What does ASIC consider to be “greenwashing” of financial products and services? ASIC has given guidance on that question with the release of INFO 271. But does that guidance introduce a derivative concept to ESG, that is EsE? And, if so, does it mean that ASIC will focus its regulatory oversight only on certain aspects of the ESG concept? What criteria will ASIC use to decide which “greenwashing” cases it should investigate and pursue enforcement action?
The term “greenwashing” is used and discussed in a way that suggests it is a well understood concept with one unifying meaning. But that might not be true. A Google search reveals a myriad of differing and sometimes irreconcilable definitions and examples of what may amount to “greenwashing”. In addition, the Australian statute books do not yet define “greenwashing”. This gap may be problematic and regulators world wide are developing definitions of “greenwashing” to enhance their ability to regulate such conduct and to guide the market[1]. Whether Australia will develop a statutory definition of “greenwashing” or create a separate cause of action for “greenwashing” is unclear. But while we await this possible development, there are statutory provisions[2] available to properly regulate “greenwashing” and guide the market.
In June 2022, the Australian Securities and Investments Commission (ASIC) released guidance on the term “greenwashing” with the release of Information Sheet 271 (How to avoid greenwashing when offering or promoting sustainability-related products) (INFO 271). In that document, ASIC describes greenwashing as “…the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical”[3] (the Description). The Description must be understood in the statutory contexts.[4]
What might ASIC consider “greenwashing” to be?
The Description focuses on “greenwashing” being the “practice of misrepresenting”. Specifically, it is “misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical”. “Misrepresentations” are a common form of misleading or deceptive conduct under the Corporations Act 2001 (Cth) [5] and the Australian Securities and Investments Commission Act 2001 (Cth)[6] (the ASIC Act). By ASIC emphasising that “greenwashing” is a specific type of “misrepresentation” it is to be expected that such conduct will be regulated under those statutory provisions. The discussion of these statutory provisions in INFO 271 suggests as much.
Placing the Description within this statutory context, a broad working definition of “greenwashing” might be, “the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical”, where the misrepresentation amounts to misleading or deceptive conduct under the Corporations Act [7] and the ASIC Act. [8]
This working definition is likely to capture a wide range of “greenwashing” conduct of differing scales of severity. And this raises the question, what level of severity will attract an ASIC investigation and possible enforcement action?
When might ASIC take enforcement action against “greenwashing”?
ASIC’s Deputy Chair, Ms Karen Chester, recently alluded to the fact that not all “greenwashing” will attract enforcement action[9]. Such action will be limited to “egregious” examples where “harm” flows[10]. The statement is a summary of ASIC’s approach which is comprehensively explained in INFO 151 (ASIC’s approach to enforcement) (INFO 151). INFO 151 explains the criteria ASIC will apply in deciding which of the “thousands of reports about misconduct” should be formally investigated with a view to taking enforcement action[11]. While the criteria can “vary according to the nature and circumstances of the suspected conduct” [12], in general, ASIC will use the following criteria.
In summary, ASIC may pursue enforcement action where the “greenwashing” amounts to misleading or deceptive conduct (as interpreted under the statutory provisions[13]) and[14]:
there exists “actual or potential…significant harm” to[15]:
(i) “vulnerable” consumers and investors;
(ii) markets; or
(iii) the financial system;
the conduct is predatory; likely to have a significant market impact; may cause widespread public harm; is systemic or widespread; or recently emerged;
the enforcement action will act as an effective deterrent (and will maintain public trust in the markets) or clarify an important legal obligation;
reliable evidence is available to prove the misconduct;
the alternatives to formal investigation (such as stakeholder engagement, surveillance, guidance and education) are not a more “efficient and effective” way to address the alleged misconduct.
The corollary is that absent compelling reasons, ASIC is less likely to investigate matters “that do not involve serious or harmful misconduct (e.g. isolated, inadvertent or minor matters that have not resulted in substantial harm)” (among other factors). However, that does not mean ASIC will take no action. As the Deputy Chair alluded to “There will be different ways we’ll deal with (breaches) – some people might get a telephone call when they put out a prospectus and there’s a statement that we think is marketing or aspirational we’ll give them a nudge and they might fix it.”[16]. Guidance and education are two further examples of non-enforcement action ASIC might pursue where “greenwashing” is at the less severe end of the scale and/or does not possess the potential to cause “significant harm”.
Has ASIC introduced an EsE concept to replace the ESG concept?
