide an exhaustive discussion of all relevant Australian laws applicable to issuers in relation to greenwashing. It is the responsibility of each entity involved to ensure it complies with all relevant Australian laws.
To avoid misleading or deceptive greenwashing practices, you should consider the questions outlined below when preparing communications and disclosures about sustainability-related products.
Consistent with RG 65, these questions are designed to facilitate:
- Truth in promotion: using clear labels and defining sustainability-related terminology
- Clarity in communication: providing clear explanations of how sustainability-related considerations are factored into investment strategies.
Is your product true to label?
Financial product labels guide investors about what they will be investing in. Investors expect a product's label to align with the underlying investment strategy, including the approach to stewardship (if relevant), as well as with asset holdings.
It is fundamental, therefore, that the sustainability-related label of a product reflects the substance of the product itself. You risk being misleading if your fund's name includes sustainability-related terminology, but sustainability-related factors are not significant in the investment selection process.
Given the current lack of standardised labelling for sustainability-related products, you need to be particularly careful to ensure that product labels are not misleading. You should think carefully about using absolute terms in a product label.
Examples of products that aren't true to label
A sustainability-related product is labelled 'No Gambling Fund'. However, under its terms, the product may 'invest in companies that earn less than 30% of their total revenue from gambling activities'.
A sustainability-related product is labelled as the 'Stewardship Equity Fund'. However, the issuer is not actively involved in stewardship activities.
The investment manager for 'Social Investing Fund' balances a number of different factors when considering an investment, including traditional financial metrics and social matters such as labour practices and gender targets. However, the sustainability-related considerations (i.e. the social matters) are not significant in the manager's investment decisions.
Have you used vague terminology?
You should avoid using broad, unsubstantiated sustainability-related statements or 'jargon' without providing clarifying information.
Terms such as ‘socially responsible' or 'ethical investing' or 'impact investing' can mean different things to different people and can vary across products or issuers.
Therefore, when using sustainability-related terminology to describe a product (including in a sustainability-related product label), take care to adequately explain such terminology in the PDS and other promotional material. This is especially important for information that investors might reasonably rely on when deciding whether to acquire that product.
Examples of vague terminology requiring further clarifying disclosures
On its website and various social media platforms, an issuer claims that it is committed to making investments that 'contribute towards positive impacts for its investors and the world'. However, the issuer does not disclose what it considers to be 'positive impacts for its investors and the world' or how its investments contribute to those stated outcomes.
On its website, an issuer states that when making investment decisions the issuer's investment managers will focus on sustainability-related factors that have 'a material financial impact on the investment'. The issuer does not clarify how it defines the concept of 'material financial impact'.
Are your headline claims potentially misleading?
If your communications and disclosures contain a headline claim about sustainability-related matters, the headline claim should not itself be misleading and exceptions and qualifications should not be used to rectify an otherwise misleading impression.
We recognise that headline claims will not always include all necessary information. However, the more that a qualification is required to balance the information contained in the headline claim, the more prominently placed the qualification should be.
If exceptions and qualifications are required, they should not be inconsistent with other content in the disclosures, including any headline claims.
Statements referring the investor to another website or webpage, or a document (such as a PDS, prospectus or contract), to find out information may not be sufficient to correct a misleading or deceptive impression. Furthermore, promotional material content should not be inconsistent with information contained in any disclosure document. See Regulatory Guide 234 Advertising financial products and services (including credit): Good practice guidance (RG 234) for further information.
Example of a potentially misleading headline claim
An issuer makes promotional statements that 'we do not invest in tobacco products'. Under its terms, however, the issuer's exclusionary investment screen for tobacco products permits investment in companies involved in the manufacture, sale and distribution of tobacco products where the company's revenue earned from those activities is below a particular threshold level.
The promotional statements are likely to be misleading and unable to be rectified by disclosure. This is because the headline claim is a statement in absolute terms that is potentially inconsistent with the use of revenue thresholds.
Have you explained how sustainability-related factors are incorporated into investment decisions and stewardship activities?
You should disclose and clearly explain your methodology or policy for integrating sustainability-related considerations into investment decisions and stewardship activities.
At a minimum, you should give investors information about the sustainability-related considerations that you take into account, and how these considerations are incorporated into investment decisions and stewardship activities (e.g. exclusionary or negative screening, inclusionary or positive screening: see the appendix in RG 65).
You should also be mindful of the content requirements under section 1013D (or equivalent provisions under the shorter PDS regime) and RG 65.
Example of an inadequate explanation
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.
This is unlikely to help investors understand the product's sustainability-related investment strategy. The issuer should explain clearly what these terms mean and use specific and clear language.
If you use a weighting system to prioritise certain sustainability-related factors over others, or to evaluate sustainability-related considerations compared to other considerations, you should also consider whether a description of that weighting system would better inform a retail investor's decision to acquire the sustainability-related product – and if so, provide a description of how that weighting approach is determined and applied by your investment managers.
In addition, when describing your stewardship approach, you should be careful to not overstate the degree of influence you could reasonably have in relation to the companies you have selected for engagement.
Have you explained your investment screening criteria? Are any of the screening criteria subject to any exceptions or qualifications?
You should avoid the use of broad promotional statements to describe investment screens. Disclosures should enable investors to fully understand the product's sustainability-related investment screening criteria.
It should also be clear to investors whether the particular investment screen(s) applies only to a certain product offering or to the issuer as a whole (that is, to all products offered by the issuer whether sustainability-related or otherwise). Additionally, where a screen is only applied to some of the portfolio, the percentage of the portfolio covered by the screen should be disclosed.
