ESG Considerations for Investment Funds in Australia – Disclosures

Articles Written by Austin Bell (Partner), Richard Graham (Partner), Jared McLachlan (Associate)

Earlier this year, Cathie Armour, a Commissioner of the Australian Securities and Investments Commission (ASIC), gave a speech on the rise of greenwashing and its potential threats. A copy of this speech can be found here.  Armour referred to the number of different disclosure frameworks and how this multiplicity may cause a lack of clarity about the standards that apply to issuers when they assess their products. This could ultimately increase the risk that product issuers overstate their green credentials.

More recently, on 8 September 2021, the Managing Director of the Monetary Authority of Singapore, Ravi Menon, gave a speech at the Financial Times Investing for Good Asia Digital Conference on the ability of green finance to unlock a sustainable future. A copy of this speech can be found here. Menon echoed Armour’s concerns, noting that, internationally, there are more than 200 frameworks, standards and other forms of guidance on sustainability reporting and climate related disclosures. Menon emphasised, among other things, that there needs to be greater consistency to cut through this disclosure diaspora.

This article considers the current environmental, social and governance (ESG) disclosure regime in Australia for Australian financial services (AFS) licensees and cites aspects of the new European Union regulatory regime that could be useful to consider if the Australian ESG disclosure regulations were refined and updated.

ESG Overview and Trends

ESG factors include climate change, environmental impacts and management, human rights infringements, diversity and inclusion, corruption, financial and corporate reporting and data protection practices. From an investment funds perspective, the consideration of ESG factors is most clearly present in the creation of investment objectives and in determining the investment mix that will achieve that objective. For many funds managers, ESG factors represent another qualitative element considered in making investment decisions.

ESG investing has been increasing over the past decade, but had a sharp increase most recently during COVID-19 and the rise of shareholder activism forcing fund managers to look beyond financial metrics to take into account ESG factors in their investment guidelines. Currently, 20% of all assets worldwide are held by funds that employ some form of ESG criteria.[1]

Current ESG Disclosure Regime in Australia

PDS Disclosures

Investments funds offered under a product disclosure statement (PDS) are subject to the following ESG disclosure requirements:

  • Subsection 1013D(1)(l) of the Corporations Act 2001 (Cth) (Corporations Act) requires a PDS to set out the extent to which labour standards or environmental, social or ethical considerations are taken into account in the selection, retention or realisation of investments. Regulation 7.9.14C of the Corporations Regulations 2001 (Cth) requires a PDS to contain more detailed disclosure about the considerations the issuer takes into account in relation to the ESG purposes of an investment and the extent to which those considerations impact the selection, retention or realisation of that investment or investments.
  • ASIC Regulatory Guide 65 Section 1013DA disclosure guidelines (RG 65) sets out ASIC’s interpretation of how financial product issuers can meet these ESG disclosure requirements in their PDS. In particular, RG 65 attempts to outline the level of detail that ought to be provided in relation to ESG disclosures, which, under Part 7.9 of the Corporations Act, includes the disclosures relating to what is known, and what a person would reasonably require to know, in relation to these features of the product. ASIC states in RG 65 that the issuer of a financial product must not give the impression that all of the ESG factors are taken into account if only some are considered in relation to the financial product.

Given that RG 65 was last updated in November 2011 and the change that has occurred in this area, it may be time for ASIC to revisit its guidance. As the Organisation for Economic Co-operation and Development (OECD) Report ESG Investing: Practices, Progress and Challenges notes:

“ESG investing has evolved from socially responsible investment philosophies into a distinct form of responsible investing. While earlier approaches used exclusionary screening and value judgments to shape their investment decisions, ESG investing has been spurred by shifts in demand from across the finance ecosystem, driven by both the search for better long-term financial value, and a pursuit of better alignment with values.”[2]

A copy of the OECD report is available here.

Task Force on Climate-related Financial Disclosures

Fund managers may want to take into consideration the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) which address the disclosure of the governance practices, strategy, risk management, and metrics and targets in relation to climate related risks and opportunities. The Final Report detailing the recommendations of the TCFD can be found here.

In June 2021, CDP, the Investor Group on Climate Change and the Principles for Responsible Investment released a roadmap titled ‘Confusion to clarity: A plan for mandatory TCFD-aligned disclosure in Australia’, a copy of which can be accessed here. The plan outlined global and domestic developments in the climate disclosure space, made a case for mandatory TCFD-aligned disclosure and outlined a number of proposals for the implementation of mandatory climate risk disclosure in Australia. One such proposal was the amendment of existing ASIC regulatory guidance to ensure that listed companies, large non-listed companies and fund managers report in accordance with the TCFD recommendations.


Some fund managers may also wish (or be required) to take into account the OECD Guidelines for Multinational Enterprises, a copy of which can be found here. The Guidelines provide a series of non-binding principles and standards for responsible business conduct covering a broad range of topics including human rights, the environment and anti-bribery actions.

