Overseas developments – rising penalties for greenwashing breaches
DWS fined €25 million
Earlier this week, German prosecutors announced that Deutsche Bank’s asset manager DWS has agreed to pay a fine of €25 million for misleading investors about the ESG credentials of certain DWS funds. The investigation was triggered by a whistleblower complaint from a former head of ESG (summarised in our earlier article here). The relevant advertising claims included that ESG was “part of our DNA” and that DWS was a “leader” in the field, as well as overstatements of the extent to which funds were screened for ESG criteria. The regulators’ investigation identified errors in the controls used for incorporating ESG factors into DWS’s research and investment recommendations for ESG integrated products.
The agreed penalty is in addition to a separate US$19 million settlement agreed with the US Securities and Exchange Commission in 2023. In its recent statement, DWS acknowledged that its past marketing was “sometimes exuberant” and described the issue as a “negligent infringement” relating to “deficits in the past regarding certain ESG-related documentation and control processes, procedures and marketing statements.”
Active Super trustee fined AU$10.5 million
LGSS Pty Ltd (LGSS) is the trustee of the Active Super fund. In marketing the ESG credentials of the fund, it made various claims regarding the exclusion of investments from certain industries, including gambling, coal mining, oil tar sands, and (following the invasion of Ukraine) Russian companies. These statements were made through multiple channels, including the fund’s website, e-mails to investors, investment reports and media interviews.
The Australian Securities and Investments Commission (ASIC) investigated the fund and identified that, contrary to the marketing statements, the fund had continued to hold positions in various companies involved in the “excluded” sectors (for example, coal mining companies and Russian entities). ASIC issued proceedings alleging breaches of Australian securities legislation, under provisions that are largely identical to those under New Zealand’s “fair dealing” regime under the Financial Markets Conduct Act 2013 (FMCA).
Following the liability judgment last year (discussed in our previous article here), the Court has now issued its sentencing judgment imposing a penalty of AU$10.5 million. In deciding the level of appropriate penalty, the Court noted that:
- The misrepresentations were not isolated errors but systematically spread across marketing materials, official reports, and client communications over two and a half years.
- Internal e-mails between investment analysts and papers presented at Active Super’s own investment committee showed that there was internal awareness of the exposure to restricted investments, but LGSS nevertheless failed to align its public ESG statements with actual portfolio holdings.
Implications for New Zealand financial institutions
Given the fundamental similarity of the applicable statutory frameworks in Australia and New Zealand, the outcome in Active Super offers a valuable reminder to New Zealand financial institutions of the risks of making misleading claims in relation to ESG funds. In particular, taking into account the two factors noted above:
- All ESG marketing claims should be consistently scrutinised and substantiated, regardless of the format or channel. Where claims are repeated across multiple channels, it can be difficult to track and correct those claims. For large businesses in particular, there is a need for strong internal controls and governance around ESG disclosures, to ensure that investment, marketing, and compliance teams work together and apply the same verification standards.
- It is important to have clear protocols for safely elevating concerns about possible non-compliance with published ESG criteria, including ensuring the relevant communications remain protected by legal privilege. That should include engaging with internal or external lawyers at an early stage if any perceived issues are identified, clearly marking communications as privileged when legal advice is sought, and ensuring that any non-legal functions avoid casual internal commentary on potential legal risks regarding ESG matters.
The risks for New Zealand financial service providers have been further highlighted by the FMA’s recent censure of Pathfinder Asset Management for online statements about its KiwiSaver funds’ ethical investments. The FMA identified that Pathfinder had claimed its funds did not invest in companies involved in animal testing and fossil fuels, despite holding investments in several such companies under exceptions allowed by its Ethical Investment Policy. The FMA deemed these omissions misleading and a breach of the fair dealing regime.
NZ developments – The Sustainable Finance Taxonomy
As businesses search for clearer guardrails to ensure they can safely market their ESG initiatives, the ongoing development by the government and the Centre for Sustainable Finance (CSF) of a New Zealand “sustainable finance taxonomy” (NZ Taxonomy) is timely. The NZ Taxonomy is intended to create a classification system for various economic activities based on environmental performance, to provide confidence to investors and creditors regarding relevant businesses’ ESG credentials and assist with directing capital toward genuinely sustainable initiatives. The NZ Taxonomy is expected to focus initially on the agriculture and forestry sectors, with future expansion into other industries such as construction, transport, and energy, and is likely to be based on existing models overseas.
In that light, the European Union taxonomy (EU Taxonomy) offers a valuable example of how similar frameworks have operated in other jurisdictions. The EU Taxonomy sets out the criteria to determine if an economic activity can be considered economically sustainable by contributing substantially to one of six specific environmental objectives. That involves confirming that a relevant activity does “no significant harm” to the relevant objectives and complying with a series of minimum social safeguards. The criteria can be complex in practice. For example, in the context of construction, new buildings must meet stringent environmental standards (e.g., a 10 per cent reduction in energy demand compared to certain national thresholds, additional air-tightness tests and lifecycle impact assessments for buildings over 5,000m², and minimum recycling requirements for construction waste to be recycled).
This example (one of a lengthy list of industry-specific standards) highlights the granularity of the EU Taxonomy screening criteria and the effort and resource that may be required to conform. There is ongoing work to simplify the regime: last week, the Platform on Sustainable Finance published a report proposing a voluntary “SME sustainable finance standard” to help SMEs access sustainable financing by simplifying disclosures and classification.
Positively, the expert groups involved in developing the NZ Taxonomy have noted the importance of ensuring the “simplicity and technical usability” of the criteria, in a report issued last year. For that reason, the expert groups have expressed a preference for “a high degree of interoperability with the Taxonomy of Australia” (which is under development and is expected to be simpler in many respects than the EU Taxonomy).
Timeline and next steps
The Minister of Climate Change is currently working to develop the NZ Taxonomy with the CSF and the first public consultation on the draft NZ Taxonomy is expected in June 2025. A second public consultation will take place in August if needed, with the final NZ Taxonomy report due in November 2025.
Ahead of the public consultation, New Zealand businesses should consider how they may be affected. In particular:
- The priority sectors recommended by the CSF’s expert advisory group (agriculture and forestry in particular – but also construction and real estate, energy, agriculture, fisheries, transport and industrial manufacturing) should ensure that the criteria are designed in a way that remains measurable and achievable in practice. For those groups, it is possible that disclosure under the NZ Taxonomy could become mandatory in due course, although even if the taxonomy is voluntary as currently proposed, it is likely to be widely adopted if it results in lower cost of capital for taxonomy-aligned businesses.
- Banks, fund managers and other investors will all have an interest in ensuring that the final form of the taxonomy is well-designed and offers clear standardised sustainability criteria, reducing the risks of promoting ESG funds, green bonds and sustainability-linked loans.
- For other businesses outside those sectors, the NZ Taxonomy may still be relevant given it could influence the interpretation of more general legal principles in an ESG context (such as prohibitions on misleading conduct or unsubstantiated representations under the Fair Trading Act 1986).
Given the wide-ranging implications and opportunities of the NZ Taxonomy, we expect that many businesses will be interested in monitoring its development alongside other related regulatory guidance and emerging case law relevant to ESG claims.
Bell Gully’s Consumer, Regulatory and Compliance (CRC) Team have been monitoring these developments closely. If you require any assistance with preparing from engaging in the consultation on the NZ Taxonomy or if you have any questions about how it might impact your business, please get in touch with the contacts listed or your usual Bell Gully adviser.