ZENITH INVESTMENT PARTNERS
The Australian regulator is taking an increasingly aggressive stance against greenwashing, having issued approximately $11.4 million in penalties within the funds management industry since 2022, and this amount is set to jump in the wake of ongoing legal cases, says Zenith Investment Partners head of responsible investment and sustainability, Dugald Higgins.
He says the recent Federal Court case involving Active Super should serve as a universal warning for fund managers.
“The Active Super case puts fund managers on notice that they can’t rely on technicalities and evidence to support reasonable grounds. They must also consider how the information will be understood by a reasonable person,” Mr Higgins said.
Although regulatory guidelines provide direction, a growing collection of case law adds complexity as regulators and courts try to apply existing laws to swiftly changing problems.
“The courts have clearly signalled they have little patience for a rigid or technical interpretation of language. A new term, ‘greenruling’, is coming into play, where too much reliance is placed on rules and technicalities in disclosures, not what a realistic explanation should be.
“It is vital for issuers to cautiously tread the line between what is considered reasonable grounds and how a reasonable individual would interpret any claims. This is not in conflict with ASIC’s guidelines, which focus more on emphasising that claims must be founded on reasonable grounds,” he said.
Zenith sees the Active Super case as providing a critical learning opportunity for the investment industry.
When putting a claim through any greenwashing test, Mr Higgins says evidence is essential to back any claim. Following the Active Super case, he has developed a six-question test for fund managers to test for greenwashing.
“First, product providers must ask if a claim is transparent, accurate and clear to ensure an informed choice?
“The second question is whether there’s current, credible evidence to support any claim?
“Thirdly, does it tell the entirety of the story without obscuring the other parts of the overall impact?
“The fourth element is whether the claim is unconditional, or does it contain partially correct or incorrect aspects, or are there conditions that apply? If there are caveats, are they transparent?
“Fifth – if product comparisons are used, is the basis for the comparisons fair, accurate and clear?
“And finally, product providers must ask if the claims are simple enough to be understood and assessed by consumers?”.
“Clearly, in light of recent events, it’s the question of simplicity that’s easy to misjudge. We all recognise that claims must be supported by reasonable grounds, and reasonable grounds must be supported by evidence. However, we also need to recognise that while evidence is part of the solution, it must not be at the expense of understanding,” Mr Higgins said.
The Australian financial regulator recently published a report on its actions against greenwashing misconduct for the 2023–2024 period (REP 791) and concluded that their “surveillance indicates there is ample room for improvement”. The report highlights that greenwashing is not uncommon among investment managers and there is the potential for consumers to be misled.
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