The responsible investment body is warning that a one-size-fits-all ESG framework mirroring those in the UK and the EU could do more harm than good.
The Responsible Investment Association Australasia (RIAA) has warned that a universal ESG framework could misguide investors, inflate fund expenses, and heighten greenwashing risks and has instead proposed a principles-based, locally developed framework built on RIAA’s Responsible Investment Standard.
RIAA made its suggestion as the government’s consultation on sustainable investment labels closed on Friday, seeking views on whether labels should apply to all financial products or only those marketed as “sustainable”, while also considering a UK-style regime giving issuers flexibility to support their environmental claims.
The government has also been looking more broadly at the EU, where its Green Claims Directive seeks to curb greenwashing by requiring scientific backing for environmental claims and limiting new labels to EU-approved schemes.
RIAA co-CEO Estelle Parker said a uniform ESG rule would not suit Australia’s complex and diverse superannuation market, noting that stringent UK and EU frameworks have already forced some high-quality responsible investment products to abandon their labels.
“If the government adopts an overly prescriptive model as often seen overseas, it will not only fail to meet market demand but also limit consumer choice,” she said. “If we don’t account for Australia’s unique and diversified investment landscape, we risk repeating those same mistakes here.”
Moreover, she added that overly rigid rules may force investment funds into costly reporting and labelling exercises that don’t reflect portfolio realities, which could translate into higher costs for members.
“To genuinely protect consumers, product labelling must be designed with super in mind first,” Parker said. “But, if the bar for regulation and policy is set too low, the door will be thrown wide open to greenwashing, and will mislead consumers about what they’re really investing in.”
UniSuper’s head of ESG Lou Capparelli backed RIAA’s locally developed principles-based approach and said it would be more practical for Australia than rigid overseas standards.
“We’ve seen in the UK, the bar the FCA sets for the use of the term ‘sustainable’ would, in an Australian context, convert to an impact fund,” he said. “The hoops you would have to go through to qualify for that would be awfully difficult for many funds to meet. A principles-based approach for sustainable product labelling is a very sensible way of doing things.”
The issue is pressing because, at present, there are no minimum standards for Australian “socially responsible” funds. Products can carry the label even if they invest in weapons or gambling, leaving consumers uncertain about what the label truly signifies.
This inconsistency was highlighted in 2023 when some super funds retained significant investments in nuclear weapons companies, while marketing “socially aware” options, including AustralianSuper’s Socially Aware product, which held over $20 million in eight nuclear weapons firms.
“It’s about setting the rules before the money is invested, not cleaning up afterwards,” Parker said.
Principles-based framework
Despite outflows in the US, sustainable funds in Australia saw positive inflows in late 2024 and early 2025, and with nearly 90 per cent of Australians expecting responsible super management, RIAA believes a principles-based ESG framework that avoids rigid rules and encourages innovation is vital.
Speaking to Super Review sister brand InvestorDaily, Parker gave an overview of the association’s certification program that takes a non-prescriptive, principles-based approach, giving funds the flexibility to define their own sustainability objectives, which can range from animal welfare to supporting social and affordable housing.
Certified funds must also avoid significant harm, including investments in nuclear weapons, tobacco, tobacco alternatives, and controversial weapons.
Parker noted that in its policing of the market, RIAA has observed numerous terms like “ethical”, “positive”, and “sustainable” being used to describe products.
Currently, product naming and marketing practices vary, with product issuers using terms to broadly indicate that the investment product aims to achieve broader goals beyond financial returns. The government consultation paper outlined this, and one of its questions asks whether particular words or terms should be specified.
In Parker’s view, defining a list of terms would not be a particularly useful labelling strategy for the government to employ, as meanings vary from person to person.
“To one person, the term ‘ethical’ could mean not investing in fossil fuels, while to someone else it might mean deliberately investing in renewable energy or screening out animal testing or human rights abuses and so on,” she said.
At the same time, there are exceptions to this rule, since RIAA’s own certification program defines the terms “sustainable” and “impact”. But, as Parker clarified, both terms have established global investment definitions and norms and are used productively in practice.
For example, RIAA classifies an investment product as “sustainable” only if the fund has a specific sustainability objective, which must be strongly supported by the processes used to determine portfolio holdings.
Mary Delahunty, CEO of the Association of Superannuation Funds of Australia, told InvestorDaily that the peak body is also advocating a principles-based approach.
“The goal is to provide as much transparency for consumers as possible, while not unduly limiting innovation by those issuing these products,” she said.
The question of exclusions
However, complexity arises when considering whether strict exclusions should be applied to product labels. For instance, if a fund is investing in renewable energy projects, but also invests in nuclear weapons, the question is whether its “sustainable” label should be withdrawn.
While it’s unclear where the government will land on this issue, Parker said RIAA’s own certification program does have criteria around avoiding significant harm separate to the product label itself.
“Another requirement for our certified funds is that they avoid significant harm, which is that they don’t invest in nuclear weapons, tobacco, tobacco alternatives and controversial weapons,” she said.
At the same time, she maintained that product labelling should aim to provide consumers with all necessary information, enabling them to make investment decisions aligned with their values, rather than compelling investment products to conform to specific categories.
“I would just stress that we need to continue to encourage the development of sustainable finance products and something that is overly prescriptive is going to discourage that, as we’ve seen in other jurisdictions,” she said.
