Vanguard pinged for greenwashing

In proceedings brought in the Federal Court of Australia, ASIC has successfully established that one of the world’s largest investment managers contravened the ASIC Act when it made a series of misleading representations about the ‘green’ credentials of one of its funds.

This case, which is part of a broader focus by the regulator on greenwashing, was against Vanguard Investments Australia (Vanguard). It arises from representations made by Vanguard in relation to the Vanguard Ethically Conscious Global Aggregate Bond Index (Fund).^[1]

Those representations, made in a number of different contexts, were to the effect that the Fund offered an “Ethically Conscious” investment opportunity, and that securities related to fossil fuels, alcohol, tobacco, gambling, military weapons, civilian firearms, nuclear power and adult entertainment were excluded from the Fund. ASIC alleged that the representations were misleading because of limitations in the screening and exclusion processes, and because of the resulting composition of the Fund. It was alleged that, in making those representations, Vanguard had contravened prohibitions in the ASIC Act against making false or misleading representations and engaging in conduct liable to mislead the public in relation to the nature of financial services.^[2]

Vanguard largely admitted the case against it, and so the primary task for the Court was to satisfy itself that the alleged contraventions were established on the basis of the admissions and the evidence (which it found were established), and to determine some narrow issues in dispute. A penalty will now be determined by the Court at a hearing in August 2024.

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

Key takeaways:

ESG disclosures need to be precise and verifiable – absolute or generalised statements regarding ‘green’ credentials can be misleading if they do not disclose relevant limitations in the underlying screening, exclusion and verification processes;
The ESG investment criteria and the system of investigation and screening should be explained clearly and sufficiently prominently. Statements made about the fund composition following these processes (e.g. the ‘outcome’) should be made carefully and checked against both the limitations of the screening processes and the actual make-up of the fund.
Where reliance is placed on third-party indexes or methodologies for selection or exclusion into a fund, the limitations or rules of the third party system should be clearly disclosed and should inform the statements made about the ESG credentials of the fund.
While some of the alleged representations arose from the PDSs, others were made on Vanguard’s website, in a media release, in an interview published on YouTube, and at a fund manager event. Accordingly, care should still be taken in relation to statements made in less formal settings.

What was the case about?

The Fund was designed to track the return of the Bloomberg MSCI Global Aggregate SRI Exclusions Float Adjusted Index (Index). The Index was designed such that securities needed to satisfy certain ESG criteria to be included in the Index.

Between 7 August 2018 and 17 February 2021 (relevant period), Vanguard made representations regarding the Fund through:

12 Product Disclosure Statements (PDS),
a media release in respect of the Fund,
statements on Vanguard’s website,
a Finance News Network Interview on YouTube, and
a presentation at a Finance News Network Fund Manager Event published online.

What did Vanguard admit and what did the Court find?

Vanguard admitted that in respect of the media release, the YouTube interview and the online presentation that it conveyed:

that the Fund offered an ethically conscious investment opportunity and the Fund did this by seeking to track the Index;
that before being included in the Index, and therefore the Fund, securities were researched and screened against applicable ESG criteria. The ESG criteria relate to fossil fuels, alcohol, tobacco, gambling, military weapons, civilian firearms, nuclear power and adult entertainment; and
that securities that violated applicable ESG criteria were excluded or removed from the Index, and therefore, the Fund.

Vanguard admitted that these representations were misleading as:

i) the research and screening of securities for inclusion in the Fund against the applicable ESG criteria had significant limitations that were not disclosed, including that:

issuers in treasury, securitised and many government-related and private companies were not researched and screened against the applicable ESG criteria (Entity Limitation);
for companies with multiple issuing entities that shared a stock exchange “ticker”, the ESG research was only conducted for the company with the largest debt outstanding (Ticker Limitation); and
the fossil fuel screen did not cover companies that derived revenue from the transportation or exploration of thermal coal (Fossil Fuel Limitation)

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

iii) the Fund included issuers that violated applicable ESG criteria.

The Representations were also reinforced by the name of the fund, which included the words “Ethically Conscious”.

In respect to the representations in the PDS and the website, ASIC alleged misrepresentations in line with those above, with Vanguard admitting that the representations set out in (1)-(2) above were made, but contested the scope of the representation of (3). That is, Vanguard contested whether its representations were to the effect that all securities were researched and subject to the ESG exclusions (ASIC’s position), or only securities issued by companies (Vanguard’s position).

The Court ultimately found in favour of Vanguard’s position as it considered Vanguard made clear representations that the Index includes various bonds, including government and corporate bonds, but that the Index only excludes company bonds based on the ESG criteria.

