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Guidance on climate risk exposure

The Financial Services Council (FSC) released its Guidance Note 44—Climate Risk Disclosure in Investment Management (Note) in August 2022, providing practical guidance to fund managers on greenwashing, climate risk disclosure, and additional environmental, social, and governance (ESG) considerations. 

Funds Management and Litigation partner Selina Nutley outlines what you need to know and what you should do next.

Need to know

  • Whilst not altering any legal obligations of fund managers, the FSC highlights the increased focus on fund managers from regulators regarding their climate risk and sustainable disclosures. 
  • The Note provides practical steps based on best practice principles to assist investment managers with the communication and marketing of green, environmental, or impact products. 
  • Boards and managers alike should be aware ASIC has repeatedly stated greenwashing is misleading and deceptive conduct which carries substantial penalties for those caught up in the practice.

Some guidance

Australian regulators and investors increasingly expect fund managers and corporations to identify, manage, and report on the climate and environmental impacts of their products. ASIC and other financial service regulators are progressively focussing their attention on funds promoting their products as ‘climate friendly, ‘impact investing’, and having ‘net zero’ (or similar) impacts to ensure investors are not misled.  

Importantly for fund managers, the Note recommends where there is a claim or representation that a product is net zero, managers should be able to articulately and reasonably demonstrate the process that will lead to the commitment being fulfilled. The guidance also offers recommendations on when to use popular labels in advertisements such as ‘impact fund’ or ‘climate friendly’. Significantly, these labels should be clearly identifiable, explained, and measurable, and must consider the current marketplace and benchmarks for similar products. 

To avoid ‘greenwashing’ or misleading investors, the Note recommends funds may look to implement a standalone section in disclosure documents detailing the environmental objective, screening process, and ongoing assessment criteria for a financial product. Additionally, the Note stresses fund managers must regularly engage in qualitative and quantitative reporting to investors and the board on performance of the product against the advertised environmental objectives, similar to reporting on the financial progress of an investment. 

What should you do next?

Fund managers should scrutinise any disclosure documents and publicly accessible material which makes an ESG claim. Managers should review disclosure material to ensure it is correctly labelled and the material can quantify or demonstrate the financial product’s ESG labels and representations, with best practice disclosure being independently verified. 

Our Funds Management and Litigation lawyers can help review your material to ensure it meets best practice.

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