ASIC continues its focus on greenwashing misconduct with 47 regulatory interventions in 15 months

What you need to know 

• On 23 August 2024, ASIC released Report 791, "ASIC's interventions on greenwashing misconduct: 2023-2024" (Report 791) which outlines 47 regulatory interventions made by ASIC between 1 April 2023 and 30 June 2024 in relation to concerns about greenwashing claims as follows:
  • commencing 2 civil penalty proceedings;
  • finalising 1 civil penalty proceeding (with a second proceeding having been finalised since Report 791); o issuing 8 infringement notices  (including to investment managers, responsible entities, superannuation trustees, ASX listed companies); 
  •  obtaining 37 corrective disclosure outcomes.

• Over a 15 month period, ASIC conducted a range of surveillance activities focusing on sustainability-related representations (e.g. "net zero", "carbon negative") made by listed companies, the governance practices and processes adopted by responsible entities of ESG funds and the sustainability disclosures made by superannuation trustees. The surveillance activities indicate that there is room for improvement in relation to the quality of sustainability-related disclosures and governance practices, particularly for small cap ASX-listed companies, responsible entities and superannuation entities (which may attract future action by ASIC).

ASIC is responsible for the administration and enforcement of the new mandatory climate reporting regime (see Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024) (mandatory climate reporting regime) passed by Parliament in September 2024. Large businesses and financial institutions can expect heightened focus and greater engagement with ASIC as these new requirements roll out in 2025.

What you need to do

• All entities should consider the matters identified in Report 791(including the focus areas identified by ASIC for listed companies, responsible entities, superannuation entities and entities issuing green bonds or sustainability-linked loans) and Report 763 ASIC's recent greenwashing interventions when preparing disclosures, and undertake a review of any existing sustainability-related disclosures having regard to the recommendations and best practices set out in these reports. 
•  All entities should also consider the guidance set out in Information Sheet 271 How to avoid greenwashing when offering or promoting sustainability-related products (INFO 271), which applies across sectors including to listed entities and entities issuing green bonds.

Key findings from ASIC's greenwashing interventions

From the 47 interventions made by ASIC during the financial year 2023-2024, Report 791 states that the following are key areas of concern for ASIC:

1. Underlying investments that are inconsistent with disclosed ESG investment screens and investment policies

• ASIC noted several cases where a fund's underlying investments did not align with the disclosed ESG investment policies or screens. ASIC pursued civil penalty proceedings where it identified a particularly serious instance of a mismatch between investments held and stated ESG investment screens and objectives. 
•  In particular, ASIC commenced two civil penalty proceeding cases in the Federal Court of Australia, one against LGSS Pty Ltd as trustee for Local Government Super (Active Super) (see our summary here) and one against Vanguard Investments Australia Ltd (see our summary here).  ASIC also finalised its first greenwashing civil penalty proceeding, obtaining a $11.3 million penalty against Mercer Superannuation (Australia) Ltd (see our summary here). Since Report 791, ASIC has also finalised its civil penalty proceeding against Vanguard, which has been ordered to pay a penalty of $12.9 million (see our summary here).