Key takeaways

ESG disclosures need to be precise and verifiable

While it can be attractive from a marketing perspective for fund managers to use generalised or absolute statements, the Vanguard case illustrates the risks in doing so in a sector where measurement and screening is often a complex exercise. For example, in this case, Vanguard’s generalised statement in its PDS was:^[3]

“The index excludes companies with significant business activities involving fossil fuels, alcohol, tobacco, gambling, military weapons and civilian firearms, nuclear power and adult entertainment. Details on the benchmark methodology can be accessed by visiting Bloomberg Barclays at www.bloomberg.com,”

It was held that this failed to sufficiently disclose the various limitations in its methodology, including the Ticker, Entity and Fossil Fuel Limitations.

This can be compared to Vanguard’s amended statements, also referred to in the case, which provided:^[4]

“The Index provider screens public companies to check for ties to fossil fuels, nuclear power, alcohol, tobacco, gambling, weapons and adult entertainment as well as conduct related screens based on severe controversies, so that they can be excluded from the Fund. Investors should be aware that the Index provider’s screening process does not review government bonds, securitised fixed rate bonds and some company structures, particularly government related corporations and non-listed companies, for ties to these business activities.

Bonds issued by these non-screened entities may still be contained in the Fund. Details on the benchmark methodology can be accessed by visiting Bloomberg Barclays at www.bloomberg.com/professional/product/indices/bloombergbarclays-indices-factsheets-publications/.

Warning: Vanguard has elected to amend the above information having recently discovered that some entity structures, including non-listed companies, are not excluded by the screens applied by the index provider. As a consequence, we have updated this index information whilst we continue to investigate the level of exposure the Fund has to securities with ties to fossil fuels, nuclear power, alcohol, tobacco, gambling, weapons and adult entertainment. Where further information becomes available, we will provide any updated information on our website or otherwise by way of a reissue of the PDS.”

ASIC did not take issue with these clarifying statements that Vanguard added to its PDS in February 2021.

Further, generalised statements will not be excused in more short form media such as media releases, website statements, and where fund representatives promote a new product via interviews and presentations (that may be subsequently published online). These contexts require particular care and qualifying statements.

The ESG investment criteria and the system of investigation and screening should be explained clearly and sufficiently prominently.

In March 2021, Vanguard included on its website a clarifying statement that provided further details regarding its screening process. While no particular findings are made about that amendment, it was likely helpful in limiting the period the prosecution to February 2021 because it clearly flags limitations of the screening process and its consequences, stating that:^[5]

“Investors should be aware that the index methodology only screens the securities of issuers that are researched by MSCI. The screening process does not review government securities, and certain securitised assets and company structures, particularly government related corporations and non-listed companies. Accordingly, securities issued by non-screened entities may also be contained in the Index that is tracked by the ETF.”

Looking forward - ASIC’s intensifying greenwashing focus

Greenwashing has been a clear and stated ASIC regulatory priority in recent years, and remains so for 2024. The action is part of a broader ‘whole of ASIC’ focus on sustainable finance and investments, and follows an admission by Mercer Super in respect of ASIC claims over sustainability-related misrepresentation (which may lead to a penalty in excess of $10 million), an action filed against Active Super and a range of greenwashing infringement notices issued to fund promoters and asset management companies.[6] ASIC’s focus is supported by the growth in sustainability related financial products and the significant consumer interest in ESG metrics, including in the retail superannuation sector.

We expect ASIC will continue to be attuned to potential competitor complaints (and investigations against greenwashing conduct), making it imperative for market participants to take a proactive approach to compliance, also having regard to the forthcoming climate disclosure laws.

^[1] JWS wrote about this case in July 2023, ‘ASIC files greenwashing case against Vanguard Investments’.

^[2] Australian Securities and Investments Commission Act 2001 (Cth) s 12DB(1)(a),(e) and s12DF (‘ASIC Act’).

^[3] ASIC v Vanguard Investments Australia Ltd [2024] FCA 308 at [41].

^[4] ASIC v Vanguard Investments Australia Ltd [2024] FCA 308 at [64].

^[5] ASIC v Vanguard Investments Australia Ltd [2024] FCA 308 at [66].

^[6] Hannah Wootton, ‘Vanguard guilty of greenwashing in ASIC’s first major court win’, Australian Financial Review (online, 28 March 2024); See also ASIC, ASIC issues infringement notices to Northern Trust Asset Management for greenwashing (19 December 2023); ASIC, ASIC commences greenwashing case against Active Super (11 August 2023); ASIC, ASIC issues infringement notice to superannuation fund promoter for greenwashing (2 May 2023).