Post: ASIC and greenwashing antidotes

Thank you to the Responsible Investment Association Australasia (RIAA) for the opportunity to join you today. The Association has clearly set your target statement: to scale new heights in sustainability and with impact.

I would like to begin by acknowledging the Traditional Owners’ ongoing connection to, and custodianship of, the lands on which we meet – for me today the Wurundjeri people of the Kulin nation, and to pay my respects to their Elders past, present and future. I extend that respect to Aboriginal and Torres Strait Islander people with us today.

I’d also like to acknowledge the long-standing contribution of the RIAA. Having begun this journey to scale new heights in 2000, some 23 years ago.

As Australia’s integrated corporate, markets, financial services and consumer credit regulator, our enduring ‘north star’ is maintaining fair and efficient markets. To do that we need to have confident and informed investors.

That’s why it should be no surprise that sustainable finance is today a ‘whole of ASIC’ priority. And I’m sure of no surprise to all of you, it will be an enduring one. As sustainable finance has itself become an enduring force, and exponentially so, driving the global capital frontier.

What matters most to us is to support market integrity through proactive supervision and enforcement of governance, transparency and disclosure standards for sustainable finance. Especially now as they relate to climate.

Why? Tackling climate change (through decarbonisation) is arguably the single biggest driver of global capital developments and allocation. Today and for the foreseeable future. Two statistics – one global, one local – reveal why:

the overwhelming majority of global GDP (90% by latest estimates) is now covered by a national net zero target at or around mid-century,
and locally, 2022 Australian Council of Superannuation Investors (ACSI) research tells us that 70% or $1.6 trillion of the ASX 200 market cap is subject to a net zero commitment.
Globally, the infrastructure required to get to net zero will require a step change in capital reallocation. McKinsey recently estimated this amount to be 9.2 trillion US dollars annually, a 60% increase on current spend.[1]

So, market transparency and integrity are essential. Their absence runs counter to fair and efficient markets. Their absence also runs counter to confident and informed investors supporting this transition. All of which is needed for the efficient deployment of this transition capital.

And failure to do so will impose a pernicious and costly drag on our economy. And why pernicious? Imposing a long-lasting impost on our cost structures and drag on our global competitiveness. And where the incidence of those economic costs will likely prove regressive.

Greenwashing (put simply) is for ASIC, and I’m confident for all of us here today, a corrosive agent to market integrity and thus to fair, efficient and informed markets.

From our perspective, there are three ‘must haves’ to ensure we maintain fair and efficient sustainable finance markets.

All three, working collectively, should prove an effective antidote to greenwashing.

They are:

transparency, through disclosures that comply with today’s law and ultimately a quality, global baseline for sustainability-related disclosure standards,
policy-installed ‘bright lines’ to support that disclosure, and
regulators doing their job and working together in doing so.
Before I take us through the three antidotes, let me expand a little more on the greenwashing imperative.

Greenwashing is a growing playing field
We identify ‘greenwashing’ to be the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical.

Greenwashing distorts the information that a current or prospective investor might need to make informed investment decisions. In doing so it results in capital misallocation. Greenwashing corrodes investor confidence in the market for sustainability-related financial products and corporate strategies.

And we are dealing with an ever-growing playing field for greenwashing. Again, this plays out in the numbers.

Internationally, Bloomberg Intelligence estimates that ESG assets are projected to exceed 53 trillion US dollars by 2025 and represent more than a third of total assets under management.

Locally, the RIAA’s 2022 Responsible Investment Benchmark Report[2] revealed that 17% of Australians currently hold responsible investments, and more than a quarter plan to invest responsibly in the 12 months following the report’s publication.

Australia-wide, the number of assets managed using a responsible investment approach has increased to $1.54 trillion, now accounting for 43% of the total market for managed funds[2]. So, supply is clearly moving to meet demand.

On the listed company disclosure side, ASIC’s analysis finds over 400 companies referenced the terms ‘carbon neutral’ or ‘net zero’ in price sensitive ASX announcements in 2022. In 2019 it was below 50 – so an eightfold increase in just three years.

And with the transition heavy lifting that lies ahead, this direction of investment demand will continue

The Australian Parliament last year enacted the Climate Change Act 2022, setting in legislation its ambition to reach net zero by 2050 with an interim target of a 43% reduction in emissions by 2030 (off a 2005 baseline). More recently, yesterday’s (2023-24) Budget announced a further $4 billion in renewable energy programs, including a new $2 billion program to support hydrogen production.

We are also beginning to see large scale industrial policies tilt towards the furtherance of decarbonisation objectives in key jurisdictions such as the USA (with the Inflation Reduction Act) and the EU (with the Green Industrial Plan).

