While many super funds have been keen to push their “green” credentials, with some offering products with specific sustainability claims, there is a new concern to rethink what is being publicly claimed due to increased scrutiny from regulators and pressure from environmental activist groups.
Superannuation funds are checking their websites and PDS statements, as well as revising some claims around sustainability as they respond to regulatory crackdown and activist pressure on “greenwashing”.
Active Super confirmed a Bloomberg News report last week that said the super fund had removed its 70-page online Responsible Investment Report showing how its investments were assessed for the “environmental, social and governance risk they pose to the world”.
Bloomberg also reported $115 billion UniSuper took down a 16-page section a climate risk report after discovering what it called “anomalies.” The deleted pages provided estimated calculations of the impact of emissions across the various strategies that its 620,000 members invest in. The news wire said it had been alerted to the alterations on the two funds’ websites by investor activist group Market Forces.
Several senior sources in the super fund industry said internal teams were now double-checking websites, PDS statements and other marketing material to make sure that any specific green claims could be backed up with evidence.
One said there was a new concern that the marketing departments of funds had closer connection with the investment section, particularly when it was around making claims around sustainability.
ASIC signalled last year that it was crackdown on “green washing”, following up its comments in February with court action against Mercer Superannuation for claims around its “Sustainable Plus” investment options, the first court action against a manager alleging green washing.
The moves by ASIC and more scrutiny by investor activist groups such as Market Forces have led to a rethink which Morningstar’s ESG analyst, Erica Hall, calls “green hushing” or a softening of green claims by asset managers.
In an interview with Investment Magazine, Hall says the new focus by regulators was “fantastic because they are really holding super funds and investment managers to account”.
She says funds which made green claims now “needed to be able to back up their claims with evidence”.
“If not, they are going to face regulatory disapproval and action.”
Flying under the radar
Hall says there is now a new caution about making green claims which was causing some managers to be more wary and even under report their green credentials, preferring to fly under the radar.
“The increased focus on green washing is good for the [funds management] industry, as it should provide confidence to investors seeking sustainable investments as to whether the claims reported are indeed accurate.”
But she warns that “green hushing is a phenomenon to watch closely, as it is also detrimental to the transparency and credibility of the investment management industry as it pertains to sustainability”.
Mercer Super action sets precedent
The regulator is challenging statements made on Mercer’s website about seven “Sustainable Plus” investment options which said they were suitable for members who are “deeply committed” to sustainability because they excluded investments in carbon intensive fossil fuel companies as well as those involved in alcohol production and gambling.
ASIC alleges the products did have investments in companies involved in the production of fossil fuels including Whitehaven Coal and Glencore as well as 15 companies in the production of alcohol and 19 in the gambling industry.
Asked for a comment on the action, Mercer provided Investment Magazine with a statement saying the action against Mercer Superannuation “relates to certain statements on the MST website concerning the extent of investment exclusions applied in the MST’s Sustainable Plus investment options.”
“Mercer has co-operated with ASIC throughout its investigation and will continue to carefully consider ASIC’s concerns with respect to this matter. It would be inappropriate to comment further as the matter is now before the courts.”
One super fund executive pointed out the difference between ASIC’s action against the Australian arm of US fund manager, Vanguard, last year for what some observers describe as a very “technical issue” and the regulator’s more recent decision to take court action against Mercer.
The Mercer action is being studied by legal advisers to the financial industry.
In a commentary on the action, law firm Gilbert + Tobin said it was the latest in a “growing list of superannuation firms which have faced threatened or actual legal action in relation to their sustainability claims” including REST, HESTA and UniSuper.
“We expect scrutiny of companies’ sustainability and climate-related claims and commitments to remain a focal point for litigation throughout 2023 and for regulator activity in this space to continue,” it warned.
More rigour needed
The moves by ASIC against greenwashing have been hailed as an important step forward in putting more rigour around “green claims” by super funds and asset managers who see sustainability credentials as appealing to investors and clients, particularly younger super fund members.
“Responsible Investment Association Australia sees it as critical that greenwashing is eliminated in the financial services sector to ensure that consumers don’t get misled, and that trust in this fast growing, and highly in demand segment is not damaged,” RIAA chief executive, Simon O’Connor tells Investment Magazine.
“We have welcomed the clarity and guidance that the regulator has provided the market, in particular through issuing the Infosheet last year which sets out the expectations of the regulator in this area.”
“The regulator has signalled clearly they will take action where they believe there are products that are misleading consumers on their sustainability claims.”
He says the RIAA was “aware that there has been a lot of activity in the industry by fund managers and super funds to ensure alignment to this guidance.”
“We see this action by funds as a healthy maturing of the sector.
“Those products that are making stronger claims such as seeking to achieve positive sustainability outcomes do have a higher burden of evidence and must be able to substantiate in detail how they aim to deliver on those promises.”
One of the challenges, as O’Connor points out, was the lack of standards in Australia around disclosure of sustainability claims.
Both Europe and the US have moved further to “build out classification systems to define sustainable funds but such guidance is largely still absent in this market, which does provide additional risk to funds who are working out the right level of disclosures, commitments and sustainability goals.”
RIAA’s product labelling Responsible Investment Certification Program will help give investors clarity. The private sector-led Australian Sustainable Finance Institute is working on the Sustainable Finance Taxonomy which will also lift disclosure standards when it goes live.
“We also welcome the Treasurer’s commitment to focus on product labelling as one pillar of his sustainable finance strategy,” says O’Connor.
Mandatory climate disclosure
The Federal government is considering moves towards mandatory disclosure of climate risk reporting for major listed companies and others in the financial sector.
The move to improve climate-related disclosure will bring Australia in line with other major markets, which should help mobilising more investor capital into the country.
While it is unclear whether it will apply to super funds in the first instance, the sector is gearing up for more pressure around ESG disclosure with momentum expected to increase if Canberra introduces mandatory reporting requirements to corporations.
While many Australian super funds are committed to moving to net zero by 2050, there are challenges about what frameworks and standards to use, particularly if disclosures are to include Scope Three emissions – emissions by clients and suppliers rather than those made by the fund or company itself.
On the other hand, as Morningstar’s Hall says, having much more rigorous reporting standards around climate change disclosure, by particularly ASX listed companies, makes it easier for super funds and investors to make comparisons between the differing claims by companies they may decide to invest in.
But she argues that “we are getting better data coming through” including around Scope Three emissions.
“We are going to see more Scope Three emission reporting. This is where most of the greenhouse gas emissions lie but it is really challenging.”