Managers need to look beyond ‘knee jerk’ greenhushing: Zenith

Even when a fundie’s formal ESG disclosures are correct, the way they’re articulated to potential clients in marketing materials can still lead to allegations of greenwashing, according to Zenith head of responsible investment and sustainability Dugald Higgins.

“Disclosure requirements on ESG and sustainability issues are rising exponentially, with regulators doubling down and reminding product providers that claims around environmental and sustainability-related issues are being scrutinised,” Higgins said.

“We have seen the release of ASIC’s information sheet on avoiding greenwashing in June 2022, followed by the Australian Competition and Consumer Commission’s (ACCC) July 2023 release of comprehensive draft guidelines on environmental and sustainability claims, noting that financial services are not exempt from Australian Consumer Law.”

Higgins noted that in three recent cases of civil litigation between ASIC bringing and investment managers on greenwashing, there was a disconnect between the actions being taken “versus how they were being articulated in marketing activity”. In one case ASIC issued an infringement notice to a super fund for overstating its positive environmental impact in a social media post.

That rise in ESG regulation and ASIC’s surging focus on the sector has led to an increase in ‘greenhushing’, where managers remove or reduce available information on how responsible their investments are to avoid any allegations of greenwashing. But greenhushing won’t work for two reasons, Higgins said.

“Firstly, the financial world is undergoing one of the biggest changes in reporting standards in over 50 years. Love them or loathe them, most jurisdictions globally are preparing to localise standards mandated by the International Sustainability Standards Board,” he said.

“In Australia, climate-related financial reports are set to be mandated for much of the real and financial economy and Parliament has legislated the ambition to reach net zero by 2050. This mirrors actions from many major global trading partners… Clearly, going dark on disclosures is not an option.”

And while there isn’t yet a “perfect solution” for disclosing ESG credentials, the accuracy and transparency of communications – including marketing communications – to clients and regulators is critical.

“Firms need to ensure the right response is made, and not respond with knee-jerk reactions that are unlikely to solve the problem,” Higgins said. “Financial products are complex by nature but when you add ESG or sustainability factors into a fund’s design, the complexity and subjectivity increase. This creates problems when dealing with clients who have varying levels of financial sophistication.

“While there is a fine line between being accurate enough to be correct and being succinct enough to be understandable, the message is clear. Managers and promoters of any products featuring environmental or sustainability claims need to be prepared to defend their claims.”

Staff Writer