FSC Proposals Aim to Eliminate Greenwashing
The Financial Services Council (FSC) has released guidance outlining industry expectations for net zero targets, investment product labelling, and climate risk disclosure clarity.
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."
The guidance stated that fund managers making net-zero commitments should be able to explain their route to achieving these objectives.
In addition to examining industry guidelines, asset managers must continuously examine portfolios for alignment with net zero and establish relevant assessment procedures.
The guidance states that all methodology must be transparent so that internal and external stakeholder reporting can detail the approaches used for portfolio emissions evaluations when reporting against net-zero targets.
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 strategies."
Additionally, the FSC addressed greenwashing concerns 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 prevent these types of misrepresentations, the guidelines recommend that investment managers disclose their general, financial, and specific carbon or environmental objectives in detail.
The FSC recommends that, when declaring a fund's objectives, it is best to outline any financial objectives linked to the consideration of environmental objectives and then clarify these objectives. Determine further the definition of actions within the scope of the aforementioned objectives.
The FSC directive requires investment managers to also reveal the fund's formalised responsible investing strategy and the methods it will employ to achieve net zero objectives (if it has one).
The FSC added that it is also essential that funds are appropriately labelled and that the meanings of labels are clearly understood.
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.
Source: Financial Standard
