Businesses facing tougher ESG reporting requirements under new international standards are being reminded by regulators to be ready for greater scrutiny.
Claims about being a “carbon neutral” this or offering the first “green” that - often seen on digital billboards, buses and in online ads - will need to be backed up by facts.
Regulators in Australian and New Zealand have pointedly referred to soon-to-be-unveiled standards in recent public announcements.
Added impetus to tackling the climate challenge is coming from politicians, too. Certainly more so than at the beginning of 2022. A raft of initiatives were announced at the inaugural Australia–New Zealand Climate Ministers’ meeting in Auckland have clearly put the problem – and the opportunity – high on Boardroom agendas.
But just how prepared do firms and directors need to be?
Picking through the latest regulatory commentary from both sides of the Tasman, the answer seems to be: Very.
Take the speech at a recent ESG conference by ASIC Chair Joseph Longo where he put firms on notice about tougher scrutiny of “misleading or deceptive” products.
While he recognised many large Australian companies have been engaging on climate-related matters for several years - with 90% recognising climate as a financial risk and 74% reporting against the Taskforce on Climate-related Financial Disclosures (TCFD) framework – he said: “It’s not an opportunity to rest on our laurels.
“Data is telling us that markets and investors are increasingly relying on this information in order to make decisions.
“That’s why ESG disclosures and statements need to be rigorous, robust, and comprehensive.
“And it should go without saying, they cannot be misleading or deceptive. This is nothing new – it has never been okay to be misleading or deceptive.”
With the International Sustainability Standards Board finalising its first two standards by the end of this month, the reminder to the audience that over the past 12 months the corporate regulator had secured 23 corrective disclosure outcomes, issued 12 infringement notices, and commenced its first civil penalty proceedings suggests much more activity in the coming months.
The ASIC Chair also stated that there was ongoing surveillance and investigations into the problematic behaviour that falls under the heading of ‘greenwashing’.
For those needing a reminder of what ASIC is looking out for, the following four sentences are a good starting point.
Net zero statements and targets without a reasonable basis or that are factually incorrect.
Terms like ‘carbon neutral’, ‘clean’ or ‘green’, that aren’t founded on reasonable grounds.
Overstatement or inconsistent application of sustainability-related investment screens.
The use of inaccurate labelling or vague terms in sustainability-related funds.
A review carried out by ASIC last year examining greenwashing and sustainability-related products found half of the issuers needed to “improve the way they described their screening criteria in both websites and regulated disclosure documents,” according to the regulator.
“Some of the disclosure concerns we identified during our initial review remain for many issuers,” he noted.
Not surprisingly, New Zealand’s Financial Markets Authority FMA has been delivering the same message, encouraging entities to ensure there was real substance to their “sustainable” and “ethical” claims.
In an op-ed, the FMA Executive Director Response and Enforcement Paul Gregory said it was important because of the consequences to consumers who want to align their investments with appropriate products.
“While we’re familiar with harm from unexpectedly poor returns, poor risk management and poor value for money over an investment horizon,” he said.
But because sustainability-focused products are relatively new and because they are ‘so personal’ it is more difficult to “fathom the harm” to investors finding out their investments have compromised their values for 10, 15, 20 or more years contributing to harming people, animals, or the environment over decades.
That’s why greenwashing matters so much, he says.
“Providing misleading or false claims about social or environmental benefits or impact goes to the heart of fair dealing, and the overall impression provided by marketing materials is critical here,” he said.
“We know investors choose funds based on marketing and what they think they know about what the fund invests in, and how.
“That same investor can also be prepared to pay higher fees and/or accept lower returns for a fund they believe better fits their values.
“If the funds’ investments don’t line up with what they believe they are investing in, that is a misleading value proposition.
“Choosing and using financial products is hard. Global research repeatedly shows this. Introducing ethical or responsible or sustainable or impact concepts to it, makes it harder. It must be easier for people to make informed choices.
“Consumer expectation is growing. Fund managers can add substance to support their claims and labels and disclose accordingly, or stop using the claims and labels. Marketing without underlying substance won’t wash, green or otherwise.”
The FMA’s Jenika Phipps - Manager, Climate-related Disclosures – has subsequently spelled out the regulator’s expectations to CEOs, CFOs, Board members and Directors, telling them they would need climate-related data and information to substantiate the climate statements produced for their entity.
“This is a significant change. It may require more resources, new processes, and systems, and some upskilling across your organisation. Our advice is don’t delay. Start preparing now,” she said.
But is that easier said than done?
In an article about the rise of Greenhushing published in InFinance, Morningstar's ESG lead Erica Hall highlighted lack of clarity over the language governing green targets.
“Sometimes greenwashing may not be intentional but instead result from differing definitions of sustainability and/or a mismatch between an investor's expectations and the specific approach used by a sustainable investment fund,” said Hall.
“There is no universal, accepted standard for sustainable investing.
“It is estimated there is upward of more than 200 different ESG taxonomies in existence, which can make it difficult to undertake meaningful comparisons and to ascertain the extent of a fund's greenness.”
When ASIC published an information sheet targeted at superannuation and managed fund issuers on how to avoid greenwashing, some asset managers and superannuation funds walked away from their involvement in organisations that required certain green commitments and milestones to be met, which they did not feel were achievable, according to Hall.
A survey by the South Pole international advocacy organisation of 1,200 companies in 12 countries found that although business were targeting science-based emissions reductions, nearly a quarter (23%) decided not to publicise their milestones beyond what is mandated.
