With ASIC intensifying its scrutiny of misleading sustainability claims, a legal expert has highlighted crucial lessons for super funds and fund managers to navigate this emerging regulatory challenge.
Good intentions or honest mistakes won’t protect funds from greenwashing claims, highlighting the rising regulatory risk, said John Moutsopoulos, partner at Mills Oakley.
He said that ASIC has been rigorously examining a wide range of sustainability claims and plans to further investigate vague terms, investment screens, and net-zero statements.
“That focus puts ASIC on a potential collision course with many super funds and fund managers who currently have or intend to have a public facing sustainability profile,” Moutsopoulos said in a recent note.
In the 15 months leading up to 30 June 2023, ASIC made nearly 50 regulatory interventions targeting greenwashing, resulting in over $123,000 in infringement notice payments.
During this period, ASIC initiated civil penalty proceedings against Active Super and Vanguard Investments Australia and concluded a case against Mercer Super with an $11.3 million penalty in August. Moutsopoulos said that this intensified scrutiny is starting to have a significant impact.
“For some, it appears that ASIC’s behaviour is not curbing their ESG ambition, but it is causing them to revisit and potentially refine or even dial back on existing voluntary sustainability related disclosures. Others are feeling vindicated in not having made any (or as many) voluntary sustainability related disclosures,” he said.
Reflecting on the recent ASIC cases, he advised fund managers to “look up above the canopy and survey the forest”, emphasising the need to comprehensively assess and bolster their greenwashing risk management strategies.
“Greenwashing risk is a material regulatory risk and not just another example of technical compliance risk,” Moutsopoulos said.
He further said that with no safe harbour available, regulated entities should expect no leniency from ASIC.
“Right now, ASIC is your plaintiff,” he said. “Legally they do not need to prove any investor suffered loss from the disclosures made that ASIC claims constitute greenwashing.”
Looking ahead, Moutsopoulos said that ASIC might expand its focus beyond misleading conduct to include licence obligations, director duties, and other regulatory responsibilities. He also highlighted the possibility of class actions if investor losses occur.
“[Greenwashing] risk is special in part because of this point,” he said.
Reflecting on the current market environment, Moutsopoulos said that Australia’s voluntary disclosure or ‘opt-in’ framework will likely fall short for super funds and fund managers.
“Instead they face the increasing challenge of meeting their stakeholders’ sustainability expectations, as well as needing to implement their own strategic ambition to position for the green investor,” he said.
Moutsopoulos advised funds and managers to closely monitor public claims like net-zero pledges due to their long-term nature and the higher legal standards for forward-looking statements.
“Every day your profile is in the public domain you are exposed to potential greenwashing risk. In addition, as a rule of thumb, any form of pledge should be qualified via an appropriately worded and positioned disclaimer which better communicates the message to investors in terms of the very many ways that the absolute language used in the pledge itself is qualified,” he said.
He also highlighted that Australia’s evolving sustainability regulations, including the sustainable finance strategy and product labelling laws, may affect how ‘ESG integration’ is perceived.
“A good example, based upon the global experience so far, is that if all you do is follow an ‘ESG integration’ strategy then that may not actually qualify for a sustainable investment label now or later when Australia finally gets its own investment product labelling regime. The rationale given is that managing ESG material risks is seen as no more than what a good fiduciary should be doing in any event,” he said.
“The implications of that need to be considered today in terms of transparency of your disclosures about what you mean by ‘ESG integration’.”
