Australian greenwashing on trial

Australian Securities and Investments Commission v Vanguard Investments Australia Ltd [2024] FCA 308.

Executive Summary

ASIC has won its first greenwashing civil penalty case against Vanguard in relation to misleading claims it made about certain ESG exclusionary screens applied to the Vanguard Ethically Conscious Global Aggregate Bond Index (Fund) investment fund.

This is the first successful judgment for ASIC of this kind. While Vanguard had admitted certain conduct, various issues remained in play between the parties. They provide a useful early indication of the types of arguments regulators and respondents will grapple with in greenwashing cases, as well as how the courts will interpret them.    

Separate penalty proceedings are set to take place in August this year where further clarity will be provided on the quantum of these types of claims and the extent to which mitigating factors are applied.

Factual Background

The proceedings concern the Fund, which was a registered management investment scheme. The Fund commenced operation in or around August 2018. The defendant, Vanguard Investments Australia Ltd (Vanguard) is the responsible entity of the Fund.

Investors in the Fund included institutional, wholesale and retail investors. In the period between 7 August 2018 and approximately 17 February 2021 (Relevant Period), the composition of the Fund was based on the Bloomberg Barclays MSCI Global Aggregate SRI Exclusions Float Adjusted Index (Bloomberg SRI Index).

The relationship between the Fund and the Bloomberg SRI Index is clearly explained in the Product Disclosure Statements (PDSs) issued by Vanguard. However, for present purposes, it is sufficient to note that the investment strategy deployed by the Fund during the relevant period was to track the Bloomberg SRI Index.

ASIC alleged that, in the Relevant Period, Vanguard:

(a) made false or misleading representations that the Fund, and interests in the Fund, were of a particular standard, quality or grade or had certain performance characteristics or benefits in contravention of ss 12DB(1)(a) and (e) of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act); and

(b) engaged in conduct that was liable to mislead the public as to the nature, the characteristics and the suitability for their purpose of the Fund, and interests in the Fund, contrary to s 12DF(1) of the ASIC Act.

ASIC identified a series of communications made by Vanguard in respect of the Fund, in which ASIC alleges Vanguard made representations that were false or misleading.

ASIC alleged, and Vanguard admitted, in general terms, that the representations were false or misleading because:

(a) the research and the screening of securities for inclusion in the Fund against the applicable ESG criteria had significant limitations. For instance, the screening did not cover companies that derived revenue from the transportation or exploration of thermal coal;

(b) a significant proportion of securities in the Fund were from issuers that were not researched or screened against applicable ESG criteria; and

(c) the Fund included issuers that violated applicable ESG criteria.

Issue

The overarching issue considered in this judgment was whether the statements in the PDSs conveyed either:

(a) that all securities in the Bloomberg SRI Index (and therefore the Fund) were screened against ESG criteria; or

(b) that only the securities issued by “companies” were screened against ESG criteria (as opposed to bonds issued by government entities or other organisations).  

Decision

ASIC contended that, when read in context, the PDSs issued in respect of the Fund and Vanguard’s website conveyed representations that applied to all securities, not just securities issued by companies. ASIC argued that:

(a) the language of the PDSs conveyed that the words “issuer” and “company” are used interchangeably;

(b) representations in the PDSs did not indicate that the “ethically conscious screen” applied to only some of the securities in the Fund, but rather, the natural reading of such representations is that the “ethically conscious screen” applied to the whole portfolio of securities;

(c) the PDSs referred to Bloomberg’s website for further details, and as such, the PDSs should be read in conjunction with the Bloomberg SRI Index Fact Sheet which asserted that the “ethically conscious screen” applied to all issuers of securities and not only corporate issuers;

(d) the title and description of the Fund as “Ethically Conscious” conveyed the message that all securities in the Fund, and not a subset of securities (being securities issued by companies), was the subject of ESG research and screening; and

(e) the statements made in the media release issued in respect of the launch of the Fund, the Finance News Network (FNN) interview published on Youtube and the FNN presentation published on the FNN website also provided context for the impugned statements made in the PDSs and on Vanguard’s website and reinforced the message that all securities in the Fund were subject to ESG screening.

Justice O’Bryan did not accept ASIC’s contention and declared that, in the relevant period, the language of the PDSs issued in respect of the Fund and Vanguard’s website stated in clear terms that the Fund comprised bonds issued by governments, government related entities and companies, but the ESG screening was applied only to companies. Justice O’Bryan simply rejected that because the words “issuers” and “companies” were used in the same paragraph, an ordinary and reasonable reader would understand them to be interchangeable and carry the same meaning.

The Court went on to say that the submissions advanced by ASIC that Vanguard, through its PDSs and website statements, represented that ESG screening was applied to all securities are strained and conceptually flawed. The Court did not accept that the Bloomberg SRI Index’s Fact Scheet are matters of context affecting the meaning that would be given to the impugned statements in Vanguard’s PDSs and on its website by ordinary members of the public considering an investment in the Fund. His Honour declared that Vanguard cannot be held liable for the misleading statements in Bloomberg SRI Index’s Fact Sheet unless Vanguard adopted and repeated those statements, which was not alleged by ASIC.

This led to a minor win for Vanguard over the extent of its liability, however, Justice O’Bryan maintained that the representations made about the Fund by Vanguard across its PDSs, website, media releases and in media interviews amounted to misleading conduct. These statements, made in the relevant period, were “liable to mislead the public as to the nature, the characteristics and the suitability for their purpose” of the Fund if they wanted to invest ethically.

The Court will hand down Vanguard’s penalty in another hearing later this year, expected to take place at some time in August this year.

Conclusion

While we await a separate hearing to determine penalties and costs, this case demonstrates that businesses should be cautious in their marketing of ESG services and products, ensuring that it accurately reflects the nature of the product or service.

The case provides guidance on the standards of disclosure required in relation financial services being marketed as ethically conscious or ESG complaint.