Two recent infringement notices, the first such notices issued for greenwashing in Australia, highlight this new regulatory focus. They also offer lessons for New Zealand market participants after the FMA issued a stark reminder of its own that “‘Green-washing’ is illegal”. This follows overseas regulatory enforcement actions earlier in the year which also highlighted greenwashing risks (see our article here).
ASIC’s first action for greenwashing
ASIC took its first action for greenwashing in Australia in late October 2022, with infringement notices to Tlou Energy Limited (Tlou), a listed energy company. Tlou had issued ASX announcements in October 2021 which claimed:
- electricity produced by Tlou would be carbon neutral;
- Tlou had environmental approval and the capability to generate certain quantities of electricity from solar power;
- Tlou’s gas-to-power project would be ‘low emissions’; and
- Tlou was equally concerned with producing ‘clean energy’ through the use of renewable sources as it was with developing its gas-to-power project.
ASIC found that Tlou did not have sufficient basis to make the claims, given it had not undertaken modelling, investigations, or obtained studies to verify them. ASIC concluded that either there was no reasonable basis to make the representations, or they were in fact incorrect.
It is important that environmental claims are not only correct but also substantiated by reasonable grounds at the time they are made, to comply with restrictions on unsubstantiated representations under the Fair Trading Act 1986 (and an equivalent prohibition, in the context of financial products and services, under the Financial Markets Conduct Act 2013). The New Zealand legislation requires the Court to have regard to various circumstances when considering whether claims are substantiated by reasonable grounds, including the nature of the representation, the sources relied on (as well as any research undertaken), and compliance with any relevant standards, codes, or practices. The Commerce Commission has advised in its Environmental Claims Guidelines that claims referring to scientific proof or independent tests need to be supported by “a high level of substantiation involving reliable and credible scientific evidence”.
Greenwashing is not limited to environmental claims
On 2 December, ASIC issued infringement notices against a second company, Vanguard Investments Australia Limited (Vanguard). ASIC was concerned that certain claims made in product disclosure statements for Vanguard funds were liable to mislead by overstating an exclusion (or ‘investment screen’). Notably, the representation in question related to ethical investing rather than solely environmental claims.
In the respective product disclosure statements for three separate funds, Vanguard had represented that the fund “excludes securities involved in the production, manufacturing, or significant sales of tobacco”. In fact, the funds only excluded securities involved in production and manufacturing, but not sales, of tobacco. ASIC noted that “investors can feel strongly about not investing in tobacco production, manufacturing and sales” so it was important to be able to “substantiate the full exclusion of those investments”.
This action is a strong reminder that regulatory interest in greenwashing extends beyond purely environmental claims, to wider representations about environmental, social and governance (ESG) credentials or ethical investing.
In New Zealand, the FMA recently undertook a thematic disclosure review into funds that incorporate non-financial factors into their investment decisions (see our earlier article here). That review called for fund managers to better substantiate their claims and noted that many claims were so high level, or so subjective, that they were of no value to investors.
ASIC’s guidance offers lessons for New Zealand
ASIC has also released guidance on how to avoid greenwashing in relation to financial products or investment strategies. This guidance focusses on both “truth in promotion” and “clarity in communication”. ASIC raises a series of questions for regulated entities, which will also be relevant for New Zealand market participants given the similar regulatory scheme. These include:
- Is your product true to label? If the product has a sustainability-related label, sustainability-related factors should be significant in the investment selection process.
- Have you used vague terminology? Market participants should avoid broad statements or jargon without providing clarifying information.
- Are headline claims potentially misleading? The more information required to balance the information contained in the headline claim, the more prominently placed the qualification should be. Qualifications should not be inconsistent with headline claims.
- Have you explained how sustainability-related factors are incorporated into investment decisions and stewardship activities? Entities should clearly explain methodologies and policies.
- Do you have reasonable grounds for a stated sustainability target?
- Have you explained how this target will be measured and achieved?
Australia’s increasing regulatory focus on this area is a strong reminder for New Zealand market participants that they must ensure that statements across the whole spectrum of ESG are not only true but also substantiated.
If you have any questions about the matters raised in this article, please get in touch with the contacts listed or your usual Bell Gully advisor.