The Financial Markets Authority (FMA) yesterday published its insights into ethical investment disclosure. This follows an international shift towards a clearer and more universal understanding of “sustainable” and “ethical” investments, and continues to ensure the effective implementation of the 2020 Disclosure Framework for Integrated Financial Products (Disclosure Framework) and 2022 thematic review observations.
Who should read this? Why?
Managed investment scheme (MIS) managers should familiarise themselves with the insights in accordance with the FMA’s intensifying supervisory role in monitoring ethical claims made in relation to integrated financial products and services, and the objective of continuing to improve the quality of disclosures. The FMA’s view is that the current lack of standardisation and consistency will be addressed through engagement, education, and feedback.
What does it cover?
The insights cover observations from the disclosure documents, advertising, and sustainability progress reporting of 10 funds that claim to have ethical features, in accordance with the fair dealing provisions under Part 2 of the Financial Markets Conduct Act 2013 (FMCA). The insights set out the FMA’s findings in three focus areas, where the fund managers included in the review were engaged on some or all of the focus areas, depending on the issues identified. We summarise these focus areas and their findings, as follows:
Product disclosure statement (PDS), statements of investment policies and objectives (SIPO) and other material information (OMI):
Good practices were identified where MIS managers:
- disclosed that PDS information did not represent all scheme details;
- clearly cross-referenced SIPO and OMI documents;
- set out the scheme’s full strategy in their Disclose Register documents;
- made the strategy’s application clear; and
- made clear that website information only summarises the strategy and does not introduce new information.
Areas for improvement were identified where PDS, SIPO and OMI documents:
- lacked clarity and consistency;
- used ethical labelling without ethical strategy information;
- used an ethical scoring system without detailing the system’s application; and
- lacked detail about how managers would determine whether an existing asset no longer complied with an investment policy, or the timeframe investors could expect for this determination to be made.
Advertising and reporting:
Good practices were identified where MIS managers:
- included a list of companies that they do not invest in on their website; and
- reported on what votes they have cast and the themes of their reasons for voting (where engaging in shareholder voting is part of their strategy).
Areas for improvement were identified where advertising and reporting by some MIS Managers:
- did not align with the SIPO and responsible investing policy;
- lacked clarity on planned sustainability activities; and
- claimed they had net-zero targets but did not report progress towards those targets.
A compliance review of MIS funds with sustainable labelling or third-party certification, in accordance with the MIS manager’s sector exclusion policies, found that most MIS Managers could provide an adequate explanation of how specific assets were held in accordance with the exclusion policies.
Future focus
The FMA will continue to review ethical investing practices and will exercise its regulatory powers where any conduct or advertising is misleading or deceptive, disclosure is materially false, advertising is likely to confuse investors, or there is a material omission under the offer disclosures provisions.
The FMA is currently considering consultation responses in relation to a green, social, sustainability and sustainability-linked (GSSS) bonds exemption, which would require issuers to disclose the basis on which the bond is described as a GSSS, instead of the current requirement to give full disclosure.
The insights also highlight the climate-related disclosure (CRD) regime, where the FMA is undertaking a review of the first cohort of climate statement lodged in April 2024 (for climate reporting entities with a December year-end), in accordance with the FMA’s broadly educative and supportive approach to monitoring and enforcement. The FMA is expected to report on their review findings in November this year.
Our view
Observations by the FMA of international approaches to sustainable and ethical disclosure has been a focus for some time, particularly following the implementation of the Disclosure Framework. The insights provide valuable guidance for both the FMA and MIS managers as to examples of good practice, but also where there is room for improvement in respect of both local and international approaches.
This is of particular relevance in light of an increase in litigation proceedings by the Australian Securities and Investments Commission (ASIC) for cases of false and misleading environmental, social and governance (ESG) claims, and greenwashing.
What next?
We will continue to monitor any developments from the FMA until their November report. If you have any questions in relation to ethical investment, greenwashing and ESG claims more generally, please contact one of our experts.
This article was co-authored by Andrew Walker, a Law Clerk in our Financial Services team.
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