The boom in ESG investing will see fund managers and asset owners face ongoing regulatory scrutiny in the year ahead according to ISS ESG, the responsible investment arm of proxy firm Institutional Shareholder Services.
After playing catch-up in previous years, ISS ESG said that local regulators including the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission had now begun to take serious action on ESG-related issues including greenwashing.
“Investor commitments to addressing climate change and setting ambitious net zero targets are spurring regulators to enhance disclosure requirements, and to actively monitor marketing claims related to ESG products,” said ISS ESG.
ISS ESG pointed to ASIC’s corporate plan for 2021-25 in which the regulator highlighted the importance of making accurate claims regarding sustainability.
As part of its response to greenwashing, ASIC has said that it would “conduct targeted surveillance of financial products to identify misleading statements relating to environmental, social and governance claims, particularly across social media”.
ISS ESG said that misleading conduct by fund managers and asset owners could include potentially inaccurate commitments to net zero.
“If net zero commitments are not supported by an adequate underlying strategy, an investor may be found to be misleading consumers,” it said.
“Other forms of potentially misleading conduct include inaccurate disclosures about target achievement, ESG targets that rely heavily on non-existent technologies, and disclosures that omit material ESG risks.”
Increased public scrutiny is also set to put additional pressure on investors in the future, including with the introduction of mandatory disclosure of portfolio holdings for super funds.
Research from the Responsible Investment Association of Australasia identified a significant disconnect between the preferences of consumers and the practices of investment managers.
“The Portfolio Holdings Disclosure Regulations 2021 will make it much easier for end consumers of financial products to hold large investors to account for their decisions, which may help to bridge this disconnect between consumer interests and product offerings,” it said.
However, ISS ESG also noted that a number of challenges could limit efforts to combat greenwashing including the lack of clear definitions for what constitutes a “green” or “sustainable” investment as well as the federal government’s deregulation task force potentially limiting regulatory action that can be taken by ASIC.
“Scrutiny about green-labelled products will only increase as investors seek to publicly hold investors to account and regulators seek to stamp out misrepresentations about sustainability-related products,” ISS ESG concluded.
“As ESG disclosures become more common through 2022, investors should be alert to the possibility of misleading and deceptive conduct and be diligent in ensuring that their own investment practices match the representations they make about their products.”
Jon Bragg
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.
