CPD: Greenwashing – a major financial consumer protection challenge


As the surge of funds flow into sustainable investments gathers pace the risk of greenwashing – intentional or otherwise is likely to grow.

Greenwashing, and the importance of being kind to trees

Some readers with more than a few miles on the clock may remember a comedy show from the 1990s, Absolutely Fabulous, about a shambolic and vacuous Public Relations expert, Edina Monsoon.

In one of the show’s more memorable scenes, Edina’s daughter Saffy questions the meaning of a sticker on a pair of plastic sunglasses. The sticker shows a tree and reads ‘Kind to Trees’.

Saffy: ‘What does that mean?’
Edina: ‘Kind to trees, sweetie.’
Saffy: ‘How are they kind to trees?’
Edina: ‘Well, they ain’t made of wood, how much kinder can you get?’

And in that moment, unknowingly, Edina articulated what has become one of the greatest consumer protection challenges of our times – that of ‘greenwashing’.

Greenwashing in the news

Whilst greenwashing as a topic has been bubbling away for many years now, it has recently taken on increased prominence. A quick glance of the news reveals a number of recent and high-profile prosecutions and investigations:

  • in Germany, the offices of Fund Manager DWR[1] were raided after a whistle-blower alerted authorities to dubious ESG practices and claims
  • in the UK, HSBC has been accused over an advertising campaign which authorities say created a false impression as to the bank’s overall environmental impact[2].
  • in the US, Securities and Exchange Commission charged BNY Mellon Investment Adviser, Inc. for misstatements and omissions about Environmental, Social, and Governance (ESG) considerations in making investment decisions for certain mutual funds that it managed[3].

Closer to home – and of more immediate relevance to financial advisers – the ACCC declared[4] its intention to proactively target greenwashing, while ASIC[5] took the first step in their stated aim to bring greenwashers to account when it released, in June, Fact Sheet 271: How to avoid greenwashing when offering or promoting sustainability-related products.

The incentive to greenwash is significant

In simple terms, greenwashing is about over representing the extent to which a practice is environmentally friendly, sustainable, or ethical.

Whilst as a concept it is not limited to investment products – indeed some of the most problematic greenwashing emanates from sectors such as mining, energy, and aviation – the soaring popularity of ESG investing means it is very much an issue in financial services.

Sustainable investing is big, big business.

US, research[6] released in mid 2021 found the amount invested in listed ESG funds had increased elevenfold in just 5 years. The same study estimated that almost one in three dollars of total US assets under professional management were held in ESG funds.

Locally, data released by RIAA[7] revealed that in 2020, responsibly invested assets grew at 15 times the rate experienced by overall Australian professionally managed investments. And, according to Morningstar[8], that trend continued through 2021, with flows into sustainable funds in the second quarter being the highest on record.

This massive flow of funds is not surprising and is reflective of the increasing importance consumers are placing on environmental issues across all aspects of their lives, including their finances.

A 2019 RIAA study[9] found that 86% of Australians expect their super or other investments (excluding banking) to be invested responsibly and ethically, and 87% expect the money in their bank accounts to be invested responsibly and ethically. Furthermore, three quarters of respondents said they would consider moving their banking, super, or other investments, if they found their current provider was engaging in activities not consistent with their personal values.

Financial advisers have recognised this trend and have made strengthening their ESG offering one of their highest priorities for the short to medium term.

According to recent research from Australian Ethical and Investment Trends[10], almost half of all financial advisers are now providing ESG investment advice. 68% of adviser respondents to their survey agreed it was their responsibility to ensure clients’ investments align with their values, and 65% agree that asking about client’s ESG needs is required to fulfill their best interest (a figure that arguably should be at 100%).

An earlier study, also from Investment Trends[11], suggested that Responsible Investing practices doubled in importance for financial advisers through 2021.

Clearly, there is much at stake.

The risks from greenwashing

There are a number of risks that flow from widespread greenwashing.

Firstly, to the extent that it is based on false information, greenwashing can distort the operation of the market, seeing funds flow into investments for the wrong reasons. This can undermine the integrity of the financial system.