2. Sustainability-related claims made without reasonable grounds 

• ASIC noted there were instances where sustainability related claims (including claims about emissions profiles and environmental impacts), and statements about projected revenues and project status, did not appear to be based on 'reasonable grounds'. These representations were made in a range of disclosures, including prospectuses, websites, promotional materials and market announcements. To avoid greenwashing, sustainability-related information should be based on reasonable grounds, use language that ensures sufficient understanding by investors, and be accurate and data-driven.
• In one case, ASIC issued an infringement notice in relation to a social media post which overstated the positive environmental impact of a superannuation fund. The social media post included the statement "‘Naysayers don’t join together and move nearly $400 million out of fossil fuels." ASIC noted there was no basis to represent that the entirety of those funds had been invested in fossil fuels prior to being invested in the fund.
• ASIC issued another infringement notice in relation to false and misleading statements made by an ASX-listed company in a presentation published on the ASX. The presentation claimed that the company would obtain an offtake partner, or receive funding for its reforestation project in the Philippines by the end of 2023, and begin planting the initial hectares in the respective area of the project in quarter 4, 2023. At the time of the ASX publication, the company had no funding partner or funding to progress its project.
• ASIC also obtained corrective disclosure outcomes in a range of instances, including:
  • 'zero carbon' claim – a chemicals company stopped using the term "zero carbon" after ASIC found it was not possible for the company to produce their product on a "zero carbon" basis. All references to "zero carbon" were replaced with "net zero carbon".
  • 'negative carbon' claim – a metals and mining company stopped using the term 'negative carbon' to describe the carbon footprint of one of its development projects, because the project did not involve carbon removal. The company clarified that its project was instead 'net zero'.
  • 'carbon neutral' claim – a metals and mining company corrected its website by amending wording from "will" to "intends to", clarifying that one of its exploration and development projects was not yet carbon neutral. While the company had obtained a certification for carbon neutral status, this did not encompass the mining project. As such, there were no reasonable grounds for the carbon neutral claim to be linked to that project.

3. Insufficient disclosure on the scope of ESG investment screens and investment methodologies

• ASIC identified instances where the scope of investment screens or investment methodologies was vague or ambiguous, with inadequate information disclosed for investors to understand the underlying criteria or any associated limitations, qualifications or exceptions. These concerns were identified across Product Disclosure Statements (PDS), Additional Information Booklets (AIB), investment policy documents and on websites.
• In one case, ASIC issued an infringement notice to a trustee and responsible entity of a fund in respect of statements made about investment exclusions. The fund's PDS contained numerous misrepresentations about investments in activities that they sought to avoid, including fossil fuels.
• ASIC obtained corrective disclosure outcomes in a range of instances, including:
  • Clarification of the investment screening process in PDS and AIB – a responsible entity amended its PDS and AIB to explain how it determined whether a company had 'dominant exposure' to a prohibited business activity.
  • Explanation of ESG scoring process – a responsible entity updated its PDS and AIB to explain how ESG scoring metrics were integrated as part of fund selection and in investment screening criteria.
  • Clarification of fund's exposure to fossil fuels – a superannuation fund promoter updated its marketing materials (including social media accounts) to clarify its indirect exposure to fossil fuels. The promotions attempted to mislead consumers by representing that the fund had no fossil fuel exposure at all (either directly or indirectly).
  • Explanation of sustainability-related considerations – a responsible entity for a fund amended its PDS, website and responsible investment policy to provide a more detailed explanation of how sustainability-related considerations were factored into the investment process and disclosed a list of pre-defined investment exclusions.
  • Additional disclosure on fund’s use of negative screening– a responsible entity for a fund amended its website, PDS and other documentation to provide greater consistency of disclosure on the fund’s use of negative screening to exclude investments in tobacco and controversial weapons.

