Federal Court fines Vanguard $12.9 million for greenwashing conduct

The Federal Court has ordered Vanguard Investments Australia Ltd (Vanguard) to pay a $12.9 million penalty for misleading consumers about its investment fund, the Vanguard Ethically Conscious Global Aggregate Bond Index Fund (Hedged) EFT (Fund). The penalty exceeds the $11.3 million fine imposed on Mercer Superannuation (Australia) Limited (Mercer) for engaging in greenwashing conduct.

This is the highest penalty awarded in a greenwashing case to date and underscores the growing regulatory scrutiny on environmental claims made by investment firms. It also highlights the importance of transparency and accountability when promoting sustainability-related investment products.

Vanguard’s Ethically Conscious Fund

The Fund is a registered managed investment scheme of which Vanguard is the responsible entity. The Fund began operating around August 2018 and allows investors, including institutional, wholesale and retailer investors, to invest indirectly in its underlying securities by acquiring units from one of three classes of units issued by the Fund.

Investments held by the Fund were based on an index called the Bloomberg Barclays MSCI Global Aggregate SRI Exclusions Float Adjusted Index (Index), which Vanguard claimed excluded only companies with significant business activities in certain industries, including those involving fossil fuels.

Vanguard’s greenwashing conduct

Between August 2018 and February 2021, Vanguard made statements about the Fund through different media, representing to potential investors that:

• the Fund offered an ethically conscious investment opportunity
• securities were researched and screened against applicable environmental, social and governance (ESG) criteria before being included in the Fund
• securities that violated applicable ESG criteria were excluded or removed from the Fund.

However, the Australian Securities and Investments Commission (ASIC) alleged that these representations were false or misleading because:

• the research and screening of securities for inclusion in the Fund against applicable ESG criteria had significant limitations
• a significant portion of securities in the Fund were from issuers that were not researched or screened against applicable ESG criteria
• the Fund included issuers that violated applicable ESG criteria.

These representations were communicated to the public through various mediums, including:

• 12 product disclosure statements
• a media release
• statements published on Vanguard’s website
• a Finance News Network (FNN) interview on YouTube
• a presentation at a FNN Fund Manager Event which was published online.

Vanguard admitted that a significant proportion of securities in the Index and the Fund were from issuers that were not researched or screened against applicable ESG criteria.

The Federal Court’s judgment

The Federal Court found that by making the representations about the Fund, Vanguard contravened:

• Section 12DF(1) of the ASIC Act by engaging in conduct in relation to financial services that was liable to mislead the public as to the nature, the characteristics and the suitability for their purpose of those financial services
• Sections 12DB(1)(a) and (e) by making false or misleading representations that the Vanguard Ethically Conscious Fund and interests in it were a particular standard, quality or grade, and had certain characteristics or benefits.

ASIC sought to impose penalties totalling $21.6 million. While Vanguard accepted that a substantial penalty was necessary, it argued that a more appropriate range would be between $9 million and $11.25 million, accounting for a 25 per cent discount for its co-operation.

Penalty imposed on Vanguard

Ultimately, the Court agreed with Vanguard’s proposed discount due to their cooperation during the initial investigation and subsequent proceedings. The total penalty was reduced to $12.9 million, divided among the "five courses of conduct" below:

• $9 million for the 12 product disclosure statements issued for the Fund in 2018 and 2020
• $1.2 million for misleading representations on Vanguard’s website from September 2018
• $1.2 million for the media release about the Fund published in August 2018
• $750,000 for the interview with FNN on YouTube in December 2018
• $750,000 for the presentation given by Vanguard's senior manager about the Fund at a FNN Fund Manager Event held in December 2018 and published on FNN’s website.

In determining the civil penalty, the Court considered the following factors:

• approximately 74 per cent of the securities in the Fund by market value were not researched or screened against applicable ESG criteria
• Vanguard benefited from its misleading conduct
• Vanguard’s conduct was serious and the contravening conduct continued for around two and a half years
• the conduct concerned a substantial investment fund, with more than $1.1 billion in funds under management and close to 1,000 investors
• Vanguard’s desire to promote and market the Fund as “ethically conscious” took priority over ensuring the Fund’s composition and the extent of ESG screening were accurately disclosed
• senior employees of Vanguard were involved in the preparation of the misleading disclosure material relating to the Fund
• there was some attempt (albeit unsuccessful) to ensure that the product disclosure statements and website representations accurately reflected the ESG screening of securities in the Fund
• when the Head of Risk became aware of the issue, the investment product was immediately placed on a trading halt
• Vanguard self-identified and reported the conduct to ASIC
• Vanguard co-operated with ASIC during its investigation and the proceeding
• Vanguard took substantial steps to improve its compliance procedures to prevent similar conduct in the future.  

Companies beware: Greenwashing a top priority for ASIC 

Sustainable finance and reducing harm from greenwashing misconduct have been ASIC’s strategic priorities since 2022. ASIC Deputy Chair Sarah Court described greenwashing as a “serious threat” to the Australian financial system and emphasised that greenwashing remains an enforcement priority for the regulator.

During the 2023-2024 financial year, ASIC conducted surveillance on sustainability-related claims made by listed companies outside of the ASX 200, focusing on ‘net zero’, ‘carbon negative’ and other climate-related claims, as well as governance practices adopted by responsible entitles of ESG funds. Based on their findings, ASIC recommends that companies take the following actions:

• consider the relevant disclosure requirements in the Australian Sustainability Reporting Standards when voluntarily disclosing climate-related metrics and targets
• verify investments for consistency against disclosed investment strategies
• clearly explain any investment exclusions and screening criteria
• disclose how the proceeds from green bonds will be used, ensuring that this disclosure matches the current intended use of the proceeds.

Further steps to avoid greenwashing claims

To avoid greenwashing and stay off the regulators’ radar, companies should:

• be precise and clear: Avoid vague or unsubstantiated terms such as "green" or "sustainable." Claims should be specific, measurable, and verifiable
• substantiate claims with evidence: ESG claims should be backed by documented evidence. Maintaining records of this evidence is crucial in case of an audit or inquiry
• ensure transparency: Be open about the environmental and social impacts of products, including their sourcing, durability, and emissions. Provide clear information on compliance with labour, environmental, and ethical standards
• work with third-party certifiers: Partnering with reputable certification bodies can help substantiate ESG claims. However, businesses must ensure they accurately convey the meaning and scope of any certification.

Key takeaways

The Vanguard decision underscores ASIC’s focus on enforcement in this area and provides further insights into the factors that courts will consider in greenwashing cases, such as the courts’ willingness to grant discounts to cooperative respondents and their emphasis on companies having robust compliance policies and senior management involvement.

Corporations need to be vigilant about the potential repercussions of inadequate compliance frameworks and mechanisms.

If you have any questions about greenwashing claims or need assistance with reviewing ESG claims, please get in touch with our team below.

Disclaimer
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Joanne Jary

Caitlin Waldron

Anneliese Castle

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