On the flip side, and just as damaging, is the potential erosion of consumer confidence and trust in ESG investing, as more cases of greenwashing come to light.

Advisers, for their part, are understandably conscious of the potential reputational risks associated with greenwashing. In a recent survey[12] of UK advisers, more than two-thirds of said they were worried about being caught up in the fallout if they recommend products that are not as green as they claimed, with 20% saying they are ‘very concerned’ about the risk and a further 49% admitting they are ‘somewhat concerned’.

This fear of reputational damage also translates into an efficiency problem – the need to look more carefully under the hood of ESG investment products takes more of an adviser’s time.

How much of a problem is greenwashing?

To some extent, the cases already mentioned are just the tip of the iceberg. The fact that regulator attention has only stepped up relatively recently means we may not yet understand the scale of the issue. But there are some clues.

In 2019, the 2 degrees investing initiative (2DII), a think tank that co-ordinates some of the world’s largest research projects on sustainable finance, revealed that 85 per cent of funds labelled green had misleading marketing[13].

In Australia, the RIAA estimates only about one quarter of the investment managers who say they invest responsibly can actually prove their credentials[14], while a recently released KPMG study[15] found that a quarter of listed Australian companies making claims about their ESG status, without being able to back those claims up.

A Greenpeace Report[16] (Hero to Zero) examined the top polluters on the ASX and found many companies promoting their ‘Net Zero’ commitments were hiding questionable carbon offset schemes and had failed to address more fundamental issues such as phasing in renewable energy sources.

Inconsistent language, standards, and data – the ESG contradiction

What makes greenwashing hard to detect and quantify, and indeed what may even lead to some greenwashing being inadvertent, is the sheer inconsistency of the data, language and reporting standards that exist in the space. Indeed, some estimates suggest there are around 600 different ESG approaches being used today[17].

A lack of consistency in ESG terminology has long been identified as a contributor to investor confusion and difficulties in comparing companies and funds.  According to the Journal of Environmental Investing Report 2020, there are more than 20 different labels being used for sustainable debt instruments, which all align with different guidelines or frameworks[18].

A lack of reliable and comparable ESG metrics and reporting is another key challenge to tackling confusion in the ESG space. In the absence of a common standard and enforcement mechanism for instrument-level ESG disclosures, the quality and consistency of post-issuance reporting into ‘use of proceeds and ‘impact’ remains variable and fragmented across issuers and regions, adding to the difficulties in comparing and aggregating performance.

The absence of standards around labels and is also problematic, as it means two funds labelled the same way can have vastly different underpinning approaches. For example, one fund promoting the fact that it excludes certain types of activities (e.g., selling alcohol) may have a genuine, total exclusion, whereas another may only exclude those companies who earn more than a certain percentage of revenues from that activity (e.g., 20%).

Further complications arise from the different methodologies used by different research houses, some of which can throw up seemingly counterintuitive outcomes.

In one high profile example[19], McDonalds Corporation was given an improved ESG rating by one ratings agency when that agency dropped carbon emissions as an assessment criterion and determined that climate change neither posed a risk nor offered opportunities to the company’s bottom line. In other words, they assessed the risk the company faced from the world, not the risk the world faced from the company.

More recently, the world’s richest man, Elon Musk, questioned the integrity and value of ESG ratings after S&P Global, kicked Musk’s electric car company out of the index while giving high marks to US oil giant Exxon Mobil[20].

(There are two perspectives on this. The energy intensive processes that go into manufacturing electric cars, the minerals that are used in their components, and the fact that the electricity they are charged with is mostly not from renewable sources, means right now they aren’t totally environmentally friendly. On the other hand, electric vehicles don’t emit carbon, and the proportion of energy produced by renewable sources is increasing all the time, meaning on balance they may be more deserving an environmentally friendly label than an oil company.)

What is being done to combat greenwashing?

The key to combatting greenwashing seems to rest in the introduction of consistent standards– in methodologies, labels, reporting – and in increased transparency. In this regard, some regions are doing better than others.

