Greenwashing enforcement viewed as possible RI investment deterrent

With at least two superannuation funds and one investment manager facing civil penalty proceedings for alleged greenwashing, the threat is deterring over half of investors, according to the latest Responsible Investment Benchmark Report. 

In the Responsible Investment Association of Australasia’s (RIAA) annual 22nd Benchmark Report, it asked respondents what is a key deterrent to responsible investment growth and 62 per cent said “mistrust or concerns around greenwashing”. This is up from less than a quarter (23 per cent) in the previous year. 

The concern is second only to worries around financial performance for investors, which is up from 51 per cent to 70 per cent. This is particularly prevalent this year as responsible investments have underperformed in the past year as a result of a lack of resources holdings. 

ASIC has made greenwashing a top enforcement priority for the 2023 financial year, the report stated.

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In February, ASIC launched court action against Mercer Super for allegedly making misleading statements regarding the sustainable nature of its investment options, the first time it had taken an Australian entity to court regarding alleged greenwashing conduct.

It also lodged civil penalty proceedings in the Federal Court against Vanguard Investments Australia, alleging the firm had made false and misleading statements and engaged in conduct liable to mislead the public in representing that all securities in the Vanguard Ethically Conscious Global Aggregate Bond Index Fund (Hedged) (Fund) were screened against certain environmental, social and governance (ESG) criteria. 

Most recently, ASIC commenced civil penalty proceedings against the $13.5 billion Active Super fund for alleged misleading conduct and misrepresentations to the market around eliminating investments that posed too great a risk to the environment and the community, including tobacco manufacturing, oil tar sands and gambling. The fund also stated it had added Russia to its list of excluded countries, following the invasion of Ukraine.

The benchmark report observed: “As investor demand in responsible investment products increases, it’s likely that the risk of greenwashing will become more prevalent.” 

The regulator’s focus is encouraging firms to consider their communication about the extent of their RI or ESG coverage, it said, to avoid making incorrect or misleading statements.

“For example, some funds provide greater detail, clarity or context around the coverage of ESG or responsible investment policies. This may involve limiting coverage to specific asset classes such as listed equities or portfolios that the fund manages directly, rather than claiming overall coverage of ESG or responsible investment policies.

“The shift in ESG communication practices is possibly in response to Australian regulators’ crackdown on greenwashing, but is not necessarily ‘greenhushing’, which is commonly understood as deliberately keeping quiet about sustainability intentions or goals to avoid scrutiny. 

“Refinements and adjustments in language around ESG practices signals a maturing market and a growing understanding that communication about responsible investing is important and should be carefully crafted.” 

Simon O’Connor, chief executive at RIAA, agreed that while there are growing concerns around greenwashing, heightened scrutiny on sustainability claims will ultimately lead to clarity and confidence among RI investors.

“That when they’re choosing and opting into a fund that’s labelled responsible, ethical, or impactful, they can have much greater faith and trust in getting what they’re asking for,” he said. 

Reflecting on the findings of the report, Leah Willis, head of client relationships at Australian Ethical Investment, believes the RI market is going through a period of maturity, much like “a teenager with growing pains”.

She said: “Greenwashing and regulation really get to the point of intentionality – what are you intending to do or produce in your portfolio, how can you report on the outcomes, and how do they align?

“Perhaps we’re in this period of growing pains where there’s more interest, more demand, more momentum in RI than ever before, and investors are looking for guidance and direction around how to know what they’re getting,” Willis remarked. 

Responsible investment market 

Amid a difficult year for financial markets, RIAA found Australia’s responsible investment (RI) market was $1.3 trillion at the end of 2022, a 16 per cent decrease from the previous year.

The downturn was attributed to slow global economic growth and the inability of the RI market to capitalise on the success of the mining sector – which is often underweighted by responsible investors that target lower carbon portfolios.

“In 2022, this total responsible investment AUM did see a decline – an anomaly not seen in previous years. Contributing to this was the weak performance of financial markets globally and in Australia, as markets adjusted to stubbornly high inflation and rapidly rising rates aimed at curtailing inflation,” the report observed.  

A record of 272 professional investment managers in Australia are now engaged in RI amounting to $3.3 trillion or 93 per cent of all professionally managed assets in Australia.

RI products suffered lower short-term returns in 2022 on average because they often held lower exposure to the mining and energy sectors, which performed strongly in 2022. 

Sustainability-themed investing grew by 46 per cent from $161 billion in 2021 to $235 billion in 2022, while impact investments almost doubled compared to last year – up from $30 billion in 2021 to $59 billion in 2022. 

As well as concerns about greenwashing and financial performance, a third factor cited as a deterrent is a lack of understanding by retail investors which has risen from 9 per cent to 29 per cent. 

“Retail investors may not understand responsible investing sufficiently to be able to identify credible options.”
Interestingly, demand from retail investors is also identified as a key driver of RI market growth by 36 per cent of the report’s respondents. Reflecting on this, it suggested that retail investors’ attitudes towards such investment could depend on the type of fund and/or asset class.