Recent industry guidance for fund managers on climate risk disclosure

Focusing on greenwashing, net zero targets and ESG labelling 6 min read

Fund managers should take note of recent guidance published by the Financial Services Council, which provides a set of baseline expectations for the investment management industry's approach to making net zero targets, ESG product labelling and other climate risk disclosure considerations.

Key takeaways

• The guidance does not change the legal obligations or impose new ones for fund managers in relation to climate risk disclosure and greenwashing – ie managers should continue to ensure they avoid misleading and deceptive conduct, and comply with financial product disclosure requirements, in their approach to climate-related disclosures. Rather, the guidance reflects the shifting baseline of what is expected of fund managers by regulators, industry and investors.
• Fund managers should check that their climate-related disclosures, policies and procedures align with the industry guidance on leading practice, and implement any desirable uplifts.
• The guidance also highlights the increasing focus on climate risk disclosure more broadly, as it comes amid an upswell of regulatory developments affecting companies in Australia and globally. Fund managers should continue to monitor such developments closely for how they directly impact them or their investors.

What you need to know

FSC Guidance Note No 44 Climate Risk Disclosure in Investment Management (Guidance Note 44) was published last month by the Financial Services Council (the FSC). It provides practical guidance to fund managers on 'greenwashing' and other climate risk disclosure considerations, including those related to ESG product labelling, net zero targets and the Financial Stability Board's voluntary Task Force on Climate-related Financial Disclosures (TCFD) framework. The guidance reflects the ongoing regulatory focus in Australia, particularly by ASIC, on greenwashing and climate and sustainability-related disclosure. While the guidance is for investment managers, it is likely to be relevant to all asset managers, including trustees of super funds that manage assets. 

As a refresher, ASIC recently identified 'greenwashing' as 'the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical' (see our Insight: New ASIC guidance on how superannuation and managed funds can avoid 'greenwashing').¹ In the context of the investment management industry, Guidance Note 44 considers greenwashing to be: 'when funds, both institutional and retail funds overrepresent to the market the extent to which their investment practices are sustainable, ethical, or net zero aligned'.²

What's in the guidance?

Guidance Note 44 provides a set of common considerations for fund managers and practical steps to align with leading practice in three key areas of climate risk disclosures.

How should fund managers respond?

Review existing climate-related disclosures

We recommend that fund managers undertake a review of their publicly available materials that include climate-related disclosures, with a particular focus on the accuracy of the disclosures, and existing industry and regulator guidance on avoiding greenwashing. This could include:

• testing whether products are labelled accurately, and that the descriptive terms used are clearly defined, by eg ensuring the particular label can be quantified and/or otherwise has regard to international labelling standards or existing taxonomies;
• ensuring that sufficient climate-related information is provided to investors regarding the specific fund / product – such as the product's investment objectives (including any portfolio emissions targets), any climate-related screening criteria, and the ongoing assessment process for underlying assets (both from a climate risk perspective and generally);
• comparing different climate-related disclosures that are accessible to investors and relating to the same product, to ensure that they are not vague or conflicting; and
• testing whether appropriate disclosures are made in relation to how and when net zero or other portfolio emissions targets will be met, such as by disclosing the fund's chosen methodology for setting such targets, including any assumptions relied on, and reporting against the set target, as well as ensuring that such disclosure aligns with the fund's investment strategy. Guidance Note 44 also recommends that products claiming to be 'net zero' have such claims independently verified.

Consider policies and procedures relating to climate-related disclosures

Fund managers should review their existing policies and procedures that are relevant to the making of climate-related disclosures, in order to ensure they support practices that avoid greenwashing.  

Guidance Note 44 specifically calls out certain climate-related policies that fund managers may consider implementing. These include policies relating to: stewardship to guide the assessment and reporting of portfolio emissions,  engagement with investees to align with net zero targets, and an escalation strategy for concerns repeatedly raised by stakeholders.

Fund managers should also ensure that they engage in regular qualitative and quantitative reporting to the board of directors as well as reporting to investors on performance against the product's investment objectives (including any net zero or other portfolio emissions targets).

TCFD and other developments relating to climate-related disclosure requirements

For fund managers committed to reporting in line with the TCFD framework, we recommend reviewing Guidance Note 44 on how these disclosures should be incorporated in the context of funds management. Fund managers should also consider ensuring that their climate-related disclosure approach is consistent overall –  ie to achieve consistency of disclosure across all forms of disclosures made to stakeholders.

Fund managers should be aware that, even if they do not implement the TCFD framework, their investors, as the underlying asset owners, may bear potential climate-related risks to which their investments are exposed and may require reporting from managers in line with the TCFD (or other disclosure frameworks). This is consistent with APRA's recent climate risk self-assessment survey – it indicated that 69% of the 64 APRA-regulated institutions across the banking, insurance and superannuation industries reported having publicly disclosed their approach to measuring and managing climate risks, and of those, almost 90% reported having aligned their disclosure to the TCFD framework.³

Finally, fund managers should also remain alert to changing industry standards and regulations on climate-related disclosures in Australia and globally. The International Sustainability Standards Board (the ISSB) is consulting on exposure draft rules to enhance and standardise climate-related disclosures, while the United States, New Zealand and the United Kingdom have taken steps to mandate climate-related disclosures for certain entities.⁴ Closer to home, fund managers should note recent indications from the Federal Minister for Climate Change and Energy that a climate risk disclosure framework may well be on the cards.⁵ It is also worth closely monitoring Australian regulators as they continue to address climate risk disclosures and greenwashing. This includes ASIC's recent suggestions of greenwashing matters under active investigation, as well as its recent comments encouraging companies to adopt the TCFD framework in preparedness for transitioning to any future ISSB standards applied to them in Australia.⁶