The Task Force on Climate Related Financial Disclosures was formed at the behest of the G20, the international forum to which the world’s to economies – including Australia – belongs. The task force has made a number of recommendations, which in some countries has been reflected in mandatory reporting by public companies of climate related performance and the climate risks faced by those businesses.

Such climate risk disclosures are already mandatory in the UK, the EU, Switzerland, Hong Kong, Japan, Singapore, and New Zealand, and in March 2022, the United States Securities and Exchange Commission (SEC) also issued proposed rules in this area[21].

Whilst not currently mandatory in Australia, APRA and ASIC have both cited the TCFD recommendations as being best practice for climate-related financial disclosures. In 2019 ASIC updated RG 228 (Prospectuses: Effective disclosure for retail investors); and RG 247 (Effective disclosure in an operating and financial review) to include examples of recommended climate related disclosures.

As with most things ESG related, Europe seems to be leading the charge. Developments there may provide a clue as the potential direction in Australia.

The EU Taxonomy Regulation is a classification system for economic activities to be considered “environmentally sustainable and is an important step in creating a more consistent language around sustainability, and greater availability and reliability of ESG data and disclosures.

The EU has also adopted regulation addressing ESG reporting obligations such as the Sustainable Finance Disclosure Regulation (SFDR), which requires financial market participants to disclose how they take sustainability risks and adverse impacts into account at the entity and product level, with the primary goal of avoiding greenwashing in financial products.

In Australia the main consumer protection at the moment is in the form of Australian Consumer Law, which covers misleading and deceptive conduct. Greenwashing – promoting ESG related credentials which cannot be substantiated or are likely to mislead consumers – is captured here. This legislation is relevant to greenwashing generally and is not specific to financial products.

Of more direct relevance to financial product issuers, and in addition to the existing guidance around ESG disclosures (RG 65 and RG 168), is the ASIC Fact Sheet on Greenwashing previously mentioned (271), released in June 2022.

The Fact Sheet contains a number of questions issuers should consider when offering or promoting sustainability related products. These questions include:

  • Is the product true to label?
  • Has vague terminology been used?
  • Are headline claims potentially misleading?
  • Is there an explanation of how sustainability related factors are incorporated into investment decisions and stewardship activities?
  • Have the investment screening criteria been explained?
  • Do the issuers have any influence over the benchmark index for the product, and if so, is this adequately described?
  • How are sustainability related metrics used?
  • Are there reasonable grounds for the stated sustainability target, and is there an explanation of how this target will be measured?

At the time of releasing the Fact Sheet, ASIC Deputy Chair Karen Chester observed that it was:

 “A must-have for investor confidence and trust and a must-have for both fair and efficient market outcomes here. Misdirected investment here will inevitably be at great economic cost.”[22] 

Steps to identify and avoid greenwashing

The last few years have seen concerted efforts from research houses seeking to differentiate themselves on the basis of their ESG rating methodologies.

Morningstar research formally integrated ESG into its analysis of shares, funds, and managers. Following their purchase of Sustainalytics they also launched a new rating for managers, the ESG Commitment level, which sits alongside its existing classifications.

Lonsec integrated its ESG biometric scores into its main fund rating model and entered a partnership with ESG research provider Sustainable Platforms. Zenith launched a Responsible Investment Classification to sit alongside its traditional ratings.

Of course, with no consensus on definitions and the subsequently wide variety of (proprietary) approaches taken, the proliferation of ESG research doesn’t necessarily make it easier for advisers to assess any given fund against their clients’ ESG preferences.

Happily, for those advisers seeking to ‘look under the hood’ prior to recommending an investment, there are a number of questions they can ask, and resources they can draw on, to give more clarity and confidence to themselves and their clients.

