Climate change: Urgency, integrity, ambition

Speech by ASIC Deputy Chair Karen Chester at the Carbon Market Institute’s 9th Australasian Emissions Reduction Summit, 25 October 2022.

Check against delivery

Thank you to the Carbon Market Institute for the opportunity to participate in this plenary session alongside my fellow regulators in David Parker from the Clean Energy Regulator (CER) and Liza Carver from the Australian Competition and Consumer Commission (ACCC).

You’ll all be aware, ASIC is Australia’s integrated corporate, markets, financial services and consumer credit regulator. What matters most to us is maintaining fair and efficient markets. To do that we need to have confident and informed investors.

That’s why it should be no surprise that sustainable finance is today a ‘whole of ASIC’ priority. Our primary focus being to support market integrity through proactive supervision and enforcement of governance, transparency and disclosure standards for sustainable finance. Especially as they relate to climate.

Why? Tackling climate change (or decarbonisation) is the single biggest driver of global capital developments and allocation. Today and for the foreseeable future. Two statistics – one global, one local – reveal why:

• the overwhelming majority of global GDP (80% by some estimates) is now covered by a national net zero target, and
• locally, recent Australian Council of Superannuation Investors (ACSI) research tells us that 70% or $1.59 trillion of the ASX 200 market cap is subject to a net zero commitment.

So, transparency and integrity are our must have bookends. Their absence runs counter to fair and efficient markets. Their absence runs counter to confident and informed investment decisions to support this transition. All of which is needed for the efficient deployment of this transition capital.

So, how do we support this?

It’s worth noting that we continue with our business-as-usual regulatory activities. So, where a carbon unit meets the definition of a financial product under the Corporations Act – so for example Australian carbon credit units (ACCUs) or eligible international offset units, we have a role in licensing dealers and service providers in relation to those products.

We also have an ongoing supervisory role in relation to conduct of those licensed entities. We’ve issued regulatory guidance which sets out how we administer these requirements, and this is well established.

These are established areas of work for ASIC, and they will continue to evolve.

My focus today is on how ASIC administers and where needed enforces a range of provisions in the Corporations Act that relate to disclosure by listed companies and product issuers. So, we are talking about:

• requirements for listed companies to disclose business prospects, strategies and risks in certain statutory documents such as prospectuses and annual reports and also forward-looking disclosures put out by those companies, which must be predicated on reasonable grounds, and
• certain prohibitions against false, misleading and/or deceptive disclosure to investors and financial consumers.

This underpins our work on both climate change-related disclosure and greenwashing.

On disclosure, our focus is on transparency and trust in the information that is flowing to investors and financial consumers. And perhaps the key message here is that companies’ forward-looking statements cannot be purely aspirational. Representations about future matters need to be supported by reasonable grounds.

Our approach to date has been to encourage listed companies to voluntarily adopt the recommendations of the Taskforce on Climate-Related Financial Disclosures (TCFD). Indeed, we’ve been doing that since 2018. There is good uptake of TCFD within the ASX 100 cohort of listed companies to date, albeit and perhaps unsurprisingly with much variability.

We would like to see more companies outside the top 100 or 200 looking closely at TCFD. Why? Because the bar continues to rise.

How? On the international front, at COP 26 we saw the establishment of the International Sustainability Standards Board (ISSB), under the auspices of the global accounting standard setter, the International Financial Reporting Standards (IFRS) Foundation. This is a beyond significant development.

ISSB is seeking to deliver a comprehensive global baseline of sustainability-related disclosure standards that provide investors and other capital market participants with the key information that they need. For all of us, a global baseline is a must have. Absent that baseline, global fragmentation of climate related disclosure standards would impose a costly ‘efficiency tax’ on capital allocation.

ISSB is working at pace, consulting on a draft climate-related financial disclosure standard for corporates. And working to finalise this standard in coming months.

As presently drafted, the standard proposes a number of prescriptive disclosure requirements related to transition plans including things like the use and provenance of carbon offsets factored into decarbonisation pathways.

It also deals with physical risks to assets, governance arrangements, risk management strategies and other climate-related metrics such as emissions disclosure.

The Council of Financial Regulators, which includes the Australian Prudential Regulation Authority (APRA), the Reserve Bank of Australia (RBA), ASIC and Treasury, have publicly expressed support for the ISSB objectives. And made a submission to the ISSB on their draft exposure standards in July.

The Australian Government has also foreshadowed enhancing the transparency of financial institutions and large-listed companies in this area and aligning with international best practice.

The inevitable bottom line is that there is going to be increased transparency through disclosure on climate related risks and opportunities – including transition plans and decarbonisation pathways. Importantly, this will be the price of access to global capital markets.

In terms of the here and now. We encourage companies to report voluntarily under TCFD and think clearly about their existing legal obligations. Is there a reasonable basis for the forward-looking information you are putting into the market?

We also think companies should be identifying and developing the skill sets within the organisation to drive better disclosures. With the direction of travel here clear.

Moving on to greenwashing. We identify ‘greenwashing’ to be the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical.

Greenwashing distorts the information that a current or prospective investor might need to make informed investment decisions.

It erodes investor confidence in the market for sustainability-related financial products and corporate strategies. It corrodes fair and efficient markets.

Again, this plays out in the numbers. There has been an increase in investor demand for, and the availability of, sustainability-related financial products.

Bloomberg Intelligence estimates ESG assets are projected to exceed USD $53 trillion by 2025 and represent more than a third of total assets under management.

With this comes a bigger playing field for greenwashing and, as a result, investors being confused and misled.

Earlier this year we released Information Sheet 271 How to avoid greenwashing when offering or promoting sustainability-related products (INFO 271). This was to help superannuation and investment funds comply with existing regulatory obligations to avoid greenwashing. It followed our review of a sample of superannuation and investment products which identified some areas for improvement.

The crux here – whether a product is true to label. ASIC is now moving into compliance and indeed enforcement mode.

We have a number of investigations underway in relation to allegations of greenwashing. The kinds of things that we’re looking at involve potential misleading or deceptive conduct by various listed entities, super fund trustees and managed fund responsible entities. They relate to things like net zero target statements and investment exclusions and screening for sustainability-related financial products.

Why? The economic costs of greenwashing cannot be overstated. Companies or funds engaging in greenwashing attract capital at the expense of others that are more worthy – creating costly inefficiencies. But there is also the indirect and compounding cost – the loss of investor confidence. Confidence in sustainable investment products. Confidence in target statements. This is why we need to strongly deter greenwashing misconduct.

Which is also why ASIC cannot be and is not an island here.

First, we are working closely with international regulators (especially through IOSCO, or the International Organization of Securities Commissions) on sustainable finance. And with organisations like IFRS and the ISSB.

Second, we are working with our CFR colleagues on quality and comparable disclosure and will continue to do so.

Third, we have formed a coalition with the CER and ACCC. To quote David, a coalition against greenwashing.

Fourth, we continue to ask market participants to alert us to suspected greenwashing. This is very important and highlights the collective effort here.

So, in summing up, our bookends of transparency and integrity – translate to our work on disclosure: lifting the quality and comparability bar. And our work on greenwashing: being one of abatement. In doing so, we are anything but an island.