ASIC secures victory against Vanguard Investments for ‘ethically conscious’ greenwashing conduct

Last year, we reported on the Australian Securities and Investments Commissions (ASIC) commencement of proceedings against Vanguard Investments Australia Ltd (Vanguard) alleging that Vanguard engaged in misleading conduct in breach of the ASIC Act by making false or misleading claims about the ESG criteria applied to an investment fund it offered to potential investors. On 28 March 2024, his Honour O’Bryan J delivered judgment in those proceedings against Vanguard, finding that it had engaged in several instances of misleading and deceptive conduct.

A link to our previous article on this topic can be found here.

Allegations

In broad terms, ASIC alleged that between August 2018 and February 2021, Vanguard made false and misleading representations to potential investors that:

• its Vanguard Ethically Conscious Global Aggregate Bond Index Fund (Hedged) (Fund), comprised of various securities from a Bloomberg Index, offered an ethically conscious investment opportunity;
• before being included in the relevant Bloomberg Index on which the Fund was based, relevant securities were researched and screened against applicable ESG criteria; and
• securities that violated the applicable ESG criteria were excluded or removed from the Bloomberg Index on which the Fund was based.

In its statement of claim, ASIC alleged that Vanguard made the representations in respect of the Fund in a series of communications to investors, including in:

• 12 Product Disclosure Statements that Vanguard had issued in respect of the Fund;
• a media release that Vanguard issued on or about 30 August 2018 in respect of the launch of the Fund;
• statements that Vanguard published on its website from about 11 September 2018 in respect of the Fund;
• an interview given by a manager of Vanguard that was published on YouTube on or about 14 December 2018; and
• a presentation given by a manager of Vanguard at an FNN Fund Manager event on or about 5 December 2018, a video of which was published on the FNN website on or about 14 December 2018.

Admissions by Vanguard

Investments that were held by the Fund were primarily based on the Bloomberg Barclays MSCI Global Aggregate SRI Exclusions Float Adjusted Index (Index). Throughout the proceedings, Vanguard made a number of admissions regarding the limitations of the Index, in particular, the research and screening of Index Investments against applicable ESG criteria.

Vanguard admitted that the research and screening that was performed to create the Index was limited in a manner that meant that:

• not all issuers of securities that were included in the index were researched and screened against applicable ESG criteria;
• companies with multiple issuing entities that shared a particular stock ticker were not properly researched prior to inclusion in the Fund; and
• from 15 July 2020 companies that derived revenue from the transportation or exploration of thermal coal were not properly screened and excluded.

Accordingly, Vanguard admitted that it had made representations which conveyed that:

• the Fund offered an ethically conscious investment opportunity;
• before being included in the Index, and therefore the Fund, securities issued by companies were researched and screened against applicable ESG criteria; and
• securities issued by companies that violated the applicable ESG criteria were excluded or removed from the Index, and therefore the Fund; and
• admitted, as a result of the limitations identified in the research and screening process for the Index, and therefore the Fund, that these representations were false or misleading.

Findings made

Although Vanguard made a number of admissions in the Proceedings, both parties made submissions about an issue that arose in respect of the extent of the representations made by Vanguard over and above Vanguard’s admitted conduct. The Court determined the latter issue in favour of Vanguard.

However, given the admissions made by Vanguard, his Honour O’Bryan J found that Vanguard made misleading claims about the research and screening process applied to the investments in the Fund. The Court made declarations that Vanguard had engaged in conduct in relation to financial services that:

• was liable to mislead the public as to the nature, characteristics and suitability for their purpose of those financial services, and thereby contravened s 12DF(1) of the ASIC Act;
• was false or misleading in representing that the Fund and interests in it were of a particular standard, quality or grade, and had certain performance characteristics or benefits, and thereby contravened s 12DB(1)(a) and (e) of the ASIC Act.

The Federal Court has listed the proceedings for a further hearing on 1 August 2024 with respect to issues of pecuniary penalties or an adverse publicity.

Lessons to be learnt

This latest judgment again reiterates ASIC’s commitment to identifying and prosecuting instances of greenwashing in the Australian market, in pursuit of one of its continuing strategic priorities, being to monitor sustainability-related disclosure and governance practices of its regulated entities. This is a timely reminder to all financial services funds about the dangers of making unsubstantiated representations concerning their offerings and their ESG features.

Investments that claim to have been researched and subjected to ESG criteria need to be vigorously tested to ensure that they indeed comply with the applicable ESG criteria. Neglecting to do so will only heighten the risk of misleading investors and the likelihood of potential enforcement action by ASIC and claims by investors.

If you would like further information, please do not hesitate to contact Susan goodman.

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Authored by:

Susan Goodman, Partner
Jack Tipple, Special Counsel
Ahmed El-Jaam, Lawyer