4. Sustainability-related claims made without sufficient detail

• ASIC noted there were instances where investors were not provided with the information required to understand the context, status or scope of various sustainability-related claims and initiatives (including the weight placed by responsible entities and superannuation trustees on sustainability-related factors).
• ASIC noted that a lack of sufficient information often coincided with the use of vague terminology and undefined terms across a range of disclosure types, including prospectuses, scheme booklets, PDSs, websites and other promotional materials.
• ASIC obtained corrective disclosure outcomes in a range of instances, including:
  • Disclosure of further detail on sustainability initiatives in a replacement or supplementary prospectus – one company provided further disclosure in a replacement prospectus to explain the company’s initiatives to reduce operational power consumption and manage its carbon emissions, such as the use of solar power, and the company’s intention to employ a system to collect and report on carbon emission data. Another company issued a supplementary prospectus disclosing further information and context to support the sustainability-related claims made in its original prospectus, in relation to the use of renewable energy, and the absence of hazardous chemicals in the production process.
  • Greater clarity, consistency and detail in sustainability-related claims – a responsible entity amended its PDS and website, and issued a new guide on its investment process to provide greater clarity, consistency and detail on its sustainability-related claims and investment processes. It had previously also used undefined terms and made broad claims about its funds’ environmental and social impacts in its PDS and AIB that were subject to qualifications disclosed outside of these documents. Separately, the group had published an advertisement comparing the sustainability-related impact of an investor staying with their current fund to one switching to a sustainability-based superannuation fund. The comparison did not appear to be supported by reasonable assumptions and was removed from the campaign.
  • Clarification on use of term 'leader' –  a responsible entity amended both its PDS (for one fund) and AIB (for multiple funds) to clarify that a reference to ‘Leaders’ in the fund’s product label was not a reference to it being a leader in sustainability-related practices.
  • Further detail on the application of ESG factors in investment decision-making – a responsible entity amended its PDS, reference guide and website to clarify the importance placed on ESG factors and include details about the investment manager’s approach to considering ESG, when making investment decisions. Undefined terms were removed or amended, and the PDS and reference guide were updated to incorporate direct website links for additional disclosures. A superannuation trustee amended its website and investment guide to clarify that ESG factors are not considered as part of the investment decision-making process.

Report 791 also sets out the following focus areas by entity type:

• Listed companies – All companies, especially the small cap ASX listed companies outside of the ASX 200, should consider the recommendations and good practice examples set out in the Report when preparing and reviewing sustainability-related disclosures (such as annual reports, sustainability reports, investor presentations, market announcements), particularly when disclosing climate-related claims and targets. If you are making any voluntary climate-related disclosures about climate-related metrics and targets, consider and be informed by the disclosure requirements set out in the Australian Sustainability Reporting Standards. Ensure you have a clear understanding of the meaning of sustainability terms (such as "zero emissions", "net zero emissions" and "carbon neutral") and also ensure you clearly explain such meaning to investors.
• Responsible entities – Take adequate steps to ensure investments made by managers or sub-managers are competently and independently verified as being consistent with the claims made about the funds’ sustainability strategies. These reviews may be completed internally by an independent compliance or risk function, or by using a third party that is independent of the investment manager.
• Superannuation entities – Ensure you provide adequate explanations of exclusions or screening criteria, including explaining any terms used in screens or thresholds that may be vague, ambiguous or have differing accepted definitions, and clearly indicate whether screens are absolute or threshold based. Report 791 states that almost all superannuation funds that made sustainability claims or used investment screens require uplifts in their disclosures and may attract future action by ASIC.
• Entities issuing green bonds or sustainability-linked loans – Avoid ambiguity when disclosing potential use of proceeds and ensure disclosure aligns with any current intended use of proceeds.

Future landscape for greenwashing misconduct

ASIC's stated outlook is that:

• While the landscape for sustainability-related disclosures in Australia is undergoing significant change, ASIC will maintain current governance and disclosure standards and ensure that entities comply with their existing legal obligations, such as the prohibition against misleading or deceptive conduct.
• ASIC will continue its surveillance and enforcement activities, and continued supervision of carbon markets and the issuance of sustainable bonds.
• ASIC is currently investigating suspected greenwashing cases, with future enforcement action anticipated.
• ASIC will be responsible for the administration and enforcement of the mandatory climate reporting regime (once passed). Large Australian businesses and financial institutions can expect greater engagements with ASIC as the requirements under the mandatory climate reporting regime are rolled out.
• ASIC will continue supporting the government's implementation of the Sustainable Finance Roadmap through its participation in the Council of Financial Regulators’ Climate Working Group.

As a result of continued regulatory focus from ASIC, the ACCC and APRA, as well as various private activist actions, we expect that greenwashing (and climate change and ESG issues more broadly) will remain a key risk area for Australian corporates over the next year.

Authors: Hong-Viet Nguyen, Partner; Justin Ho, Senior Associate and Mansi Gupta, Associate.