We are all begrudgingly familiar with the concept of 'washing', be it our dishes or our clothes. In the world of corporate governance, 'whitewashing', 'pinkwashing', and 'greenwashing' are all colloquial terms used to describe one fundamental concept – glossing over or a deliberate attempt to cover up information that is incriminating or unpleasant.

In this article, partner Langton Clarke looks at 'greenwashing', a process of conveying a false or misleading impression about environmental and sustainability practices and the potential implications for funds engaging in this practice.

Environmental disclosures about financial products

Recently, ASIC Commissioner Cathie Armour wrote that ASIC would review the disclosure practices of managed funds and superannuation funds offering financial products claiming to be environmentally friendly or 'green'. ASIC will now review disclosures of managed funds claiming to have environmental, social, and corporate governance (ESG) practices over concern these funds may be misleading investors about the 'green' status it is attributing to its investments or activities.

In Australia, there is no clear legal framework or guidelines on how managed funds should disclose or promote financial products or fund assets as 'green' or 'environmentally friendly'. This makes it difficult to objectively assess whether funds are implementing ESG practices or if they are simply marketing themselves as 'green' to obtain a higher return on investment.

Actions for misleading and deceptive statements

Regardless of the lack of clear parameters about the meaning of 'green', ASIC and investors can still take action against funds for breaching the prohibition in the Corporations Act on making or engaging in conduct in respect of financial products or services that are, or are likely to be, misleading and deceptive. This prohibition applies to any fund, whether wholesale or retail, issuing a disclosure document to investors.

We regularly caution fund managers issuing information memoranda or product disclosure statements about the potential implications of making misleading and deceptive statements, which commonly arise in the 'promotional' piece of every disclosure document. In the context of greenwashing, a clear example of such conduct is an equities fund stating its investment activities are limited to 'environmentally sustainable' investments, but then proceeds to report investments into the fossil fuel industry.

Mitigating the risk of greenwashing

Until clear parameters are developed for disclosure on ESG practices, to mitigate the risk of making a misleading or deceptive statement or greenwashing, we recommend the following:

1. Develop a strong investment policy – In the absence of objective disclosure requirements about what is classified as a 'green' financial product or service in Australian law, ESG-focused funds should have strong investment policies with clear guidelines outlining what it classifies as 'green' and the criteria it will assess financial products or services against.
2. Exercise caution when preparing disclosure documents – All funds should seek legal advice before issuing a disclosure document as there is a tendency to overstate the positives of an investment and inadequately disclose the risks. This remains true for ESG-focused funds which must still disclose risks posing a significant risk to investors and should not overstate the value of something being classified as 'green'.

A final word

It is unclear whether ASIC's review is looking to uncover the next Volkswagen 'dieselgate' scandal or simply scoping out a new regulatory framework for ESG practices in Australian managed funds. Regardless of what ASIC is immediately trying to achieve from its study of ESG practices in the Australian market, the corporate regulator has made clear it is looking to wash away any dubious claims of what it means to be 'green'.