Authored by John Moutsopoulos, Partner, Financial Services

Now that ASIC has successfully concluded its Federal Court cases against Vanguard Investments, Active Super and Mercer Super, it’s worth taking stock of key lessons learned about greenwashing risk so far and what that means for super funds and fund managers.

Firstly it’s important to frame 8 key points about greenwashing risk as follows:

1. Regulator spotlight on greenwashing – ASIC’s recent sharp enforcement activity against leading fund managers and super funds for greenwashing has shone a spotlight on greenwashing risk as a new potential material regulatory risk for super funds and fund managers. Its status as a regulatory enforcement priority for ASIC which it uses for deterrent purposes, is unlikely to change any time soon. It was ASIC who said something like tackling climate change (through decarbonisation) is arguably the single biggest driver of global capital developments and allocation today and for the foreseeable future, and we cannot risk unchecked greenwashing behaviour jeopardising that objective.
2. Increased awareness of greenwashing amongst the regulated community – The high visibility given to greenwashing by ASIC is starting to have an effect. Awareness of greenwashing risk (and the direction of travel regarding its regulation and enforcement by ASIC) is definitely on the rise with super funds and fund managers, meaning that the greenwashing risk some may have been prepared to take has changed. 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.
3. ASIC on collision course with many supers and fund managers – ASIC’s interventions (both Court-based and otherwise) so far have focused on a broad range of different sustainability related claims and they have signalled that they are looking at investment screens, net zero statements and targets and use of vague sustainability related terms. 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.
4. What makes up a fund’s sustainability profile? As climate change is the mother of all risks, it was framed early on by both ASIC and APRA as a financially material risk for regulated entities. So, it followed that climate change related risk was the first ‘ESG Factor’ to be managed by fiduciaries and then voluntarily disclosed. But this practise of making voluntary sustainability disclosures continues to expand beyond climate to encompass broader sustainability related claims by fund managers and super funds about their business and funds. Today, the market facing sustainability profile of some super funds and fund managers has many or most of the following features published and maintained on its website and other channels:

• voluntary disclosure in the form of an annual climate report and/or sustainability report;
• voluntary disclosure claiming to adhere to some or all of the recommendations of the TCFD climate framework;
• voluntary climate pledge to align the carbon emissions of the fund‘s investment portfolio to the goals of the Paris Agreement (net zero by 2050) accompanied by an interim 2030 pledge. The nature and wording of pledges varies a lot between different businesses and often very little is disclosed about the actual roadmap to achieve climate targets or goals. Depending on the actual terms of the pledge, they can be the quintessential forward-looking statement and under the liability regime for misleading and deceptive conduct must be based on reasonable grounds;
• voluntary disclosure about their ESG credentials such as a claim to be signatories of various ESG bodies or frameworks and to ‘integrate ESG’ into their investment decision-making and stewardship; and
• claims that the fund itself (or one or more of its investment options) has sustainability related features (e.g. an ethical option, a screened investment option or a real-world impact).

Currently, there is very limited (if any) nature loss related claims and targets disclosed. Nature is back legging climate at the minute, but it will catch up given the number of different initiatives underway focused on natural capital.

There are a few points to make here about such a profile:

• The first is that a fund with a public sustainability profile like the one above has ambition, a valuable quality, which should not be discouraged;
• The second point to note is that they are trying to do the right thing; and
• They are also trying to position themselves competitively in the market in a way that they consider aligns with their strategic goals taking into account the opportunities available from the net zero transition and the broader ESG momentum in the market.

Apart from the preparation of the fund’s offering document, much of the above voluntary content which makes up their sustainability profile has no doubt had significant marketing team input but material content  may not have gone through a structured process of due diligence and verification involving relevant internal business functions and teams and legal and compliance inputs. In addition, it is noteworthy that ASIC will assess your market facing sustainability profile across multiple channels as has been demonstrated in the recent ASIC cases. Management of ESG related risks has a commercialisation side to it for which it is legitimate to properly seek to take advantage. It is that side which can attract potential greenwashing risk. Selling the benefits without misleading, including  by way of over-statement or unsupported claims, is at the heart of managing that risk.

Whilst there has been much analysis of the detail of the three ASIC cases themselves, it is important to look up ‘above the canopy and survey the forest’ so to speak. Now is the time to do that and take stock of, and get set on, greenwashing risk management so that you have confidence in progressing further on your ESG journey.