Through the work of the Taskforce on Nature-Related Financial Disclosures, we see the increasing emergence of biodiversity risk and opportunity as a key consideration.

As capital around the world leans into the investment task at hand, trust and transparency are paramount.

ASIC is not on its own here (and no regulator is an island). Greenwashing has been identified as an area of concern and priority by many securities regulators globally. The ACCC and Clean Energy Regulator too have prioritised work in this area, working in alignment with us. And we are working with our Council of Financial Regulator colleagues through the CFR’s Climate Working Group, which I’ll return to later.

Transparency through disclosure … with ‘bright lines’
Turning to the first of our greenwashing antidotes, transparency through disclosure. And this a story of an evolving policy landscape. And evolving at pace. Let me cover a few recent important developments.

But before I do, it would be remiss of me not to acknowledge that ASIC began this drive to lift climate-related financial disclosures back in 2018. Since then, we have been encouraging voluntary climate-related disclosures consistent with the framework developed by the Taskforce on Climate-Related Financial Disclosure. Close to three quarters of the ASX 100 now report voluntarily under the TCFD framework.

Then, two years ago, the global disclosure standards world changed. It seemed like overnight and has moved at pace since. In late 2021, the International Sustainability Standards Board (ISSB) was established under the auspices of the global accounting standard setter, the International Financial Reporting Standards (IFRS) Foundation. This is a beyond significant development. It matters in our quest for fair and efficient markets supporting the transition capital allocation. And our quest to stamp out greenwashing.

The ISSB seeks to deliver a quality and comparable global baseline of sustainability-related disclosure standards. Their goal is to provide investors and other capital market participants with the key information that they need. They are finalising their first two standards this year – one on general sustainability and the other on climate-related financial information. The ISSB is planning to issue its first two standards by the end of June 2023 and it is prioritising the climate related disclosures in the initial application.

To bring to life how we see these disclosure standards becoming an ongoing transparency antidote to greenwashing, let me unbundle some of the disclosures they will herald. And how they will ultimately create comparability.

On target statements, the draft ISSB standard proposes the disclosure of information such as:

how progress towards reaching the target is measured,
the specific target and type (for example, absolute or intensity),
what is the target objective (for example, mitigation, adaptation),
how a target compares to the latest international agreement and whether it has been validated by a third party,
any milestones or interim targets, and
the period the target applies to and the base period to measure progress.
On the intended use of carbon offsets, the draft ISSB standard proposes the disclosure of (among other things):

the extent the target relies on carbon offsets,
whether offsets are subject to third-party verification and if so by whom,
the type of carbon offset used (for example, carbon removal or emission avoidance), and
any other significant factors to understand the credibility and integrity of the offsets, such as permanence.
Here in Australia, the Government (through the Australian Treasury) has been consulting on the introduction of a proposed mandatory climate change-related disclosure regime for large businesses and financial institutions (including superannuation funds) – aligned with international best practice under ISSB.

ASIC supports both the shift to mandatory disclosure in Australia and the work of the ISSB in developing the global baseline to do so. For all of us, a global baseline is a must-have antidote to greenwashing. And a must-have if Australia is to remain a destination for global capital.

In parallel, and importantly so, the Government has work underway to develop the policy scaffolding that will deliver locally on this transparency, and in a comparable way over time. The Treasurer late last year announced that the Government has tasked Treasury with developing a comprehensive sustainable finance strategy. The Government expects consultation on the strategy will get underway in the second half of the year.

The strategy will include the development of new standards or taxonomies for sustainable investment, and further initiatives to reduce greenwashing and strengthen ESG labelling. The Government is also introducing a sovereign green bonds program. Further, the Treasurer last month announced that the Government will co‑fund the initial development phase of an Australian Sustainable Finance Taxonomy, in partnership with industry through the Australian Sustainable Finance Institute. And you have a great panel to hear from tomorrow on the sustainable finance taxonomy.

Taken collectively, these policy initiatives will provide the ‘bright lines’ to afford greater comparability in climate-related financial disclosure and, over time, sustainability issues more generally.

Taken collectively they will also, over time, prove to be a broad antidote to greenwashing. The ‘nowhere to hide’ transparency of quality and comparable climate-related financial disclosures with the supporting policy installed ‘bright lines’.

Over the long-term, case-by-case intervention is not a cost-effective nor comprehensive antidote to greenwashing. We are therefore active in supporting Treasury in these policy developments to support increased transparency and trust across the system.

Of course, this does not mean that ASIC is stepping back from our greenwashing regulatory action in the here and now.

