Could advisers face their own greenwashing scrutiny?

As clients increasingly seek sustainability-related products and funds, advisers who recommend them can eventually fall under the greenwashing purview of regulators, according to industry experts.

Since July 2022, the Australian Securities and Investments Commission (ASIC) secured 23 corrective disclosure outcomes, issued over $150,000 in infringement notices, and commenced its first civil penalty proceeding on greenwashing against Mercer Super. 

To not act would be inconsistent with ASIC making sustainable finance a priority, according to ASIC deputy chair, Karen Chester. 

“We will be out of step with other regulators if we stopped and paused. The first thing that happens when a securities regulator gets out of step globally is people that tend to do those sorts of misconduct come to that jurisdiction and we are encouraging them to come here and practice greenwashing,” she said at the 2023 Responsible Investment Association of Australasia (RIAA) Conference.

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Additionally, there are over $14 million in budget commitments towards developing an Australian sustainable finance taxonomy, bolstering ASIC’s enforcement action against greenwashing and developing and issuing sovereign green bonds. 

As action clearly ramped up towards sustainable finance in the country, Zenith’s head of responsible investment and sustainability, Dugald Higgins, believed there would “absolutely come a time” when anyone making green claims, including financial advisers, could be put under the microscope.

“Should advisers be cautious and aware about the statements they make? Absolutely, and it’s no different from what they have to do now. They have to be certain they don’t do anything that can be construed as misleading,” he told Money Management. 

“I think there will absolutely come a time when the regulators will have a harder look at this. It’s not just ASIC, it’s also the Australian Competition and Consumer Commission (ACCC), who doesn’t overtly regulate the financial services space but isn’t absent from it either.”

In March 2023, a Senate inquiry into greenwashing was announced after an ACCC report found over half (57 per cent) of the 247 businesses reviewed made ‘concerning’ claims about their environmental credentials.

“That should send a very clear and loud signal to anybody making any sort of claim around something being sustainable, green, ethical, or responsible, that they should be certain the impression they’re giving is true and correct, and ultimately have evidence to back up the claims,” Higgins said. 

“For advisers, yes, it means that they have to have a proper understanding of products, [but] there’s nothing new there. Is it going to mean more work because there is such a wide array of product styles and implementations in the marketplace? Yes, it is, and they have to get to a level of comfort with how they are adequately resourced to be across those things.”

Previously, rating experts had warned advisers who were overwhelmed by volumes of ESG information to expect no change in this over the coming years. 

Jono Broome, associate director at Morningstar Sustainalytics, said: “Too much information is a symptom of this industry and the range of things people have to cover; the list goes on and on, and I am hugely sympathetic [to] that feeling of being overwhelmed. More data is the direction this is going towards, and people need to decide how to make it useful and meaningful to them. 

“We won’t ever hit a sweet spot, unfortunately, as some people will always want as much as possible  and others will want less and want it to be more succinct.”

A spokesperson for ASIC told Money Management that an adviser’s obligations to act in the best interests of their client would apply to investment recommendations, including about sustainability-related products.

“As set out in Regulatory Guide 175: Licensing: Financial product advisers — Conduct and disclosure, financial advice providers must form their own view about how far the requirement to act in the best interests of their clients requires inquiries to be made into the client’s attitude to environmental, social or ethical considerations,” an ASIC representative said. 

“Advice providers may need to ascertain whether environmental, social or ethical considerations are important to the client and, if they are, conduct inquiries about them.

“Financial advisers should exercise their judgement in terms of the research they undertake. The requirement to conduct a reasonable investigation is scalable. Less extensive inquiries are likely to be necessary when the advice is for a relatively simple purpose. More extensive inquiries are likely to be necessary when the advice involves complex financial products or strategies.”

ASIC added that advice providers may rely on investigations conducted by their AFS licensees and to some extent, various service providers like research houses. However, “the advice provider remains responsible to the client for the advice that they give,” the representative stated. 

Speaking at a panel on product labelling at the 2023 RIAA Conference, Christopher Lang, adviser and director of Ethical Choice Investments, agreed that advisers should do an “extra scan” of a fund or product when it comes to any sustainability claims. 

“To some degree, you have to accept what the information is provided and accept the fund managers are doing what they say they are and there are tools to match [these claims],” he said.

“But I think it’s also on advisers to do that extra scan and check where possible what fund managers and funds say they’re doing.”

Previously, ASIC had highlighted four main categories of problematic behaviour that it said fell under the heading of greenwashing:

• Net-zero statements and targets without a reasonable basis or that are factually incorrect
• Terms like ‘carbon neutral’, ‘clean’ or ‘green’, that aren’t founded on reasonable grounds
• Overstatement or inconsistent application of sustainability-related investment screens
• The use of inaccurate labelling or vague terms in sustainability-related funds

Zenith’s Higgins noted: “There’s probably well in excess of 100 different funds here that would be positioning themselves in that greener, sustainable end of the market.

“But, there’s probably not as much clarity as there should be on the difference between funds integrating ESG as a part of their standard investment process as opposed to using ESG integration as a pathway to moving into the sustainability and impact end of the spectrum. They are two different things. 

“Sometimes managers can be a bit quick to pull out the ESG term as a way of alluding that they’re green or sustainable, and that’s a problem for advisers if they don’t recognise the difference. They’ll have to be very certain that they have an accurate read on what a fund does (or doesn’t do) because they won’t be immune.”