ESG Labelling On the Cards for Global Regulation

By: Jim Bulling and Laura McFadzean

On 2 November 2023, the Australian Treasury announced a proposal to develop a labelling system for investment products marketed as sustainable in its Sustainable Finance Strategy Consultation Paper.

The proposal seeks to establish a labelling regime which provides information to consumers and investors on the sustainability characteristics of financial products labelled as “green”, “sustainable”, “ESG” or similar.

The proposed regime will require “clear minimum standards” for what qualifies as a prescribed sustainability label, though the proposal does not yet contain the criteria against which the minimum standards will be assessed.

In formulating its own framework, Australia will attempt to be consistent with the sustainability labelling processes in other jurisdictions. In that regard we note that:

• In the US, there are proposals for funds with an ESG-related name to invest at least 80% of the fund’s assets in the manner suggested by the fund’s name.
• In the UK there are proposals for an optional labelling regime to distinguish between products that have an objective to invest at least 70% of their assets in investments that meet a standard of environmental or social sustainability, products that seek to deliver improvements in the sustainability of their assets over time, and products which have a predetermined social impact.
• While there is currently no need for financial products to be “labelled” in the EU, market participants usually refer to their financial products in accordance with their Sustainable Finance Disclosure Regulation (SFDR) disclosure requirements. The EU Commission has identified this as a potential shortcoming of its ESG system and is undertaking a consultation on the SFDR which could lead to a more formalised labelling system.
• Singapore and Hong Kong continue to rely on misleading conduct causes of action to ensure that scheme names are appropriate and reflect their investment portfolio or strategy in a substantial manner. In assessing whether a scheme name is accurate, Singapore will look to the actual capital invested and generally requires that at least two thirds of the scheme’s net asset value is invested in accordance with an ESG-related strategy.
• In locations such as Japan and Hong Kong, there has been no formal adoption of ESG investment labels or categories.

Unlike the US and UK, it is not clear whether Australia will prescribe a percentage by which funds must invest in the manner suggested by their name. However, like the UK, funds in Australia would need to qualify for use of a label under the proposed regime. Australia’s proposal would require funds to have both an explicit sustainability objective and integrate sustainability into their investment processes to qualify for use of a label.

The Treasury will commence work on a labelling regime in 2024 and will consult with industry stakeholders and regulators on policy and legislative design.