The Financial Markets Authority (FMA) is sharpening its focus on greenwashing. A media release issued on 25 May 2023 by Paul Gregory, Executive Director Response and Enforcement, should be seen as a deliberate warning flag to providers of financial products and services that the FMA is now in full-swing in terms of monitoring and responding to instances of greenwashing.
Who needs to read it and why?
Senior executives and directors of managers of managed investment schemes (including KiwiSaver and other managed funds) are the primary audience of the release. However, we recommend that those involved in offers of other forms of financial products or services, e.g. issuers of debt securities, derivatives and equity securities, and DIMS providers, also consider its implications carefully.
The regulatory focus on claims relating to environmental, social or governance (ESG) factors is relatively new in New Zealand. The FMA is, in our view, highlighting that its tolerance of “aspirational” claims is rapidly coming to an end.
What does it cover?
In Mr Gregory’s words:
The FMA is sharpening its focus in this area [greenwashing] and there are broader policy and consumer tailwinds for claims to be articulate, accurate and meaningful. Mandatory climate-reporting standards are here, broader sustainability standards are in the wings. Consumer expectation is growing. Fund managers can add substance to support their claims and labels and disclose accordingly, or stop using the claims and labels. Marketing without underlying substance won’t wash, green or otherwise.
Mr Gregory’s release follows three prior publications by the FMA which, taken together, indicate an increasing focus on ESG claims in relation to financial products. They are:
- Disclosure framework for integrated financial products:14 December 2020 – which gives guidance on the FMA’s advertising and disclosure in respect of financial products that incorporate non-financial factors, which it refers to as an ‘integrated financial product’ (IFP).
- Integrated financial products: Review of managed fund documentation: 28 July 2022 – a review of disclosure practices for a sample of managed funds (including KiwiSaver funds) that use an IFP label in their name or description (e.g. sustainable, ethical, green).
- Ethical investing journey research: 28 July 2022 – a report which contains the findings from a qualitative study interviewing a range of New Zealanders about their experience of, and journey to, buying an ethical investment.
Mr Gregory points out that greenwashing, which he effectively defines as “misleading or false claims about social or environmental benefits or impact”, goes to the heart of fair dealing, and he points out that the overall impression created by marketing materials is critical. The FMA notes that “choosing and using financial products is hard” and when a claim as to ethical or sustainable impact is introduced things become even more complicated, leading to many consumers essentially making a “leap of faith” when investing.
Accordingly, Mr Gregory says “providers using terms like ethical and responsible to describe their products must ensure there is cohesive substance in how they design such products, how they market and advertise them and, most important, how they manage them.” He says that such claims have a real affect on how investors choose where to invest and can be a basis for investors deciding to pay higher fees and accept lower returns. This impact on consumer behaviour, and potential for harm, serves as the background for the FMA’s close attention to the issue.
The FMA expects the industry to be making “high-quality disclosure to provide insight into – and examples of – how future investment choices will be made, not just the make-up of the fund at a point in time.” The FMA expressed concern following an investigation into what it would be like for an investor trying to make investments that better fit their values, and improved disclosure is intended to create a more user-friendly environment that is free of extensive jargon and facilitates the comparison of different investment options.
But Mr Gregory also points out that not everything would be looked at from the perspective of an investor. He stated that “even if an investor never looks for the underlying detail and takes claims on trust, you can be assured the FMA will be looking.” This shows that the FMA’s increased focus on the promotion of investments has come with the expectation that either fund managers substantiate claims and labels, or remove them entirely.
Our view
The last several years have seen an increasing focus on “greenwashing” – both in relation to financial products and services, and also in relation to other goods and services. New Zealand regulators (the FMA and the Commerce Commission) have been slower to the party than others – notably when compared to Australia where both the Australian Securities and Investment Commission (ASIC) and the Australian Competition and Consumer Commission (ACCC) have been more activist. See here for a recent update from our sister firm in Australia as to the steps ASIC is taking. In that context, the pressure on the FMA to take a similarly assertive approach is increasing, and activist litigation is also a risk as we explain in our newsletter here.
Its important to note that “greenwashing is not limited to environmental or climate claims. It can apply equally to other social, governance or ethical claims for example." For example, Mr Gregory uses the response to Russia’s actions in Ukraine as an example in his media release, which to the extent it goes beyond the steps legally required is an ethical, rather than environmental, issue.
However, it is apparent that the FMA’s focus and understanding is being influenced by its important role as the regulator under the new climate-related disclosure (CRD) regime now included in Part 7A of the Financial Markets Conduct Act 2013. These regulations will apply to about 180 large banks, insurers, fund managers and NZX-listed companies, starting from this financial reporting period. This will stimulate public interest in what those entities say about climate change, and will also expand the scope of that attention to other entities. In our view, that means that climate-related claims deserve special attention.
What to do?
Issuers should apply the same rigorous due diligence approach they take in relation to financial claims in relation to ESG claims. Four key actions we recommend are:
1. Identify current ESG-related claims made not only in mandatory disclosure (e.g. the product disclosure statement and disclose register entries), but also in product names and promotional material eg on websites, in press releases and advertisements.
2. Undertake a risk assessment of existing claims against regulator guidance/principles:
- Be truthful and accurate.
- Be specific.
- Use plain language.
- Do not exaggerate.
- Make information easy to locate and access.
- Remember the overall impression counts, and technical accuracy is not enough if an ordinary investor would be misled.
- Clearly explain and substantiate your claims - e.g. do you have reasonable grounds for a claim? Do you have a plan of action that gives reasonable grounds to believe future claims will be achieved?
- Be clear. How will you measure performance and achieve the claim?
3. If past ESG claims have mislead or confused customers, consider options for customer redress and then take action promptly to address both the past and the future.
4. For the future, ensure you are clear on what your position is, and that future claims meet the tests above.
See more here.
At the same time, issuers should avoid the temptation to partake in “greenhushing”, the latest trend overseas where issuers simply expunge all references to climate issues in materials produced. That will not work for those subject to the mandatory CRD regime. But even for entities who are outside the regime, climate-related impacts on their investments made may well be material to their prudent, but non-expert, investors.
What next
If you have any questions in relation to greenwashing and its regulation, please contact one of our experts.
This article was co-authored by Elise Plunket, a solicitor in our Financial Services team.
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