Fiducian’s $7.3 million greenwashing penalty exposes how green finance can mask continued investment in carbon-intensive industries, writes Clara Zhou.
ON 11 AUGUST, the NSW Supreme Court ordered Fiducian Investment Management Services to pay a $7.3 million penalty for breaches relating to the operation of its Diversified Social Aspirations Fund.
The fund was marketed as an “ethical” or “socially responsible” option, but its underlying funds held investments in companies earning revenue from fossil fuels. The court found that Fiducian breached its duty of care and diligence as the responsible entity and made statements liable to mislead the public.
The Australian Securities and Investments Commission (ASIC) says this is its fourth greenwashing civil penalty outcome, after cases against Mercer, Vanguard and Active Super. It is also the first against the operator of a managed fund for failures in the governance, compliance and oversight of environmental, social and governance (ESG) claims.
The case moves beyond the wording of a marketing claim to the systems used to monitor it. A fund manager cannot promise an ethical product and then fail to check whether the investments fit the promise.
But this type of enforcement has limits. A green bond may finance eligible projects while the bank’s broader loan book is exposed to high-emitting borrowers. No false statement is required for that gap to arise.
Green bonds and the rest of the loan book
In a recent paper with colleagues at Macquarie Business School, we studied what happened to banks’ lending after they issued green bonds.
Our sample covers 725 banks across 44 countries and regions from 2007 to 2022. Green bonds raise money for projects or activities with environmental benefits. For a bank, however, the bond is only one part of a much larger balance sheet. We therefore examined the environmental profile of borrowers across the bank’s wider loan portfolio.
After issuance, banks lent more to companies with strong environmental ratings and the average rating of their loan portfolios rose. On that measure, the portfolios looked greener. But the outcome-based measures moved the other way. The portfolios contained borrowers with higher carbon emissions relative to sales and more environmental incidents. The difference between cleaner and dirtier borrowers also widened.
We call this pattern “selective greening”. Banks add more borrowers with strong, visible environmental scores while retaining carbon-intensive clients with whom they already have lending relationships. Banks often know these clients well and have invested in the relationship, so walking away can be costly. In loans made after green bond issuance, borrowers with poorer environmental outcomes paid higher loan spreads, a result consistent with repricing those exposures rather than simply exiting them.
Why more scrutiny does not close the gap
One result went against our initial expectation. The divergence between environmental ratings and actual outcomes was larger in countries with stronger regulatory settings and where institutional investors played a larger role. This is not an argument for less scrutiny. It suggests that pressure can be channelled towards what is easiest to report and verify.
Environmental ratings combine many company-reported indicators. Emissions intensity and environmental incidents provide more direct measures of outcomes, and an average rating can hide how widely those outcomes vary across borrowers.
This is different from the Fiducian case. Our study did not examine whether banks made false statements or misused green bond proceeds and it should not be read as alleging either. Even accurate information about a green bond and its eligible projects may not tell investors what is happening across the rest of the loan book.
Look beyond the portfolio average
Australia has begun phasing in mandatory climate-related financial reporting and the Australian Sustainable Finance Taxonomy is available for voluntary use. ASIC’s enforcement also makes clear that ESG claims need proper governance behind them.
But portfolio outcomes need to sit alongside claims and scores. Regulators and investors should look at financed emissions, environmental incidents and the spread of performance across borrowers. An average can rise because a bank adds several highly rated firms, even while it keeps substantial exposure to carbon-intensive clients.
The Fiducian case asks whether a fund’s claims matched its investments. For banks, there is a second question: after the green bond proceeds are allocated, what does the rest of the loan book look like? That is where much of the environmental impact may remain.
Clara Zhou is an Associate Professor of Finance at Macquarie Business School.
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia License
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