In addition to working closely with our Council of Financial Regulator colleagues to support Treasury on the policy build, we are tasked with administering and enforcing existing law. We are taking action against greenwashing today.

ASIC getting on with greenwashing action
Close to a year ago, we released our Information Sheet 271 directly titled, and intentionally so as: ‘How to avoid greenwashing’. Informed by surveillance findings, it was our way to help super funds and investment managers avoid greenwashing when offering or promoting sustainability-related products. Alongside its release, we announced sustainable finance and greenwashing as ASIC priorities.

‘How to avoid greenwashing’, was short (at 7 pages), based on current legal obligations and intended to be practical. We posed nine simple questions that issuers (and indeed many other companies) should make sure they ask and answer in seeking to avoid greenwashing. They included:

Have you used vague terminology?
Are your headline claims potentially misleading?
Is there a reasonable basis for a stated sustainability target?
Is it easy for investors to locate and access relevant information?
We shared case study examples of where companies cleared or failed the ‘dos and don’ts’ embedded in these questions.

We then moved to expand our surveillance and regulatory action on greenwashing. Mindful of the need to lift the conduct tide on greenwashing, and in advance of the significant uplift in climate related disclosure globally and ultimately locally.

So, fast-forward to today. Today we released ‘ASIC’s recent greenwashing interventions’, a short report (some 10 pages) on our regulatory actions on greenwashing since the publication of ‘How to avoid greenwashing’.

As the report highlights, we have been active in addressing greenwashing, by making some 35 interventions in nine months.

Importantly, our report outlines how and why we intervened alongside the corrective outcomes of our actions. In doing so, it is akin to Season 2 of ‘How to avoid greenwashing’.

Our work focused on disclosure documents, product disclosure statements, advertisements and other market disclosures by managed funds, superannuation funds and listed companies.

First, and by the headline numbers, from 1 July 2022 through to 31 March 2023, we:

secured 23 corrective disclosure outcomes,
issued 11 infringement notices, and
commenced our first civil penalty proceeding.
It also calls out the positive impact of our ‘How to avoid greenwashing’ (Season 1). Anecdotal reports and direct industry feedback suggest that our 2022 information sheet has assisted product issuers to improve their disclosures and manage their risk of greenwashing.

Importantly, today’s report details the main problems we found and addressed across our 35 interventions, including:

net zero statements and targets not having a reasonable basis or being factually incorrect,
terms like ‘carbon neutral’, ‘clean’ or ‘green’, not underpinned by reasonable grounds,
the scope or application of sustainability-related investment screens being either overstated or inconsistently applied, and
the use of inaccurate labelling or vague terms in sustainability-related funds.
But we are not stopping there. We continue to progress ongoing investigations and open new surveillances. Last week we issued another infringement notice to a super fund, highlighting that their statements on social media promoting green claims are not immune to ASIC action.

In addition to continuing our surveillance of the managed fund and corporate sectors, we are progressing surveillance of the superannuation fund sector and the wholesale green bond market. There is a distinct pipeline.

But this action resides alongside our supporting the ‘antidote’ policy work of the Government, as we work with the Treasury and our CFR colleagues.

It’s important here for me to acknowledge the further resourcing support from the Government for our greenwashing work. The Treasurer recently announced additional funding for ASIC (of $4.3 million for 2023-24) to continue our greenwashing surveillance and enforcement work.

With many of you here today in the funds management industry, let me finally draw together the practical take-outs:

a reminder on Information Sheet 271 in terms of complying with your existing legal obligations to avoid greenwashing,
consider our report released today, which highlights the kinds of statements and disclosures we have been taking issue with,
keep on top of emerging policy developments, and finally
ensure your governance practices are, and remain, fit for sustainability purpose – as the tide lifts.
One final PS thought. And something that is sometimes missed here. When a significant cohort of businesses and financial institutions are disclosing under a mandatory disclosure framework, and the information is high quality – that information is a valuable asset for everyone, including fund managers. It provides the baseline information to better support product development and in turn disclosures at the fund level. For me, it’s an extraordinarily valuable public good from the ’information architecture’ of disclosure.

In closing, at ASIC we too aspire to scale heights. For us to herald the best chance for fair and efficient sustainable finance markets.

It is no accident that ASIC has, since 2018, maintained our regulatory focus on improving climate-related financial disclosures. And now, today, with the welcome planetary alignment of a global baseline of sustainability related disclosures, alongside the policy scaffolding offering ’bright line’ support – and regulators doing their bit. All three proving an enduring, collective antidote to greenwashing.

Search below to find any information or documents you are interested in.