Questions to ask of companies and fund managers

  • Are they signatories to any codes and initiatives? What is their UN PRI rating?
  • How are any exclusions applied and is this clearly stated?
  • What ESG integration techniques are applied?
  • What is their longevity in the sustainable space? Do they have only one or two ‘sustainable’ funds, or is their entire offering based on ESG principles?
  • Do they have ESG subject-matter experts dedicated to engagement, stewardship, and responsible investing?
  • What is their own approach to ESG, in terms of diversity and inclusion, working conditions, and emissions reductions?
  • How transparent are they, and how well are they able to link investment activity with environmental/social outcomes? And can they quantify those outcomes it in a way that is easily understood?

The RIAA and other resources

There are a number of publicly available resources advisers can also draw on. The Responsible Investment Association of Australasia (RIAA) publishes a number of reports and guides for advisers seeking to get more active in this space. They also provide Product Certification for ESG products and a search function on their website allows advisers to identify what certified products match their clients’ ESG beliefs.

A similar resource is that provided by the Ethical Advisers Co-operative, an Australian adviser collective who have a ‘leaf rating’ system for superannuation and investment funds. Their fund ratings, along with other resources, can be found on their website[23] .


Evolving community attitudes, and more interventionist governments, will ensure that the demand for sustainable investment options will continue to grow. Whilst this creates new and exciting opportunities for advisers to engage with clients, the lure of substantial funds flow provides a significant temptation for companies and funds to put their most sustainable foot forward. As such, the risk of greenwashing – intentional or otherwise is likely to grow. By understanding the nature of greenwashing, the relevant regulations, and the ways to spot and avoid it, advisers can play a major role in protecting their clients from investment decisions which are risky, misunderstood, and inconsistent with their personal values.


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[2] https://www.professionaladviser.com/news/4048954/hsbc-set-accused-greenwashing-advertising-standards-authority-reports
[3] https://www.bloomberg.com/opinion/articles/2022-05-23/the-sec-goes-after-greenwashing
[4] https://www.afr.com/companies/financial-services/accc-says-it-s-ready-to-pursue-greenwashers-20220615-p5atv7
[5] https://asic.gov.au/regulatory-resources/financial-services/how-to-avoid-greenwashing-when-offering-or-promoting-sustainability-related-products/
[6] https://www.afr.com/markets/equity-markets/fund-numbers-double-in-two-years-amid-esg-boom-20210713-p5894s
[7] https://responsibleinvestment.org/resources/benchmark-report/
[8] https://www.morningstar.com.au/funds/article/australias-sustainable-funds-market-is-growin/214505
[9] https://responsibleinvestment.org/wp-content/uploads/2020/03/From-Values-to-Riches-2020-full-report.pdf
[10] https://www.financialstandard.com.au/news/50-of-advisers-now-offering-esg-advice-179795654?q=greenwash
[11] https://www.professionalplanner.com.au/2021/12/esg-doubled-in-importance-for-advisers-in-2021-investment-trends/
[12] https://www.professionaladviser.com/news/4036830/report-reputational-risk-putting-advisers-sustainable-funds
[13] https://www.ftadviser.com/investments/2022/06/16/how-can-advisers-insulate-themselves-and-clients-from-greenwashing/?page=1
[14] https://www.smh.com.au/money/investing/pressure-mounts-on-funds-to-come-clean-on-being-green-20211007-p58xzb.html
[15] https://www.afr.com/wealth/investing/study-of-600-listed-companies-throws-cold-water-on-esg-claims-20220627-p5awwx
[16] https://acthubspot.greenpeace.org.au/re-hero-to-zero
[17] https://www.forbes.com/sites/feliciajackson/2021/10/05/are-universal-sustainability-standards-and-esg-reporting-the-key-to-net-zero/?sh=449a914d9ace
[18] https://www.evidenceinvestor.com/greenwashing-how-widespread-is-it/
[19] https://www.linkedin.com/pulse/esg-msci-example-how-invest-sustainably-tillmann-lang/?trk=public_profile_article_view
[21] https://www.gtlaw.com.au/knowledge/effect-secs-proposed-climate-related-disclosures-australian-companies
[22] https://probonoaustralia.com.au/news/2022/06/asic-releases-greenwashing-guide-could-mandatory-international-reporting-be-on-the-horizon/
[23] https://www.leafratings.org/all-funds.html

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