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Image: Archi Banal
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BusinessMarch 22, 2023

Australia opens a fascinating new front in the fight for ethical investing

Image: Archi Banal
Image: Archi Banal

A recent court action by Australia’s financial regulator suggests ‘greenwashing’ claims can expect far greater scrutiny – a situation likely to happen here soon enough, writes Steven Moe.

Coal mining can seem like yesterday’s fuel – a relic of the last century, in the coming age of wind farms and renewable energy. But it remains very big business, with companies like AGL Energy and Glencore worth billions of dollars. It’s not winding down, either – Whitehaven Coal opened its largest operation in 2015. The Maules Creek coal mine has 700 employees operating 24/7, with coal reserves to support 40 years of production. 

The rise of ethical investing has calmed the frayed nerves of KiwiSaver investors who don’t want any of their money invested into companies like Whitehaven. Yet it pays to read the fine print – Australian investors in sustainable funds recently discovered those coal mining companies listed as among the asset base. Is your “Sustainable tick” investment really that sustainable?

Regulators know this is an issue. At the end of last month a strong signal was sent of how they may react in the future when companies “greenwash” their products. Greenwashing or social washing is when the sales pitch promises positive environmental outcomes from a product or service which in reality may be damaging the planet. 

Up until now the enforcement of such claims has been lacking in Australasia – it was largely self-policed. However, a decision by the regulator of Australian companies, ASIC, shows that is changing. In a press release, ASIC noted that sustainability-related claims need to be accurate, so it has launched its first court action alleging “greenwashing conduct” by a superannuation company. 

ASIC alleges a superannuation fund made misleading statements about its investment options. Specifically, some of the products were marketed as “Sustainable Plus” options as they excluded investments in industries like fossil fuels, as well as alcohol and gambling. The reality was apparently different, as investments were in fact made in the extraction or sale of carbon-intensive fossil fuels (including those mentioned above), in brewing companies and in gambling companies. ASIC alleges false and misleading statements that could convince the public they were investing according to their personal ethics, when the reality was very different. 

(Image: Archi Banal)

“There is increased demand for sustainability-related financial products, and with that comes the growing risk of misleading marketing and greenwashing,” says ASIC deputy chair Sarah Court. “If financial products make sustainable investment claims to investors and potential investors, they need to reflect the true position. If investments in certain industries like fossil fuels are said to be excluded, this promise must be upheld.”

The situation and concerns are the same in New Zealand. A report by the Centre for Social Impact charting the growth of “impact investing” outlines how some of the thinking on these topics is changing here too, and the opportunity it represents.

What we should be watching in New Zealand is whether the Financial Markets Authority (FMA) follows its Australian counterpart’s lead and takes legal action. In July 2022 it issued the “Ethical Investment Journey Research” report, which noted that managed funds needed to be clear about what they claimed. The clear indication is that in the right situation, the FMA is ready to take legal action. The guidance says that “it’s illegal to mislead or confuse investors by suggesting or omitting certain information. The FMA can take action to stop or prevent this behaviour. Contact us if you think a company is ‘green-washing’ and can’t back up their claims.”

Barry Coates is the CEO of Mindful Money, a charity focused on educating people about responsible investment choices. He has been watching this space for years and notes that “regulators are showing they are prepared to look at a core issue – the alignment of marketing claims with the characteristics of companies that fund providers invest in”. 

The demand from consumers is growing for responsible investment alternatives, but to be effective it needs to be matched with visible enforcement. Credibility demands accountability, and perhaps at some stage we will also take more steps to require companies to clearly outline what their purpose and impact is, and hold them to account through reporting. 

There are indications of what might come in the future. One example is the proposed reform of the Companies Act which would see directors considering a wide range of issues when making decisions. Other green shoots that align with this shift include the reports of the IOD-led initiative Chapter Zero, Aotearoa Circle on Sustainable Finance, the impact investment approaches of KiwiSaver providers like Pathfinder, Kernel, Simplicity and Generate, the Stewardship Code recently introduced by the Responsible Investment Association Australasia, and the consideration of “degrowth” as an alternative path forward by Jennifer Wilkins.

Another example is the changes from the XRB (External Reporting Board), which sets accounting standards in New Zealand, which this year introduced new requirements for climate-related disclosures. The changes only apply to the biggest New Zealand companies (about 200 fall into the category) but it lays the groundwork for requiring reporting by smaller companies in the future as well. This is a fast-evolving space, with climate change considered by some just one part of a much bigger puzzle of social obligations owed by companies. These ultimately suggest a move toward new paradigms of thought about the role of companies themselves. 

That falls under the banner of environmental, social and governance, or ESG – derisively dubbed “woke capitalism” in the US culture wars. This latest case in Australia will be one to watch as it heralds a shift from regulatory bodies discussing the importance of credible statements about investments to an era where they are actually enforcing the talk.

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