On 28 March 2024, the Federal Court handed down its verdict on the greenwashing civil penalty action brought by the Australian Securities and Investments Commission (ASIC).

Justice O’Bryan found that Vanguard Investments Australia Ltd (Vanguard) as responsible entity, had contravened section 12DF(1) of the Australian Securities and Investments Commission Act 2001 (Cth) by making false and misleading representations about certain environmental, social and governance (ESG) screens applied to investments in the Vanguard Ethically Conscious Global Aggregate Bond Index Fund (Fund), which tracks the Bloomberg Barclays MSCI Global Aggregate SRI Exclusions Float Adjusted Index (Index).

Background

Vanguard represented in a range of communications that the ESG screen applied at the Index level excluded companies with significant business activities involving fossil fuels, alcohol, tobacco, gambling, military weapons, civilian fire arms, nuclear weapons and adult entertainment.

However, the ESG screens applied had limitations which meant that a proportion of securities in the Index, and therefore the Fund, were from issuers that were not researched or screened against applicable ESG criteria. This was evident from a spreadsheet produced by Vanguard that provided data regarding the categories, number and market value of the securities during the 2021 time period. The Court noted 46% of all securities held by the Fund were not subject to ESG screening. With respect to those securities issued by companies, approximately 10% were not subject to ESG screening.

Admitted contraventions

The Court found, and Vanguard admitted that statements it made concerning ESG screening were false or misleading. In particular, representations that the Fund offered an “ethically conscious” investment opportunity by tracking the Index were false or misleading.

Court’s findings on the liability issue

Interestingly, the disputed issue was whether Vanguard represented that ‘all securities’ were researched and screened against ESG criteria or whether representations were confined to securities issued by companies only. On this issue, the Court upheld Vanguard’s submission. Justice O’Bryan agreed with Vanguard that the PDS issued in respect of units in the Fund and the Vanguard 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 stated it was “complete truth in the sense that the ESG screening was limited to companies and did not extend to governments or government related entities”.

The Court will consider the appropriate penalty to impose on Vanguard for the conduct on 1 August 2024.

Conclusion

ASIC continues to make it clear that greenwashing is an enforcement priority. ASIC has issued multiple infringement notices and has another two greenwashing-related civil penalty actions before the Federal Court.

This case highlights the importance of disclosure and explaining within the disclosure, how ESG screening is applied across a fund portfolio.