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FSC guidance looks to eliminate greenwashing

The Financial Services Council (FSC) has released guidance setting industry expectations for net zero targets, the labelling of investment products and transparency of climate risk disclosures.

On the guidance's creation, FSC chief executive Blake Briggs said: "The Australian funds management industry takes the challenge of climate change seriously, along with its role in allocating capital to facilitate the transition to a low carbon economy."

"The Glasgow Financial Alliance for Net Zero estimates US$4.5 trillion a year from 2026 is required to transition the global economy to net zero by 2050.

"Investment funds are playing a vital role in this economic transition by working with their portfolio companies to adopt lower emissions practices."

For fund managers making net zero commitments, the guidance said they should be able to demonstrate their pathway to meeting such goals.

But aside from reviewing industry frameworks, it's prescribed that asset managers assess portfolios for alignment to net zero on an ongoing basis and select appropriate assessment methodologies.

All methodologies should be transparent so that internal and external stakeholder reporting can describe the approaches used for portfolio emissions assessments when reporting against net-zero targets, the guidance said.

The FSC added: "Where portfolio emissions targets are being set, they (asset managers) should specifically consider the overall investment strategy of the portfolio to ensure there are no conflicts between targets and the overall investment objectives. The priority remains the client's best interests."

"ESG integration is the primary process of ensuring a systematic approach to the incorporation of climate risk and net zero alignment considerations are factored into investment decision making.

"This involves ensuring the price paid for an asset is valued appropriately given the perceived impact (risk/opportunity) of climate change and net zero strategy."

The FSC also addressed greenwashing considerations for investment managers.

ASIC defines greenwashing as the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable, or ethical.

To mitigate these types of misrepresentations, the guidance points to investment managers needing to clearly describe its general, financial, and specific carbon or environmental objectives.

In disclosing a fund's objectives, the FSC said best practice is to outline any financial objectives linked to the consideration of environmental objectives, then describe what these objectives are and how they're defined. Further, determine the definition of activities within the scope of the said objectives.

The FSC guidance calls on investment managers to also disclose the fund's formalised responsible investment strategy and approaches it will utilise to meet net zero objectives (if it has one).

It's also important to ensure funds are labelled accurately and that the meanings of labels used are clearly defined, the FSC stated.

The peak body cites an example of funds being labelled as 'climate friendly' or 'net zero' comprising of a mix of companies with strong transition plans and also those which don't take into account ESG issues in any capacity. This could be a greenwashing issue the guidance outlines, particularly if other companies included don't fit the defined investment criteria.

In an exclusive with the Financial Standard, Briggs commented on the guidance stating: "A decade of climate policy malaise in Canberra has not stopped Australian investors from responding to the threat of climate change."

"Climate change is a real risk to the Australian and global economies and fund managers are adjusting their investment strategies to price this risk and facilitate the transition to a low carbon future."

It's intended that FSC's guidance for fund managers will signal government, regulators, and consumers that the Australian investment community sees climate action as a top priority.

"The FSC wants consumers to have confidence fund managers who set net zero targets are assessing their portfolios with robust science-based methodology and are working with companies they invest in to reduce emissions," Briggs said.

While the investment community has started, it's time for the country to grab the investment opportunities of the climate transition with both hands, he concluded.

Read more: FSCGreenwashingESGFinancial Services CouncilASICBlake BriggsFinancial StandardGlasgow Financial Alliance