You need to provide adequate relevant information so that investors can understand any screening exceptions or qualifications (including threshold-based screens). These exceptions or qualifications ought to be prominently disclosed and clearly explained to investors in all places where the investment screens are referred to. This includes explaining any terms used in the screens or thresholds that may be vague, ambiguous or have different accepted definitions.
Examples of inadequate disclosure regarding sustainability-related investment screens
An issuer makes the following promotional statement about its sustainability-related product: 'We target investments in companies that have robust plans to manage cybersecurity and data privacy risks (depending on the nature of their business).' However, the issuer's terms state that this screen only applies in relation to technology companies. This qualification has not been prominently disclosed in the respective communications and disclosures.
A sustainability-related product applies a revenue-based exclusionary screen that excludes investments in companies earning 'more than 10% of their revenue from providing palm oil as an input ingredient'.
We would generally expect the issuer to disclose what 'revenue' means in this context (for example, whether 'revenue' refers to a company's gross or net revenue, or whether this is based on revenue as reported by the company in its audited financial statements).
Do you have any influence over the benchmark index for your sustainability-related product? If you do, is your level of influence accurately described?
If you are able to influence the composition of an index against which portfolio composition is determined or performance is measured, you should disclose your level of influence. For example, an issuer should disclose if it has any influence over the investment screens applied by the index provider when constructing the index. Otherwise, investors may be misled to believe that the product issuer has little or no involvement in the development of the product's underlying investment screens, when the issuer actually has some involvement.
An issuer of sustainability-related products should not state that it is passively managed when, in substance, it has a degree of active management over the investment decision-making process.
Example of a failure to disclose influence over the composition of a benchmark index
A sustainability-related product adopts a passive investment strategy by tracking a combination of sustainability-related indexes administered by third-party index providers. However, the PDS does not disclose that the product issuer has active input on any adjustments to the negative or exclusionary screens applied to the underlying indexes.
Have you explained how you use metrics related to sustainability?
If you rely on sustainability-related metrics (such as ESG scores) to evaluate whether a new or existing investment aligns with your product's investment objective or strategy, you should disclose the following:
- the extent to which the metrics are used to evaluate new and existing investments in implementing your investment objective or strategy
- the sources of your sustainability-related metrics, including whether these are based on your own proprietary methodologies or from certain third-party providers
- a description of the underlying data used to calculate your sustainability-related metrics, as well as the calculation methodologies for those metrics
- any risks or limitations arising from your reliance on the metrics (where applicable).
Do you have reasonable grounds for a stated sustainability target? Have you explained how this target will be measured and achieved?
If your product has set a certain sustainability target, to avoid breaching the misleading statement prohibitions you should clearly explain:
- what your target is
- how and when you expect to meet your target
- how you will measure your progress or milestones
- any assumptions you have relied on when setting that target or when measuring your progress.
Example of a failure to disclose how and when an issuer expects to meet a sustainability target
An issuer prominently states on its website that it is committed to reaching net zero carbon emissions across all of its investment portfolios. However, it does not provide investors with information about how and when it expects to achieve this target. The issuer has only made a general statement in its latest annual report that the issuer remains committed to 'driving real positive changes for our environment'.
This level of disclosure does not provide investors with adequate information about the issuer's strategy or progress towards achieving its 'net zero' objective.
Stewardship investment approach
If you have adopted a stewardship investment approach to achieve your sustainability-related targets, you should:
- explain to investors the rationale for engaging with particular companies to influence changes in their corporate behaviour
- provide regular updates on your progress with those companies, including stewardship activities and outcomes, such as voting and engagement activities.
Is it easy for investors to locate and access relevant information?
When an issuer offers a financial product to a retail investor, the general disclosure obligations for a PDS apply to any offer of financial products to those investors.
Consistent with these requirements, you should provide investors with adequate information that is concise and clear enough for investors to understand the sustainability-related considerations incorporated into the product being offered.
You should ensure that all information that you publish that is relevant to a retail investor's (or their adviser's) investment decision regarding a particular sustainability-related product is easy to locate and readily available, particularly when this information is made available through your website.
If your approach to investing is guided by third-party frameworks (such as the UN Sustainable Development Goals or the UN Principles for Responsible Investment), this should be disclosed.
The information that you provide should be consistent across all mediums, including regulatory documentation (e.g. the product's PDS or the fund's annual financial reports), voluntary disclosure frameworks or publications (e.g. sustainability reports by the issuer) and social media platforms (e.g. Facebook, Instagram and YouTube).
You should also be conscious that providing significant volumes of sustainability-related information in numerous online documents and/or dispersed across various platforms may not be particularly helpful for an investor deciding whether to invest in your sustainability-related product.
Where can I get more information?
What is 'greenwashing' and what are its potential threats? Article by former ASIC Commissioner Cathie Armour, first published in AICD's Company Director magazine in July 2021.
RG 65 Section 1013DA disclosure guidelines
RG 168 Disclosure: Product Disclosure Statements (and other disclosure obligations)
RG 234 Advertising financial products and services (including credit): Good practice guidance
INFO 155 Shorter PDSs: Complying with requirements for superannuation products and simple managed investment schemes
Please note that this information sheet is a summary giving you basic information about a particular topic. It does not cover the whole of the relevant law regarding that topic, and it is not a substitute for professional advice
You should also note that because this information sheet avoids legal language wherever possible, it might include some generalisations about the application of the law. Some provisions of the law referred to have exceptions or important qualifications. In most cases, your particular circumstances must be taken into account when determining how the law applies to you.