Here are 8 key points that super funds and fund managers need to know about greenwashing. Get these points under your belt (i.e. understand the nature of this risk and strengthen your greenwashing risk management) and you can manage your greenwashing risk and thrive as you continue to lean into the net zero, nature positive challenge consistent with your fiduciary obligations to members and investors.

1. Greenwashing risk is a material regulatory risk and not just another example of technical compliance risk. It has potential to give rise to regulatory liability and litigation risk. In addition, there is increasing investor and community sensitivity to greenwashing conduct, meaning it has reputational risk implications relevant to maintaining social license and member trust.
2. There is no safe harbour defence from greenwashing conduct. This means that having ambition and good intent or even an honest mistake will not save a super fund or fund manager from claims of engaging in greenwashing, Regulated entities can expect no latitude from ASIC on that front.
3. Right now ASIC is your plaintiff. Their enforcement strategy is a deterrence strategy and legally they do not need to prove any investor suffered loss from the disclosures made that ASIC claims constitute greenwashing. In addition, ASIC recently indicated that future cases may move beyond misleading and deceptive conduct to licence obligations, D&O duties and a range of other obligations. This risk is special in part because of this point. If, on the other hand, there is investor loss then, although no class action has so far commenced in Australia for alleged greenwashing, class actions risk exists in Australia.
4. Understand what is your existing market facing sustainability profile or what do you want it to be? Because we are basically only at the start of the ESG journey in Australia, the profile will inevitably evolve over time and will increasingly be seen as a ticket to play by the growing universe of sustainable investors. Many businesses don’t have a sustainability profile simply because they choose to say nothing in the public domain about sustainability related matters. Australia is currently in a voluntary disclosure/ opt in world. Some people may call that behaviour illegal on the basis it is ‘greenhushing’, but they would not necessarily be correct. However, the commercial reality in this era of ESG driven stakeholders is that for many super funds and fund managers opting out is just not going to cut it – 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.
5. The topics covered in the above market facing sustainability profile are many and varied. They directly or indirectly extend to organisational strategy, governance, resources, investment management, stewardship, policies and risk and compliance controls, credentials, metrics, targets and impacts. This is how sustainability related disclosures can, in fact, reach way back into different internal functions and teams within the business and also  into your contractual relationships with external managers . Ask yourself, do your business functions and teams (and your external manager relationships) actually support and align with those disclosures? That is why you need to take a structured holistic approach to managing greenwashing risk, one which starts with a recalibration of your greenwashing risk appetite to align it with the special nature of this material risk.
6. Net zero pledges raise special legal risk management issues given their long-dated nature, the fact that they are tricky and the higher standard expected by the law for forward looking statements in terms of a Board being able to show reasonable grounds. This is why they need careful attention and why using a simplified version of the market standard approach to IPO prospectus preparation could be a good model to adapt and use in this context to provide the Board with the necessary comfort. This includes seeking appropriate external expertise on key specialised aspects of the pledge and ensuring you have a credible roadmap to deliver on the pledge. 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. That does not mean burying important qualifications in the fine print, but it means managing an absolute headline message to ensure that investors understand the factors which qualify it.
7. It is important to understand the different ways that a sustainability disclosure may be misleading or deceptive. The EU regulators have identified 12 different misleading qualities including cherry picking, vagueness, inconsistency, empty or excessive claims and many more. Some of these have also been picked up by ASIC in its IS271 Greenwashing guide. 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. The implications of that need to be considered today in terms of transparency of your disclosures about what you mean by ‘ESG integration’.
8. Greenwashing is an issue occurring in an evolving regulatory landscape, which includes Australia’s sustainable finance strategy and taxonomy (both currently in development) and sustainable product labelling laws, all of which should improve the quality and clarity of sustainability related disclosures, but these are a while away. In addition, first up, many fund managers and super funds are covered entities under the new mandatory sustainability reporting regime which will implement the global baseline for disclosure of climate related risks and opportunities commencing in 2025 for the largest covered entities. I will post my further thoughts on key point No 8 in the next little while.

There is indeed a lot going on. Mills Oakley is here to help. If you would like to have a chat about your own situation or the thoughts shared above, please feel free to reach out to us.