Thus far, 2023 is shaping up to be a tumultuous one for anyone involved in making green claims. Around the world, regulators are forcing businesses to walk a narrow tightrope. On one hand, disclosure requirements on ESG and sustainability issues are rising exponentially. On the other, crackdowns on greenwash are accelerating as businesses and funds are called out over alleged misleading disclosures.  

This has seen the rise of ‘greenhushing’, a species of greenwash we examined earlier this year. Greenhushing, where entities under-report or remove information on green claims to avoid scrutiny, is an unfortunate side effect of regulator crackdowns on green claims. And while businesses are understandably concerned about regulatory scrutiny, what are the implications of greenhushing? And is there a cure? 

Is greenhushing the solution to greenwash? 

The rise of green claims in marketing is nothing new, but it’s certainly taken off in recent years. But with increases in greenwash penalties, it’s unsurprising that firms are increasingly ‘going green then going dark’. A 2022 global report from South Pole found that while 67% of the 1,200 companies surveyed deemed to be ‘engaged in climate action’, meaning they have both a net zero target and a Science Based Target (SBT), 23% of them do not plan to publicise their SBTs. This appears conflicting to say the least. 

We’ve also noted that locally, since ASIC’s first civil litigation against a major investment manager in February 2023, there is an observable trend in managers removing or drastically reducing available information on ESG and sustainability efforts in their funds.  

So is greenhushing going to work as a tactic? We believe that the answer is a resounding no, for two main reasons.  

Firstly, the financial world is undergoing one of the biggest changes in reporting standards in over 50 years. Love them or loath them, the majority of jurisdictions globally are preparing to localise the ISSB standards. In Australia, climate-related financial reports are set to be mandated for a lot of the real and financial economy and Parliament has legislated the ambition to reach net zero by 2050. This mirrors actions from many major global trading partners. Clearly, going dark on disclosures is not an option. This was echoed in a recent speech by ASIC Chair Joe Longo, who stated that “greenhushing is in our view just another form of greenwashing, and risks misleading by omission. Silence from firms and failing to engage isn’t the answer”. Enough said. 

Secondly, if you sell a fund on the basis of its sustainability attributes and then withdraw the claims or remove evidence supporting them, you’re denying your clients the full picture. Clients may rely on certain claims at the time of purchase; removing that information should raise legitimate concerns. Adopting a code of silence is unlikely to work. Instead, clients may choose to either avoid, abandon or retaliate against a product in protest. 

Advertising – is it getting lost in translation? 

As greenwash revolves around misrepresentation, advertising can be a facilitator of offending claims. However, what may be less well understood is that even if a fund’s formal disclosures are correct, their translation into marketing collateral can trigger greenwash allegations. 

Financial products are complex by nature but when you add ESG or sustainability factors into a fund’s design, the complexity and subjectivity increase. This creates problems when dealing with clients who have varying levels of financial sophistication. There is a fine line between being accurate enough to be correct and being succinct enough to be understandable.  

Regulators are doubling down on reminding product providers that claims around environmental and sustainability related issues are being scrutinised. ASIC’s release of INFO 271 on avoiding greenwashing was released in June 2022 and in July 2023, the ACCC released comprehensive draft guidelines on environmental and sustainability claims while noting that financial services are not exempt from Australian Consumer Law. In addition, the Australian Senate is currently conducting an inquiry into greenwashing with particular reference to company claims, their impact on consumers, advertising standards and legislative options to protect consumers from greenwashing.  

As at the time of writing, in three of the most recent cases of civil litigation between ASIC and investment managers on greenwashing, it appears that dislocations between actions taken versus how they were being articulated in marketing have been instrumental in triggering penalties.  

The message is clear. Managers and promoters of any products featuring environmental or sustainability claims need to be prepared to defend their claims.  

Is ESG data driving greenwash? 

ASIC’s civil penalty proceedings against Vanguard alleging misleading conduct for claims on exclusionary screens is a case which many fund managers will be watching closely. In particular, the role of index providers and ESG data in the specific example raises some interesting questions. 

Describing the complexities of ESG screening methodologies clearly to the average investor is extremely difficult. Methodologies can be nuanced yet still give way to gaps in data availability reported in the outcomes. We believe that these issues don’t represent failures of the index and/or ESG data providers, if they’re sufficiently transparent on their methodologies and any limitations. However, there is clearly considerable risk for users of such data who fail to be sufficiently clear and transparent on their methodologies and the implications on any funds using them.   

Change isn’t coming…it’s already here 

For fund managers, the risk is perhaps not so much what you say but how you say it. When it comes to navigating greenwash, keeping it simple may not be the solution. Reducing the choice between greenwashing or greenhushing is perhaps naive. The choice to be made is not one or the other but ensuring robust evidence and clarity in your messaging. The accuracy and transparency of communications is critical. While there may be no perfect solutions yet, firms need to ensure the right response is made, and not undertake in knee-jerk reactions that are unlikely to solve problems. 

Note: Zenith has recently released an ‘Avoiding product greenwash for advisers’, available to subscribers through our Mosaic portal. To obtain a copy, please contact your local Zenith team member.