ASIC Secures Landmark Victory Against Greenwashing: Vanguard Admits Misleading Practices

ASIC has won its first ‘greenwashing’ civil penalty action after Vanguard Investments Australia Ltd (Vanguard) admitted in the Federal Court that it had made false or misleading representations, and engaged in conduct that was liable to mislead the public, in relation to the environmental, social and governance (ESG) credentials of its billion dollar Vanguard Ethically Conscious Global Aggregate Bond Index Fund (Fund). In short, ASIC alleged (and Vanguard admitted) that Vanguard had engaged in what is colloquially known as ‘greenwashing’. ASIC’s claims were brought under sections 12DB and 12DF of the ASIC Act.

The Representations

ASIC alleged (and Vanguard admitted) that over a 2.5 year period between August 2018 and February 2021, Vanguard had falsely represented to potential investors that:[1]

• The Fund offered an ethically conscious investment opportunity.
• Before being included in the Fund, securities were researched and screened against applicable ESG criteria, whereas in fact the research and screening of securities for inclusion in the Fund against applicable ESG criteria had significant limitations, and a significant proportion of securities in the Fund were from issuers that were not in fact researched or screened.
• Securities that violated applicable ESG criteria were excluded or removed from the Fund, whereas in fact the Fund included issuers that violated applicable ESG criteria.

The Fund relied on a Bloomberg Socially Responsible Investing Index (SRI Index) for the screening it represented that it was undertaking. However, this screening had (undisclosed) limitations, including that:[2]

• Only companies (and generally only publicly listed companies), and not all issuers of securities included in the SRI Index, were screened against ESG criteria.[3]
• Even for the companies that were screened, where multiple issuing entities shared a stock exchange ticker, ESG research was only conducted for the company with the largest debt outstanding and applied to all other companies with the same ticker.
• Fossil fuel screening did not cover companies that derived revenue from the transportation or exploration of thermal coal.

Communications

It is interesting that the impugned communications by which the representations were said to have been made were not limited to formal Product Disclosure Statements (PDSs) issued by Vanguard in respect of the Fund (although it did include 12 such PDSs). The impugned communications also included a media release, statements on Vanguard’s website, an interview given by a Vanguard manager with the Finance News Network (FNN) and published on YouTube and a video of a presentation given by a Vanguard manager at an FNN Fund Manager event, published on FNN’s website.[4] This demonstrates that entities need to be careful with all forms of formal and informal communication to the public, and not just formal written documents.

Correction of misleading statements

Vanguard changed the wording of its PDSs and website in 2021 to correct the misleading statements. ASIC relied on the altered wording to seek to prove its case that the original statements were misleading. However, O’Bryan J found that the alterations did not assist in resolving the question of what was conveyed by the original statements.[5] The extent to which changes and corrections may be used as evidence that the prior statements were misleading will be a relevant consideration for companies who are considering correcting or changing their disclosures. In this content, it is helpful that O’Bryan J declined to draw any conclusions about the earlier representations from Vanguard’s later corrections.

Implications for ASIC

ASIC has been vocal in the press about its intention to crack down on greenwashing. Whilst it has conducted a number of investments and issued several infringement notices, this case is notable as the first time ASIC has succeeded in a greenwashing civil penalty action. Other civil penalty greenwashing proceedings against the Mercer and Active superannuation funds are ongoing.

It should be noted that Vanguard admitted most of the allegations, and a separate hearing as to the appropriate penalty is listed for August 2024. It therefore remains to be seen whether ASIC would have the same success in a fully contested or less straightforward case.

[1] Australian Securities and Investments Commission v Vanguard Investments Australia Ltd [2024] FCA 308 (Judgment) at [3]-[4].

[2] Judgment at [31].

[3] There was a narrow dispute about whether or not Vanguard had made a representation to the contrary in some of its communications: Judgment at [43], [48], [73], [79]-[114]. The Judge found that the PDSs and the website had clearly stated that the ESG screening was only applied to companies and not other (non-company) issuers: Judgment at [94].

[4] Judgment at [6].

[5] Judgment at [63], [78], [102].