Financial Advisers

ASIC has raised the possibility that financial advisers may need to take into account ESG factors when providing personal financial product advice. In Regulatory Guide 175 Licensing: Financial product advisers – conduct and disclosure (RG 175), ASIC states that financial advisers must determine whether section 961B of the Corporations Act (the statutory best interests duty) requires an adviser to take into account ESG considerations when providing personal financial product advice. If an adviser determines that the best interests duty requires them to take ESG factors into account, then the adviser would have to do so when providing their personal financial product advice. Presumably, subject to the particular circumstances, an adviser could determine that section 961B of the Corporations Act will require a consideration of ESG factors for some clients, but not others.

Fund Naming Conventions

Fund managers should also be cautious about the use of ESG-related names of managed funds and financial products if they do not have a sufficient ESG nexus. Whilst ASIC has not provided specific guidance on this particular issue in the context of ESG, the United Kingdom’s Financial Conduct Authority has expressed its concern over funds with misleading ESG-related names whilst tracking non-ESG focused indexes.[3]

Overview of the SFDR

The European Union (EU) recently adopted a legal framework designed to provide greater transparency through increased disclosure of sustainability risks within financial markets in a way that ensures comparability and prevents greenwashing. This legal framework, which came into effect on 10 March 2021, is the EU Sustainable Finance Disclosure Regulation (2019/2088) (SFDR). A copy of SFDR can be accessed here.

The SFDR defines sustainability risks as ESG conditions which may have actual or potential material negative impacts on investment values. No doubt much consideration went into the definition, but it is, nonetheless, very wide, and capable of varying interpretations.

The SFDR applies to financial advisors and financial market participants which include alternative investment fund managers (aka AIFMs), investment firms which provide portfolio management, management companies of undertakings for collective investment in transferable securities (aka UCITS) and manufacturers of pension products. Some of the key features of the SFDR are outlined below:

  • Pre-contractual disclosures: Financial market participants are required to make pre-contractual disclosures outlining how the sustainability risks have been integrated into the product and the impact that those risks may have on financial performance. Additional disclosures are required where sustainability risks have been considered to be irrelevant accompanied by a justification as to why.
  • Website disclosures: Financial market participants are required to publish on their websites information about their policies on the integration of sustainability risks with decision making processes in relation to investments and investment advice. This disclosure includes a description of the characteristics of the product, due diligence conducted on a product’s underlying assets and criteria for screening underlying assets and sustainability indicators. The purpose of such comprehensive website disclosure is designed to supplement the pre-contractual disclosures which are made in relation to each product.
  • Periodic reporting requirements: The periodic reports, which are to be issued in relation to ESG products, will need to describe the extent to which the environmental or social attributes have been attained or the overall sustainability impact of the particular product measured against sustainability indicators or a relevant index. The periodic reporting requirements will come into effect on 1 January 2022.

In contrast, Australia’s ESG regulatory disclosure requirements pale in comparison. However, notwithstanding the comparative paucity of regulation, many Australian fund managers and superannuation fund trustees in Australia are increasingly disclosing their ESG credentials and initiatives voluntarily.

Facilitation of ESG through Investment Structuring

ESG elements in Investment Management Agreements (IMAs)

The agreement under which a fund manager manages assets generally specifies the guidelines to be followed by the manager when managing the assets. Increasingly, these include at least some ESG considerations and not simply negative filters (such as no tobacco or coal investments). An IMA can also require the manager to obtain the client’s consent before particular transactions are completed (thus giving the client a veto right in relation to particular ESG considerations). An IMA can also require a manager to give the client additional reporting on ESG factors, including current holdings, performance against benchmarks and ESG market conditions.

Fund Establishment and ESG Units

The establishment of ESG focused managed investment schemes represents a way to capitalise on the growing demand for ESG investments. Some product issuers have also opted to establish a separate class and pool of assets within an existing fund aligned with ESG investment objectives, rather than establish an entire fund. The creation of different classes of units referrable to a separate pool of assets within the fund allows a fund manager to employ different strategies within the same fund, including where one of those strategies effectively has an ESG overlay.


The rise of ESG investing in Australia, the current quality of specific legislative and regulatory guidance in relation to ESG considerations for financial products and services, provide challenges and opportunities for financial service providers in Australia.

Contact us if you would like to discuss these in more detail.

[1] KPMG, 2020, Catalyst for Change: Sustainable finance developments across Asia Pacific.

[2] Boffo, R., and R. Patalano, 2020, ESG Investing: Practices, Progress and Challenges, OECD.

[3] UK FCA, 2021, Authorised ESG & Sustainable Investment Funds: improving quality and clarity.

Important Disclaimer: The material contained in this article is comment of a general nature only and is not and nor is it intended to be advice on any specific professional matter. In that the effectiveness or accuracy of any professional advice depends upon the particular circumstances of each case, neither the firm nor any individual author accepts any responsibility whatsoever for any acts or omissions resulting from reliance upon the content of any articles. Before acting on the basis of any material contained in this publication, we recommend that you consult your professional adviser. Liability limited by a scheme approved under Professional Standards Legislation (Australia-wide except in Tasmania).

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