Further to our recent insight on ASIC’s greenwashing case against Vanguard Investments, ASIC’s strategic focus on greenwashing conduct in the funds sector continues. Last Friday, the regulator filed proceedings in the Federal Court of Australia against LGSS Pty Limited (LGSS), which is trustee for the superannuation fund Local Government Super (ABN 28 901 371 321) (Active Super).
Broadly, ASIC alleges that LGSS exposed Active Super members to investments in tobacco, gambling, Russia, oil tar sands projects and coal mining, when it claimed to restrict or eliminate investments in these sectors. It is seeking declarations, pecuniary penalties, adverse publicity orders and an injunction.
This is the third “green washing” civil penalty proceeding ASIC has commenced this year, following earlier claims against Mercer Super and Vanguard Investments.
LGSS is the trustee of Active Super and manages Active Super’s assets. As at 1 July 2023, Active Super managed ~$13.5 billion in super assets for the benefit of ~89,000 Active Super members.
ASIC alleges that from 1 February 2021 to 30 June 2023 (Relevant Period), LGSS promoted Active Super as an ethical super fund which provided responsible and sustainable investments for its members and marketed itself as a leader in responsible investment. It did so via a range of public channels, including through statements on Active Super’s website and social media, publication of an annual impact report, a sustainable and responsible investment policy and product disclosure statements and public statements made by a senior LGSS executive on its behalf on Active Super’s investments.
Relevantly, LGSS is alleged to have represented that the fund would restrict or eliminate certain investments that posed particular risk to the environment and the community, including tobacco manufacturing, oil tar sands and gambling. LGSS is also alleged to have stated that Active Super would not invest in Russia following the invasion of Ukraine.
Contrary to those representations, ASIC alleges that Active Super held 28 holdings, either directly or indirectly, which exposed members to securities it claimed to restrict or eliminate. The alleged misleading representations LGSS made in relation to Active Super, and the holdings LGSS held that was alleged to be inconsistent with the representations included the following:
Example of representation made
Example of LGSS holdings that contravened the representation
Gambling Representations – Active Super would not make or hold investments in companies that derive more than 10% of their revenue from gambling
“We will not invest in organisations that derive more than 10% of their revenue from…gambling”
(Active Super’s website)
The Star Entertainment Group Limited, Tabcorp Holdings Limited
Tobacco Representations – Active Super would not make or hold investments in companies that derive any revenue from tobacco
“Today is World No Tobacco Day. Did you know we were the first super fund to stop investing in tobacco over 20 years ago? Learn more about our responsible investment approach…”
(Active Super’s Facebook page and Instagram)
Russia Representations – following Russia’s invasion of Ukraine, Active Super would divest its Russian investments and make or hold no further investments in Russia
“Russia investments out in the cold
Following Russia’s invasion of Ukraine, which runs counter to our responsible investment principles, Active Super has now added Russia to its list of restricted countries in which the fund will not invest.
Furthermore, while Active Super did have a small amount of exposure to Russian investments via two Emerging Markets funds (which equated to 0.1% of our total funds under management), soon after the conflict began, these funds began divesting of any Russian stocks.”
(Active Super website and also emailed to Active Super’s members).
Rosneft Oil Company
Oil Tar Sands Representations – Active Super would not make or hold investments in companies that derive any revenue from oil tar sands projects
“The Trustee has determined that the Fund will not make investments in companies that derive 33.3% (one-third) or more of their revenues in high carbon sensitive activities… This list will include companies which derive their revenue or assets from coal mining”
(Active Super sustainable and responsible investment policy)
Coal Mining Representations – Active Super would not make or hold investments in companies that derive one-third or more of their revenue from coal mining
“Active Super will not actively invest in companies that derive 33.3% or more of their revenue from:
(Active Super product disclosure statements)
Coronado Global Resources, New Hope Corporation Limited
ASIC alleges LGSS had knowledge of at least some of those investments because they were disclosed in Investment Quarterly Reports. These Reports were managed by LGSS and noted exposure to all companies that had been placed on an investment restrictions list that was intended to assist LGSS make ethical and responsible investment decisions. The Reports were also presented to Active Super’s Investment Committee, which included officers of LGSS.
