What do Vanguard, Morningstar and Mercer Superannuation have in common? They’ve all been hit with enforcement actions in ASIC’s crackdown on greenwashing.
2023 was a watershed year when it came to ASIC’s approach to greenwashing. Morningstar paid out almost $30,000 in fines for two infringement notices. But the stakes are higher for Vanguard and Mercer, with both organisations facing Federal Court proceedings for misleading and deceptive conduct.
And 2024 could well bring more of the same, with ASIC publicly stating that sustainable finance – including greenwashing – remains a priority for the year ahead.
ASIC’s focus is in line with increasing activity in the market, with $128 billion net flows into ETFs with an environmental, social or governance (ESG) focus and a 157% cent increase in advisers who claim to provide ESG advice since 2016.
And research by Responsible Investment Association Australasia suggests clients are increasingly concerned about responsible investment options – 83% of respondents said they expect their bank account and super to be invested responsibly and ethically, and 74% would consider moving to another provider if they found out their current fund was investing in companies engaged in activities inconsistent with their values.
While ASIC’s actions have so far targeted product issuers, advisers are naturally asking – what does this mean for us?
We’ve identified three key areas where advisers are most likely to be impacted.
Be careful what you say
The first one is pretty straight-forward and is in line with ASIC’s 2023 actions – advisers need to make sure that they don’t engage in misleading or deceptive conduct in their product offerings or advice.
For example, if you say your firm only includes ‘ethical investments’ on your APL, then you need to make sure this is actually the case.
This starts with having an agreed position within your business on what ‘ethical investments’ means, as well as an established process to monitor the products on your APL against this definition.
The Morningstar case is example of how this can go wrong. The PDS for one of their funds stated it would exclude certain securities or sectors based on ESG factors, including investments in controversial weapons companies.
But for short periods the fund was exposed to a number of companies in the weapons industry. Morningstar reported the breaches to ASIC and wore the fines as a result.
Another situation where advisers need to be wary is when developing managed accounts, both in relation to ESG factors and other claims about the products.
Considering your green interests duties
The second area advisers need to consider is how a client’s ESG values need to be considered when meeting your best interests duties.
As part of your fact find and refining your client’s goals and objectives, you should ascertain the level of importance that your client places on investing in ethical products. ASIC’s guidance is clear that a client’s objectives should be considered more broadly than simply improving their financial situation.
Uncovering a client’s goals and objectives is a core part of the adviser’s role, so this is nothing new – it’s just another facet of the conversation.
The future is green
ASIC has already flagged that future cases may move beyond misleading and deceptive conduct to consider licence obligations and more.
In 2023, we saw ASIC successfully use the obligation to provide financial services fairly, honestly and efficiently in a Federal Court case against RI Advice for failing to adequately manage cybersecurity risks.
The scope of this general obligation could be broad enough to also cover licensee’s ESG conduct, including how they promote their green credentials through net zero statements and targets, and other ESG measures like diversity and inclusion.
ASIC has also pointed to the use of terms such as ‘carbon neutral’, ‘clean’ or ‘green’ as possible ‘areas of interest’.
Keeping it clean and green
For licensees looking to promote their green credentials, whether through your product offering or your ESG principles as a business, the key is to start by getting the foundations in place.
- Read ASIC’s guidance on how to avoid greenwashing which includes helpful tips on avoiding easy traps, like using vague or jargonistic terms like ‘ethical investing’ without adequate explanation.
- Do the background work first – make sure you have your policies in place so that you have a clear understanding of the ESG principles you want to emphasise in your business. For example, how will you define an ‘ethical investment’?
- Make sure your processes are updated to incorporate your ESG approach, including how you monitor and update your APL and how you build ESG elements into client fact finds.
ESG can be both good for the planet and for business. But it needs to be real, not just green-hued spin.