The risks of greenwashing have never been so apparent for superannuation fund trustees. Good intentions are not enough to protect from the legal minefield and reputational quagmire that may await trustees that aren’t proactive in understanding and addressing their fund’s greenwashing risk exposure.

The raid of the DWS head office in Frankfurt in relation to environmental, social, and governance (ESG) investment related greenwashing allegations, and legal allegations against the trustees of major superannuation funds aptly demonstrate this point and have prompted ASIC to release an information sheet on how to avoid greenwashing when offering or promoting sustainability-related products.

Trustees of superannuation funds have played a leading role in the global development of investment practices that place greater emphasis on the impact that ESG practices have on valuation and performance over time, and the impact that investments can have on environmental, ethical, and social issues.

In many instances, this holistic approach to integrating both ESG factors as valuation inputs and promotion of environmental, ethical, and social investment goals and objectives has led to well-intentioned yet fundamental risks of greenwashing. Confusion remains as to what greenwashing is and what rules apply, let alone what the best approach is for mitigating the risks of greenwashing.

A good starting point is to consider ASIC’s view as the conduct regulator for financial services, who defines greenwashing as:

In relation to investments, 'greenwashing' is the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical.

We will briefly review this definition in the context of superannuation trustees and consider how the associated risks and obligations are best managed.

ESG investing - what actually is it?

The concept of ‘ESG investing’ has changed over time and can be incorporated into investment decision making in different ways.

Ethical considerations have probably played a role in the decision making of investors for as far back as it is useful to consider. However, since the 1960s institutional investors have been applying negative screens to investments that are considered to be unethical.

In the early part of this century, ESG risks started to be factored into the assessment and valuation of an investment, alongside the more traditional financial risk-factors, to determine whether an investment was a ‘good’ investment. The investment decision would still be anchored to risk and return objectives, but the prominence of ESG risks was increasingly seen as a leading indicator for risk and return. This was seen to make the integration of ESG factors in investment practices well suited to investors with long term horizons such as superannuation funds.

Whilst this practice is still prevalent, what is becoming increasingly common is the assessment of an investment against a loftier goal or set of objectives around providing a social good or positive impact. Even in cases where an investment might otherwise produce a strong financial outcome after factoring environment, social and governance risks (amongst others) into the valuation, certain investments may be screened out (or held with the intent of influencing) based on the nature of the investment and/or industry.

Both approaches incorporate sustainable investment into the investment decisions of a fund, however, operate independently of each other and should not be conflated. The conflation of ESG risks as valuation inputs and ethical or sustainable investment objectives is a significant contributor to the risk of greenwashing by well-intentioned trustees of superannuation funds.

Navigating the legal minefield

Greenwashing activity is prohibited through various statutory mechanisms, primarily in accordance with the general financial services disclosure obligations within the Corporations Act and associated regulations, in addition to the ASIC Act and supplementary guidance.

The misleading and deceptive conduct provisions within the Corporations Act provide a basis upon which any disclosure should be viewed. This is a particularly risky provision for trustees as, setting aside the significant penalties that may apply, the standard applied is that of a reasonable person and does not require anyone to have actually been misled. Further, a genuine mistake or inadvertent representation may also be found to be in breach.

The misleading and deceptive conduct provisions extend to the disclosure of future objectives and goals, as these must have a reasonable basis or otherwise risk the representation being taken to be misleading. Considerable risk exists here as the burden of proof is reversed, requiring the trustee to prove the statement to be reasonable.

There are obligations to ensure that product disclosure is not defective, and the disclosure obligations of a trustee’s investment activities are relatively complex to navigate. Specific obligations apply in relation to the sustainable investment activity of a trustee. There is nuance in the application of this legislation that may not be immediately apparent.

For example, a Product Disclosure Statement (PDS) must state the extent to which labour standards, environmental, social or ethical considerations are taken into account in the selection, retention or realisation of an investment. Note the inclusion of ‘labour standards’ which may not be otherwise considered by a trustee. Further, there is no reference to ‘governance’ which is a common consideration given the tendency of trustees to consider sustainability in relation to the acronym ‘ESG’.

Finally, trustees should also remain wary of the ‘efficiently, honestly and fairly’ general obligation. We’ve seen a spike in enforcement activity by ASIC when using this provision, and any greenwashing accusations sits fairly in the scope of this provision. ASIC has been very successful in its enforcement activity against superannuation fund trustees under the misleading and deceptive representations, and efficiently, honestly, and fairly obligations.

Peeking behind the green sheen

There are several areas that pose greatest risk to trustees of misrepresentation in this regard.

Misleading labels and headline claims in relation to an investment product carry significant risk that an investor misinterprets the sustainability of a particular investment. The need to grab a potential investor’s attention must take a backseat to ensuring an accurate representation of the financial product or service being displayed.

The disclosure of fund investment practices within any communication material must be accurate, including fund policies and processes, such as responsible investment policies, stewardship and proxy voting. However, any form of public communication must accurately reflect investment practice, including website content, advertising and even social media posts.

A commonly noted issue is the use and importantly, the extent, to which screening and other forms of risk analysis play a part in the investment practices of the trustee and investment managers. This is particularly prevalent in statements that indicate a blanket approach to investment but in practice there are limitations or thresholds that are not otherwise disclosed.  Any discrepancy may be considered misleading and not a true representation of practice.

Investment goals and targets must be based on reasonable grounds and be accompanied by a specific plan to achieve the stated target. Consideration should be given to setting a quantifiable target that is measurable, along with timeframes and milestones to achieving the target, as well as any assumptions that may be used to support these activities.

Adopt a proactive approach

The risks of greenwashing are becoming increasingly prevalent and appropriate management of these risks requires input, commitment and training across all areas of a trustee’s operations.

An understanding of how sustainability and responsible investing has been incorporated into the trustee’s investment decision making is a basic requirement for all staff to ensure any representation made is clear and accurate. Penalties for non-compliance are considerable and even a sniff of greenwashing brings about significant media scrutiny and associated costs to the trustee, both financial and reputational.

QMV Legal can assist trustees of superannuation funds and responsible entities of managed investment schemes to identify and manage greenwashing risks in disclosures, online and on social media representations, and investment practices.

Download the flyer for more information on the greenwashing related legal obligations or information about how QMV Legal can assist.

Jessica Pomeroy and Jonathan Steffanoni
QMV Legal

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