Last year, the Federal Court of Australia handed down its decision in Australian Securities Investment Commission v Vanguard [2024] FCA 308. This case serves as a reminder that businesses who are making sustainable investment claims must ensure that those claims are not misleading or deceptive in nature.

The Australian Securities Investment Commission (ASIC) prosecuted Vanguard Investments Australia Ltd (Vanguard) alleging that Vanguard had made misleading claims about Environmental, Social and Governance (ESG) exclusionary screens in the investments it made with member funds. Vanguard admitted to most of the allegations and was ordered to pay the highest penalty yet to be administered for greenwashing claims, being $12.9 million.

Background

Vanguard is responsible for the Vanguard Ethically Conscious Global Aggregate Bond Index Fund (Hedged) (Fund). Vanguard made the following representations to the public that:

1. the Fund offered an ethically conscious investment opportunity;

2. securities were researched and screened against applicable ESG criteria before being included in the Fund; and

3. securities that violated the ESG criteria were removed from the Fund

The composition of the Fund was based on an index called Bloomberg Barclays MSCI Global Aggregate Socially Responsible Investing Exclusions Float (Bloomberg Index). Vanguard claimed that investments in the Fund excluded significant business activities involving:

• fossil fuels

• alcohol

• tobacco

• gambling

• military weapons and civilian firearms

• nuclear power

• adult entertainment

The representations were made in several forums including product disclosure statements (PDS), websites, a YouTube interview and a media release.

ASIC alleged that the statements made by Vanguard were false or misleading because:

1. there were significant limitations in the research of the securities that were included in the Fund which addressed the ESG criteria; and

2. several of the securities stated in the Fund were from issuers who were not researched or screened against ESG criteria.

Findings

Vanguard admitted that the research and screening that applied to the Bloomberg Index had limitations and not all the securities that were included in the Fund were researched or screened against the ESG criteria. In particular:

1. Not all securities were screened and researched against all the applicable ESG criteria. Generally only publicly listed companies were.

2. For companies that had multiple issuing entities that shared a particular stock exchange “ticker”, the ESG research was only conducted on the company with the largest debt outstanding and then was applied to all companies with that same ticker.

3. The fossil fuel screen did not cover companies that derived revenue from the transportation or exploration of thermal coal.

Vanguard admitted to engaging in conduct that was likely to mislead the public and that the representations were false and misleading.

After the allegations were made, but prior to judgement, Vanguard amended its PDSs and its website to correct the misleading statements.

The Court ordered Vanguard to pay a penalty in the amount of $12.9 million, the highest greenwashing penalty imposed to date.

Key Take Aways

• This case highlights the importance of ensuring that any sustainable investment claims made by businesses provide an accurate reflection of what is being claimed.

• It also emphasises the need to be across the activities of any third parties which may impact the claims made and to verify that the information they are providing is accurate or that any limitations of that information is disclosed in a clear and unambiguous manner.

• The penalties administered in this case are the highest thus far and ASIC intends to increase greenwashing regulatory investigations to deter businesses from making false or misleading representations.

If you are unsure whether you have made representations regarding ESG criteria that are likely to mislead or deceive or need assistance with your case, please contact Inshani Ward or Alicia Hill. Contacts are below.

Alicia Hill
Principal
T: +61 3 9611 0180 | M: +61 484 313 865
E: ahill@sladen.com.au

Inshani Ward
Senior Associate
T: +61 3 9611 0110 | M: +61 413 557 157
E: iward@sladen.com.au