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ESG marketing not exempt from regulatory scrutiny

By Jessica Penny
3 minute read

The mere disclosure of accurate ESG credentials might not be enough to escape accusations of greenwashing, particularly when translating those disclosures into marketing materials, a professional has said.

Fund managers are still at risk of greenwashing allegations even if their formal environmental, social, and governance (ESG) disclosures are correct, Zenith Investment Partners has cautioned.

Namely, Zenith’s head of responsible investment and sustainability, Dugald Higgins, has pointed out that a disconnection between stated actions and their portrayal in marketing activities has led to a rise in greenwashing allegations.

“Disclosure requirements on ESG and sustainability issues are rising exponentially, with regulators doubling down and reminding product providers that claims around environmental and sustainability-related issues are being scrutinised,” Mr Higgins said.

Mr Higgins cited recent cases of civil litigation between the Australian Securities and Investments Commission (ASIC) and investment managers, where exaggerated environmental claims were made in marketing materials despite accurate ESG disclosures.

In one such case, ASIC issued an infringement notice to a superannuation fund for a social media post that overstated its positive environmental impact.

The increasing regulatory focus on greenwashing, including guidelines issued by ASIC and the Australian Competition and Consumer Commission (ACCC), signifies that financial services cannot avoid scrutiny under Australian Consumer Law, Mr Higgins said.

“In addition, the Australian Senate is currently conducting an inquiry into greenwashing with particular reference to company claims, their impact on consumers, advertising standards, and legislative options to protect consumers from greenwashing.”

Mr Higgins explained that the industry’s response to these regulations has included a practice termed “greenhushing”, where fund managers reduce or eliminate information regarding their responsible investments to avoid greenwashing allegations.

Namely, he noted that since ASIC’s first civil litigation against a major investment manager in February 2023, there has been “an observable” increase in greenhushing locally.

However, he emphasised that this approach is unlikely to succeed for two key reasons.

“Firstly, the financial world is undergoing one of the biggest changes in reporting standards in over 50 years. Love them or loathe them, most jurisdictions globally are preparing to localise standards mandated by the International Sustainability Standards Board.

“In Australia, climate-related financial reports are set to be mandated for much of the real and financial economy and Parliament has legislated the ambition to reach net zero by 2050. This mirrors actions from many major global trading partners,” Mr Higgins said.

“Clearly, going dark on disclosures is not an option,” he added.

Second, he noted that fund managers that sell a fund on the basis of its sustainability attributes and then withdraw the claims or remove evidence supporting them, are denying their clients the full picture.

“Clients may rely on certain claims at the time of purchase and removing that information should raise legitimate concerns. Adopting a code of silence does a disservice to the end investor,” he continued.

Conceding that there may not be a “perfect solution” for disclosing ESG credentials as of yet, Mr Higgins said the accuracy and transparency of communications from fund managers to their clients and to regulators is still critical.

“Firms need to ensure the right response is made and respond with knee-jerk reactions that are unlikely to solve the problem,” Mr Higgins said.

“Financial products are complex by nature but when you add ESG or sustainability factors into a fund’s design, the complexity and subjectivity increase. This creates problems when dealing with clients who have varying levels of financial sophistication.

“While there is a fine line between being accurate enough to be correct and being succinct enough to be understandable, the message is clear. Managers and promoters of any products featuring environmental or sustainability claims need to be prepared to defend their claims,” he concluded.