Marketing ESG credentials could be greenwashing even if correctly disclosed

Dugald Higgins

Even if a fund manager’s formal ESG disclosures are correct, their translation into marketing materials can still trigger greenwashing allegations, says Zenith Investment Partners head of responsible investment and sustainability Dugald Higgins.

Higgins says that in three of the most recent cases of civil litigation between the Australian Securities and Investment Commission (ASIC) and investment managers on greenwashing, there was a disconnect between the actions being taken versus how they were being articulated in marketing activity.

For example, in one case ASIC issued an infringement notice to a super fund for overstating its positive environmental impact in a social media post.

“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,” Higgins says.

“We have seen the release of ASIC’s information sheet on avoiding greenwashing in June 2022, followed by the Australian Competition and Consumer Commission’s (ACCC) July 2023 release of comprehensive draft guidelines on environmental and sustainability claims, noting that financial services are not exempt from Australian Consumer Law.

“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.”

Higgins notes this rise in ESG regulation has led to ‘greenhushing’, whereby fund managers remove or drastically reduce available information on how responsible their investments are to avoid any greenwash allegations.

Since ASIC’s first civil litigation against a major investment manager in February 2023, Higgins has noted an observable increase in greenhushing locally, but also adds it will not work as a tactic for two main 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,” he says.

“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.

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

“This was echoed in a recent speech by ASIC Chair Joe Longo, who stated that ‘greenhushing is in our view just another form of greenwashing, and risks misleading by omission. Silence from firms and failing to engage isn’t the answer’.

“Secondly, if you sell a fund on the basis of its sustainability attributes and then withdraw the claims or remove evidence supporting them, you’re denying your clients the full picture,” Higgins adds.

“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.

Higgins says it may result in clients choosing to avoid, abandon or retaliate against a product in protest.

While there may be no perfect solution yet disclosing ESG credentials, Higgins says the accuracy and transparency of communications from fund managers to their clients and to the regulators is critical. This includes marketing communications.

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

“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.”