How to Ensure Your Sustainability Strategy Stays Clean

As we embrace the shift towards a greener economy, sustainability products are on the rise. However, with this growth, we’ve also seen an increase in companies making misleading claims about their environmental efforts, a practice known as “Greenwashing.” It’s crucial to understand what Greenwashing is, why it matters, and how to prevent it from tarnishing your sustainability strategy.

What is Greenwashing, and Why Does it Matter?

‘the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical’

Australian Securities and Investments Commission

Greenwashing refers to the deceptive practice of exaggerating or falsely advertising the environmental friendliness or ethical nature of a financial product or investment strategy. Companies may overstate their sustainability merits to attract eco-conscious investors, taking advantage of the growing demand for ESG (Environmental, Social, and Governance) assets.

ESG assets more than doubled between 2019 and 2022 and are projected to exceed US$53 trillion by 2025. Much of the asset flow has come from retail investors wanting to make a positive difference to the planet and society.

The Risk of Bluewashing and Greenhushing

While Greenwashing is a major concern for ASIC (Australian Securities and Investments Commission), companies should also be aware of “Bluewashing.” This involves misrepresenting the extent to which a business or investment respects human rights, particularly concerning issues like modern slavery and Indigenous rights.

Greenhushing is another deceptive practice where companies respond to increased regulatory scrutiny by ceasing voluntary ESG disclosure. ASIC considers this as another form of Greenwashing.

Managers have also responded to increased investor demand for sustainable investment options by repurposing existing conventional funds. Greenwashing could be seen to straddle this growing trend and attract more investors whose interest in environmental and climate issues is reaching new peaks.

Recent Examples of Greenwashing and ASIC’s Focus

Instances of Greenwashing have led to significant repercussions for companies. For example, DWS, an asset management firm, faced allegations of overestimating its sustainable investments and using misleading language to describe its funds. As a result, DWS’s reputation suffered, and its share price plummeted.

In a groundbreaking case, ASIC sued Mercer Super for misleading its members about excluding carbon-intensive fossil fuel companies. This sent shockwaves through the Superannuation industry and highlighted emerging legal risks surrounding ESG commitments.

How to Prevent Greenwashing and Bluewashing

ASIC considers Greenwashing a concern because:

  • It distorts relevant information that a current or prospective investor might require in order to make informed investment decisions.
  • It can erode investor confidence in the market for sustainability-related products; and
  • It poses a threat to a fair and efficient financial system.

To prevent Greenwashing and Bluewashing, ASIC has released a set of questions that superannuation and managed funds should consider:

  1. Ensure your product aligns with its sustainability label.
  2. Avoid vague terminology and clearly define sustainability terms.
  3. Avoid potentially misleading headline claims.
  4. Explain how sustainability factors influence investment decisions and stewardship activities.
  5. Disclose your investment screening criteria and any exceptions or qualifications.
  6. Accurately describe your level of influence over the benchmark index for sustainability-related products.\
  7. Explain how you use metrics related to sustainability.
  8. Establish reasonable grounds for sustainability targets and explain how they will be measured and achieved.
  9. Make relevant information easily accessible to investors.

Tips and Reminders for Regulatory Compliance

To avoid regulatory intervention from ASIC, legal, compliance, and marketing teams should verify ESG-related statements for accuracy and reasonable basis before publication. Conduct ongoing assurance exercises to test statements against actual practices and mitigate regulatory exposure or litigation risk.

    The Future of Sustainability Reporting

    With two new international standards for sustainability reporting (IFRS S1 and S2) set to apply in Australia from January 2024, companies should prepare for mandatory sustainability reporting and ensure compliance.

    In Conclusion

    As the “Green” economy continues to evolve, maintaining transparency and authenticity in sustainability strategies is paramount. Preventing Greenwashing and Bluewashing not only protects investors but also contributes to a fair and efficient financial system. By adhering to best practices, companies can build trust and credibility, even as regulatory scrutiny increases.

    Now is the time for boards to focus on disclosures and embrace sustainability reporting with utmost integrity!

    James Wincott
    James Wincott is a senior consultant with over 30 years’ experience in Risk Management. He is a strategic thinker with a proven track record transforming Enterprise Risk Management programs, implementing Climate Risk strategies and embedding Compliance obligations. He has worked as the Chief Risk Officer for Schroders across APAC and EP Financial (Sydney) delivering risk transformations and improving risk cultures across Asia. He takes a practical approach by delivering risk solutions that align with the strategic direction of the business.

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