LGSS is also alleged to have claimed that Active Super had an “overlay process” by which it aimed to eliminate any exposure to restricted companies through shorting the same number of securities. During the Relevant Period ASIC alleges the overlay process was not implemented. Instead, LGSS is said to have used an ASX200 Index Exchange Traded Fund (ETF) as a “replacement long portfolio”. This is alleged to have resulted in Active Super making investments that led to further exposure to companies contrary to its representations.
a. More to come
ASIC’s strategic focus on greenwashing appears entrenched and likely to see numerous actions over the medium term. ASIC has acknowledged it is a formal enforcement priority and we expect this focus to be further informed by international regulatory publications that are tending to set higher benchmarks for ESG related disclosures, including the climate-related disclosure standard recently released by the International Sustainability Standards Board (ISSB).
As noted in our earlier update, from 1 July 2022 to March 2023 ASIC has issued:
Those actions related, for example, to “net zero” statements / targets and the use of terms like “carbon neutral”, “clean” or “green”, where ASIC considered those statements lacked a reasonable basis.
b) Disclosure of the process is critical
Green investment mandates necessarily have vetting, monitoring and measuring processes to carry out exclusions and selection. The task is complex given the layered, and dynamic, nature of corporate activities for companies and states.
Being clear about the limitations of the processes used to carry out ‘green’ investment mandates is important, so the public can understand the limitations and the realistic outcomes of the mandate. Broad statements of ESG related ‘conclusions’ should be considered very carefully, such conclusions are only as strong as the process underlying them.
c) Scrutinise indirect exposure
Processes to monitor indirect holdings and ensure exposures are, and remain, consistent with green mandates requires careful planning. For example, Active Super’s exposure to:
Where monitoring processes are periodic, this limitation needs to be disclosed clearly, along with the exposure to funds generally (especially where funds with differing ESG priorities are included).
d) The superannuation sector on ASIC’s radar
Given the compulsory superannuation regime in Australia, and the public and media interest in ESG metrics, we expect ASIC to be particularly interested in ESG representations by superannuation funds. There is arguably a particular protective focus in this space also given the broad demographics of the potential investor base, which cannot be assumed to be of high financial sophistication.
This also raises interesting issues where the method of eliminating exposure to a certain type of stock is via a more complex process than simply ‘not investing’ in the stock (for example, the Active Super ‘overlay process’). While not addressed squarely, we anticipate more complex arrangements, potentially not well understood by many retail investors, could become the focus of regulatory attention in the future.
e) New Federal Laws coming
ASIC has stated that it will also expand its scrutiny of greenwashing conduct once climate-related financial disclosure laws are settled (with a Federal Government consultation paper released in June this year). These new laws might provide further details on the required disclosures and actions across a fund, and not just in respect of specific targeted ‘green funds’.
 See ASIC Deputy Chair Karen Chester speech “ASIC and greenwashing antidotes” (10 May 2023): https://asic.gov.au/about-asic/news-centre/speeches/asic-and-greenwashing-antidotes/; also see IFRS Sustainability Disclosure Standard (climate-related disclosures) (June 2023) https://www.ifrs.org/content/dam/ifrs/publications/pdf-standards-issb/english/2023/issued/part-a/issb-2023-a-ifrs-s2-climate-related-disclosures.pdf?bypass=on
 See ASIC’s greenwashing interventions (May 2023) report, and the article ‘ASIC pursues ‘several’ super funds for greenwashing, expects court actions’, Australian Financial Review, 13 March 2023
 Australian Government: “Climate-related financial disclosure” Consultation Paper (June 2023) - https://treasury.gov.au/sites/default/files/2023-06/c2023-402245.pdf.
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