The absence of agreed definitions is a fundamental difficulty that effects the promotion of financial products and disclosing sustainability related risks. This uncertainty creates significant risk for entities including those genuinely seeking to lawfully offer or promote sustainability related products and to disclose sustainability related risks.
The acronym ESG is well understood to refer to the tripartite concepts of “environmental, social and governance”. ASIC’s Description of “greenwashing” introduces different concepts, namely “environmentally friendly, sustainable or ethical”. That’s an “EsE” concept, rather than the “ESG” concept. This raises many questions. Does ASIC treat these concepts (i.e. EsE v ESG) as identical and interchangeable? Is “environmentally friendly” the same as “environmental”? “Sustainable” does not readily appear to be identical to “Social”. Is “ethical” the same as “governance”? The answers are most likely “no” (absent any agreed taxonomy).
ASIC’s EsE criteria appears closer to the “environmental, social and ethical considerations” required to be disclosed in product disclosure statements[17]. However, ASIC’s EsE criteria introduces the concept of “environmentally friendly” whereas, the product disclosure statement disclosure requirement refers simply to “environmental”. Further, ASIC’s EsE criteria focuses on “sustainable” rather than the “social” criteria in relation to product disclosure statements.
INFO 271 does not further define the terms, “environmentally friendly”, “sustainable” and “ethical”. The absence of an agreed meaning of these terms will present a significant challenge to compliance.
By offering an “EsE” concept is ASIC signalling that its regulatory oversight of sustainability related financial products and advice:
will not focus on the “social” component of the “ESG” concept?
will only focus on the “ethical” aspect of the “Governance” component of the ‘ESG” concept?
will primarily focus on the “environmentally friendly and sustainable” aspects of the “Environmental” component of the “ESG” concept?
The answers to these questions are predominantly a matter of ASIC policy.
Conclusion
Where does all this leave us? It may be possible to fashion a working definition of “greenwashing” from synthesising the Description with the statutory provisions regulating misleading or deceptive conduct under the Corporations Act and the ASIC Act. This will result in a definition of “greenwashing” being “the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical”, where the misrepresentation amounts to misleading or deceptive conduct under the Corporations Act [18] and the ASIC Act. [19]
Actual or potential “significant harm” caused by “greenwashing” will most likely attract an ASIC investigation with possible enforcement action. Because Australia is in the early stages of developing the regulation of “greenwashing” of financial products and services, factors such as deterrence, clarification of legal obligations and the potential harm posed by greenwashing to investor confidence and market integrity could see ASIC pursue a wide range of cases even where “significant harm” will not arise.
[1] For example, the European Commission recently announced that it was working on a legal definition of “greenwashing” to underpin enforcement action (“EU watchdog to define 'greenwashing' as sustainable funds rocket”, Reuters 11 Feb. 2022)
[2] Sections 769C, 1041E, 1041F, 1041H of the Corporations Act 2001 (Cth). Sections 12BB, 12DA, 12DB, 12DC, 12DF and 12DG of the Australian Securities and Investments Commission Act 2001 (Cth). Regulatory Guides 65, 168 and 234 provide further guidance.
[3] ASIC Information Sheet 271 (INFO 271) issued in June 2022
[4] See fn.2 above
[5] Sections 769C, 1041E, 1041F, 1041H of the Corporations Act 2001 (Cth)
[6] Sections 12BB, 12DA, 12DB, 12DC, 12DF and 12DG of the Australian Securities and Investments Commission Act 2001 (Cth)
[7] See fn.5 above
[8] See fn.6 above
[9] “ASIC gears up for crackdown on ‘egregious’ cases of greenwashing” by Richard Gluyas. The Australian (1 August 2022).
Enforcement action includes “criminal proceedings for the most serious and harmful wrongdoing”; civil penalty proceedings; other civil proceedings to for example protect assets or to compel compliance with the law or corrective disclosure; administrative and other enforcement action such as enforceable undertakings and director disqualification. A full explanation is provided in ASIC’s INFO 151 (ASIC’s approach to enforcement).
[10] “ASIC gears up for crackdown on ‘egregious’ cases of greenwashing” by Richard Gluyas. The Australian (1 August 2022)
[11] INFO 151 (ASIC’s approach to enforcement)
[12] INFO 151 (ASIC’s approach to enforcement)
[13] See fn.2
[14] INFO 151 (ASIC’s approach to enforcement)
[15] INFO 151 also references “widespread public harm”
[16] See fn 9 above
[17] Sections 1013DA and 1013D of the Corporations Act 2001 (Cth) and reg. 7.9.14C of the Corporations Regulations 2001 (Cth)
[18] See fn.5 above
[19] See fn.6 above