Check against delivery
Over two centuries ago, Honoré-Gabriel Riqueti, Count of Mirabeau, wrote that ‘If honesty did not exist, we ought to invent it, as the best means of getting rich.’ Updating this for the 21st century, today we might remark that ‘if ESG didn’t exist, we’d invent it, as the best means of attracting investment’.
The point here is an important one. ESG is not a trend. Nor is it about burdening companies with bureaucracy or shareholders with less-than-optimal returns.
It’s not a question of ‘shareholder returns or ESG’, but of shareholder returns with ESG. Rather, it’s a question of fair and efficient markets, and of confident investment.
ESG reporting is simply the next stage in a long series of important moves towards greater transparency and higher disclosure standards. Moves that benefit us all, from the consumer to the investor, to companies themselves – to say nothing of the planet.
At the same time, there’s no denying that this is a complex and rapidly changing space. Globally there is unrelenting progress towards developing clear standards and taxonomies of reporting. The ‘E’ of ESG will likely expand over time, with mandatory disclosures around climate being only the beginning, not the end.
These changes have begun, and they’re rapidly gaining momentum. But changes in ESG reporting tomorrow don’t excuse complacency today.
Looking ahead to uncertainty doesn’t excuse inaction. Some firms are making good progress, but we cannot let standards slip as we prepare for the major changes ahead.
Today I would like to discuss three key areas of focus for ASIC.
These are the ‘three Gs’ – of governance, greenwashing, and growth in sustainable financing. And yes, I realise that last one is a bit of a stretch.
These three areas not only shore up our current practices against any danger of slipping – they also help to prepare us for the changes ahead.
Governance
First, to governance.
ASIC first began scrutinising climate risk disclosures back in 2018. At the same time, we began encouraging boards to be more proactive and probative in their approach to ESG issues. And I think it’s important to begin here by recognising the good.
The truth is many large Australian companies have already been engaging on climate-related matters for a number of years.
In fact, according to KPMG’s 2022 sustainability reporting survey of ASX100 companies, they’re outperforming their global peers:
- 90% recognise climate as a financial risk,
- 74% are now reporting against the Taskforce on Climate-related Financial Disclosures, known as the TCFD framework. This is 13 points above the global G250’s 61%, and
- finally, reporting of ‘social’ risks to the business is now up to 90%, 40% above the global peer G250.
This is a reassuring indication of how seriously Australian companies are taking this issue. Credit where credit’s due. As encouraging as this is, it’s not an opportunity to rest on our laurels.
That’s because the data is telling us that markets and investors are increasingly relying on this information in order to make decisions. That’s why ESG disclosures and statements need to be rigorous, robust, and comprehensive. And it should go without saying, they cannot be misleading or deceptive. Again, this is nothing new – it has never been okay to be misleading or deceptive.
As I suggested earlier, markets are now pushing into new areas of ESG. Areas like nature and biodiversity. We are seeing the Taskforce on Nature-Related Risks on a similar track to its precursor, the TCFD.
The Australian Government has also made clear its intention to mandate climate disclosures. The International Sustainability Standards Board has been working to finalise and issue its first two standards, by the end of this month. These will be standards on general sustainability requirements and climate-related financial disclosures.
None of this should be cause for concern. It is simply a reminder that good disclosure depends on good governance.
Companies need to be thinking about integrating these considerations into their own governance structures, and asking themselves three fundamental questions:
- How can sustainability and financial reporting work together to function as an integrated whole?
- How can we ensure that marketing and advertising teams work with the legal and risk teams to ensure cohesion around sustainability-related claims?
- What assurances and processes can be put in place to ensure that the board is appropriately informed and confident about the information that is being put out?
Thinking about these and related questions now provides companies with a clear path today in preparation for tomorrow.
Greenwashing
This leads us to greenwashing. This is by no means a new topic for me or any of ASIC’s Commissioners. Greenwashing has been an enforcement priority for ASIC for some time now – and we’re not alone. Both domestically and internationally we’re seeing regulators with an increasing interest in this topic.
Just a few weeks ago we published a report which highlighted a number of our recent greenwashing interventions. Since July last year we have secured 23 corrective disclosure outcomes, issued 12 infringement notices, and commenced our first civil penalty proceedings earlier this year. While I can’t speak to ongoing actions, I can say that we have further surveillances and investigations afoot.
Through the course of this work, we have come across four main categories of problematic behaviour that fall 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.
This work builds on ASIC’s earlier guidance which was designed to help entities comply with their existing legal obligations. Last year ASIC conducted a review of greenwashing and sustainability-related products. The review found that most issuers had made changes to their sustainability-related governance processes following the release of guidance. This included conducting training for staff and enhanced legal reviews of proposed sustainability-related disclosures and communications.
