Be very, very careful. Greenwashing – or falsely saying your products meet environmental, social and governance (ESG) standards – is under the microscope right now.

It’s a key enforcement focus of the Financial Markets Authority (FMA), the NZ Stock Exchange (NZX) and regulators worldwide, including the tough Australian corporate watchdogs, the Securities and Investments Commission (ASIC), the Australian Prudential Regulation Authority (APRA) and Australian Competition and Consumer Commission (ACCC). 

Just in the last month, the US Securities and Exchange Commission (SEC) fined BNY Mellon US$1.5 million (NZ$1.85m) for greenwashing and is investigating Goldman Sachs and Deutsche Bank in relation to ESG funds. The ASIC has also announced it has been reviewing claims made by a sample of fund managers offering sustainable investments.

It is also a source of major climate litigation brought by shareholders and stakeholder groups seeking to ensure financial services providers live up to their public promises. 

Stay informed

Given this very high level of regulatory risk and the potential for reputational damage, financial sector participants should stay abreast of developments in this area.

ASIC recently released an information sheet for managed funds, corporate collective investment vehicles and superannuation schemes on advertising sustainability-related financial products. 

ASIC said that the guidance may also apply to other entities that offer or promote financial products which take into account sustainability-related considerations, such as companies listed on a securities exchange or entities issuing green bonds.

The guidance sets out practical examples which are relevant on this side of the Tasman, given that we have similar laws prohibiting misleading and deceptive conduct and unsubstantiated claims. 

We should expect that the FMA would take a similar approach when considering these matters. 

Key questions to avoid greenwashing

Here’s a brief summary of the ASIC guidance. If it’s relevant to your organisation, I’d recommend reading the original for further details. 

ASIC sets out a series of questions entities should ask themselves to make sure their advertising claims are solid and can’t be challenged. 

  • Is your product true to label? This is an important issue given the absence of agreed terms across markets and the ease with which an ESG-labelled fund can grab attention.
  • Have you used vague terminology? Broad claims without clarification or substantiation can lead to trouble. Explain what you mean.
  • Are your headline claims potentially misleading? Headlines often can’t be saved by later exceptions, qualifications, or fine print.
  • Have you explained how sustainability-related factors are part of your investment decisions and stewardship activities? Set out your methodology and decision-making considerations.
  • Have you explained your investment screening criteria [the products or companies that you exclude]? Are any of the screening criteria subject to any exceptions or qualifications? References to screening products can be tricky if the screen is only applied to certain thresholds, a percentage of a portfolio or only some of an issuer’s product offering. For example, the SEC fined BNY Mellon because it had made claims that all investments in certain funds had gone through an ESG quality review when, in fact, several investments within those funds had not.
  • Do you have any influence over the benchmark index for your sustainability-related product? If you do, is your level of influence accurately described? It should be clear how active or passive you are in investment decisions and in the composition of the index.
  • Have you explained how you use metrics related to sustainability? It matters which metrics you use and how they are made up. If you use third-party sustainability metrics, whose are you using? If you’re making your own, what data do you rely on to generate the ESG scores you assign? What are the risks or limitations of your approach?
  • Do you have reasonable grounds for a stated sustainability target? Have you explained how this target will be measured and achieved? “Net-zero by date” claims have already been challenged for lacking sufficient substantiation or evidence that measures are in place to ensure the goal is achievable. For instance, the Australasian Centre for Corporate Responsibility filed proceedings challenging Santos’s claims that it had a “clear pathway to net-zero emissions by 2040”. It claimed Santos was relying on projected carbon capture and storage technology that did not exist yet. And it claimed that Santos failed to disclose its qualifications to the statement and hadn’t disclosed that its plans would actually increase greenhouse gases.
  • Is it easy for investors to find and access relevant information? Investors shouldn’t have to hunt across multiple sources to gather what they need.

How the guidelines apply

Let’s look at some examples.

An issuer’s disclosure states that it ‘considers’, ‘integrates’, or ‘takes into account’ sustainability-related factors when assessing new and existing investments but does not explain how. 

ASIC’s view is that the issuer should explain clearly what these terms mean in specific language. Set out how you weigh the various sustainability factors with pure financial and other factors. 

The investment manager for a ‘Social Investing Fund’ assigns more importance to traditional financial metrics than to social factors when making investment decisions. 

ASIC’s view is that such an approach is not “true to label”. 

A sustainability-related product applies a revenue-based exclusionary screen that excludes investments in companies earning 'more than 10% of their revenue from providing palm oil as an input ingredient'. 

ASIC considers that the issuer must explain what “revenue” means here. 

An issuer prominently states on its website that it is committed to reaching net-zero carbon emissions across all its investment portfolios. However, it does not provide investors with information about how and when it expects to achieve this target. The issuer has only made a general statement in its latest annual report that the issuer remains committed to 'driving real positive changes for our environment'. 

ASIC expects the issuer to set out its strategy and progress towards achieving the “net zero” objective. 

The FMA’s approach

The ASIC guidance provides a useful complement to the guidance released by New Zealand’s FMA in December 2020 on claims about integrated financial products, that is, financial products containing some form of “non-financial” element. 

There is also the general FMA guidance on “Advertising offers of financial products under the FMC Act”, released in October 2021, and the Advertising Standards Authority’s (ASA) revised Financial Advertising Code, which came into effect earlier this year. 

The FMA’s guidance set out key principles for assessing ESG claims and marketing “green bonds”. 

The FMA considers that integrated financial products are inherently complex and can be difficult for investors to understand, so it is important to step back and consider the ESG claims in the round. 

In a developing area, it is difficult to set prescriptive requirements that remain valid, so principles are the focus. In particular:

  1. The overall impression matters: the claim does not actually have to be misleading or confusing for liability to follow, it just needs to be “likely to mislead”. A statement that is true in isolation, or once you read the fine print, can still leave a misleading impression.
  2. Omissions can be confusing or misleading: always consider what you have left out of an ESG claim.
  3. Substantiation is needed: you need to have a reasonable basis for the claim at the time that it is made, regardless of whether the claim is later proved true. For example, the NZ Advertising Standards Board upheld a claim against First Gas for saying that it was “ensuring” that its product was “going zero-carbon” when there was no substantiation for the claim. 

The framework provides a detailed set of disclosure expectations, including:

  • standard “vanilla” elements of each integrated financial product (such as use of proceeds or investment restrictions).
  • what the integrated financial product purports to offer, beyond a conventional product.
  • how non-financial performance is measured and evidenced.
  • governance oversight.
  • internal audit or external assurance provisions.
  • risks or costs associated with the integrated financial product, and
  • consequences of failure.

If your claims are likely to confuse or mislead, the FMA may use its “stop order” powers to prohibit you from making further offers of the relevant products. 

The risk of a pulled bond or fund offering may have wide-ranging consequences. 

Other things to think about

When you’re advertising ESG products beware of:

  1. Language unsupported by action: token references to climate change without real action, or joining emissions reduction initiatives with no real impact, can be misleading.
  2. Overstating action or understating risk that goals won’t be reached: disclosure of risks should be transparent.
  3. Claims without substantiated evidence: have the basis for your claims documented at the time the claim is made. 

Co-written with Penny Sheerin and Luke Ford.

For more information, read Chapman Tripp’s related insights:

Investing for Impact – New Zealand Trends & Insights

The time is now – a guide for climate-related financial disclosures

Directors' tool kit – Managing climate risk in New Zealand in 2020

New financial advertising code – February 2022

FMA green and sustainable finance disclosure framework – December 2020