Proposed labelling regime for sustainable investment products

In this article we take a look at the Government’s proposal to legislate for a labelling system for investment products marketed as sustainable. The regime will affect all managed investment products and superannuation products offered to retail clients where they are to be promoted under the banner of some form of sustainability.

Key points

• The Government is consulting on a proposal to introduce laws setting out the rules for marketing investment products as sustainable.
• The rules will set minimum standards for what qualifies for a prescribed sustainability label.
• Disclosure against sustainability criteria will be required upfront and on a continuous basis.
• The Government will publish an implementation roadmap for the Sustainable Finance Strategy after considering stakeholder feedback.
• In the meantime, ASIC will continue surveillance of the market for misleading conduct in relation to sustainable finance, including greenwashing.

Background

In early November 2023, Treasury released a consultation paper, Sustainable Finance Strategy, which sought feedback on the Government’s proposed strategy to reduce barriers to private investment into sustainable activities. The ‘Sustainable Finance Strategy’ seeks to provide a framework for reducing barriers in financial markets which hinder investment, and thereby pave the way for Australia’s journey to net zero. The Strategy identifies 12 key priorities, which it also structures under three key pillars. For an overview of the paper, see our earlier article.

The regulatory problem

This article focuses on ‘Priority 4’ in the paper, namely developing a labelling system for investment products marketed as sustainable. This priority comes under ‘Pillar 1’ titled ‘Improve transparency on climate and sustainability’. The stated aim of this priority is to provide more consistent information on the design and sustainability characteristics of products labelled as ‘green’, ‘sustainable’, ‘ESG’ or similar. The stated regulatory problem is that, despite the estimated $1.3 trillion worth of financial assets in Australia being managed using a ‘responsible’ investment approach, it is difficult for investors to understand how, and to verify whether, their investments are managed sustainably. Treasury states that ‘[t]his lack of clarity and the limited ways to verify that investments are true to label can contribute to greenwashing, erode credibility in the sustainable finance market and ultimately result in a misallocation of capital’.

The proposal

The consultation paper states that the Government proposes to legislate to create a labelling regime for investment products marketed as ‘sustainable’ or similar, including for managed funds and superannuation investment options.

The proposal has the following key aspects:

• There will be a labelling regime that will have the primary purpose of informing retail investors of the sustainability characteristics of different investment products.
• Sustainability terminology to be used in investment product marketing will be standardised. This will be achieved by setting minimum standards for what qualifies for a prescribed sustainability label.
• Investment product issuers would be required to provide retail investors with additional information on sustainable investment products, ‘both pre-contractually and on a periodic basis’, including a description of how sustainability is incorporated into the investment process.

Before formulating legislation, Treasury will consult with regulators and industry on policy and legislative design. In designing the regime, Treasury will also analyse international approaches and consider existing industry standards and practices in Australia. Consultation will occur this year.

The consultation paper states that this proposal is consistent with steps being taken in other jurisdictions, where financial regulators in the European Union, United Kingdom and the United States are developing new labelling and disclosure frameworks for financial products and funds.

Commentary

The laws regarding financial product disclosure and marketing will become even more complex with a new product labelling framework. The proposals to make further (and presumably detailed) upfront and continuous disclosures will require product issuers to devote additional resources to the manufacture and continuous offering of their products, or choose to either cease using such labels (with the risk of ‘greenhushing’) or cease offering the product. Such complexity and compliance costs can operate as a barrier to entry (which is perhaps intended); however, it may also reduce the diversity of sustainable products or sustainable investment strategies on offer. For example, some investment strategies merely have negative screening techniques, where such screening is undertaken on a best endeavours basis (particularly on a look-through basis through a multi-layered structure), but under the proposal it would seem that such strategies may not be sufficiently rigorous to earn the sustainability label.

Adding to legislative complexity is also at odds with other developments, particularly the recent final report of the Australian Law Reform Commission, which acknowledged the complexity of financial services laws and whose recommendations are designed to simplify financial services laws and make them more adaptive, efficient, and navigable.

One may also ask whether the existing laws governing product disclosure and marketing – in particular, not engaging in misleading or deceptive conduct – coupled with an active regulator with an improved guidance-making propensity, would be sufficient to continue to effectively regulate this area. However, rising investor demand for sustainable investment products may warrant, from a policy perspective, robust disclosure and promotional standards (and a robust underlying taxonomy) of the kind contemplated under the Sustainable Finance Strategy. A growing popularity of sustainable investment products will make it incumbent on industry participants to work with Treasury to develop coherent, reasonable and adaptive criteria that can evolve with market developments and which do not unduly burden product issuers.