Interestingly, these entities noted that the changes were consistent with feedback from their members and the Responsible Investment Association of Australasia.
Nevertheless, our review found that half of the issuers still need to improve the way they described their screening criteria in both websites and regulated disclosure documents. Some of the disclosure concerns we identified during our initial review remain for many issuers. And for some issuers, we’re monitoring subsequent disclosure concerns that have emerged. We will continue our focus on this area into the new financial year.
This is important work. It is work that supports trust in sustainable finance-related financial products, services, and disclosures. And trust is an essential element in the workings of any fair and efficient market. So, too, trust is needed if we are to have confident and informed investors.
And since fair and efficient markets, and confident and informed investors, are priorities embedded in the ASIC Act, building that trust by walking the line between encouragement and enforcement is what we aim to do. At each stage and in each case, our response is proportionate. As more sustainability claims are being made, our regulatory oversight and prioritisation has adjusted to reflect that.
Now, in response to ASIC’s scrutiny of greenwashing, some companies may be tempted to cease all voluntary disclosure, chasing greenwashing with a little ‘greenhushing’. Last year, for example, the Swiss carbon finance consultancy, South Pole, released an international report that found nearly a quarter of the 1,200 companies surveyed have decided not to talk about their net-zero commitments at all.[1] South Pole’s report sparked an intense discussion globally, with many condemning the policy of keeping quiet as simply another form of greenwashing.
Domestically, we’ve observed some commentators and firms saying, in effect, “we have such a good ESG policy, but we can’t say anything about it because the regulators won’t let us”. The reality is the critics are right: this kind of response is just another form of greenwashing; an attempt to garner a ‘green halo’ effect without having to do the work.
ASIC’s work on greenwashing also aligns with the Government’s broader sustainable finance agenda. This includes not just mandatory climate disclosure, but also ESG labelling and taxonomy. The agenda is not yet fully enacted, but ASIC will not hesitate to enforce the existing legal obligations as they stand. The prohibition against misleading and deceptive conduct is a longstanding element of those obligations, and this is where our focus on preventing greenwashing falls.
Growth in sustainable finance
Now, having looked at governance and greenwashing, let’s turn to growth in sustainable finance.
As I have mentioned several times already, climate disclosures are only the beginning. The ESG space is complex and changing – and it’s of global significance. I would go so far as to say this is the biggest change in the financial services sector in a generation. We need to be prepared for that change as it unfolds.
Why? Because Australia is part of a global financial ecosystem. As Australia’s markets regulator, we recognise that, and we’re engaging heavily at both the domestic and global level to ensure that what we’re doing in Australia is informed by what is happening overseas.
We have long been part of the Council of Financial Regulators (CoFR) Climate Working Group – alongside the Australian Prudential Regulation Authority, the Reserve Banking of Australia, and the Treasury – a group which has been working on these issues for a number of years.
We’re also a member of the International Organisation of Securities Commissions’ Sustainable Finance Taskforce, where we’re engaging with our peers in other jurisdictions in relation to the significant changes afoot.
Similarly, ASIC recognises the role carbon markets play in supporting private sector action on emissions reduction. This means that when the Clean Energy Regulator appoints an operator, we will play our part in the development of a carbon market in Australia by ensuring standards of integrity and transparency, as we do in other Australian licensed markets.
We’re also working closely with the Treasury as the Government’s sustainable finance agenda continues to unfold, to ensure we stay abreast of new developments.
This will mean we can continue to take a sensible and pragmatic approach as a national regulator. We support the shift to mandatory disclosures in Australia and will continue to engage with key stakeholders.
We do this through CoFR as well as our own panels and advisory committees.
There’s no denying there’s lot of work ahead. But sustainable finance is an important strategic priority for ASIC, and I’m determined to ensure that ASIC continues to be positioned to meet the challenges ahead.
Conclusion
To conclude, let me reiterate two points.
First, change is coming – and it won’t look kindly on those who aren’t prepared.
We have to be asking ourselves what more can be done now to:
- help strengthen and improve our standards of governance and disclosure in Australia,
- eliminate and correct greenwashing, and
- prepare us for the broader evolution of the ESG space.
The second point I’d like to leave you with today, is this: looking to the future can never be an excuse for complacency, inactivity or lowering standards now – and ASIC is here to ensure standards remain high.
[1] Net Zero And Beyond: South Pole’s 2022 Net Zero Report, https://www.southpole.com/publications/net-zero-and-beyond