ASIC Has Its First Greenwashing Win in the Federal Court

Introduction

Previously, we reported on how ASIC and the ACCC are cracking down on “greenwashing” – the practice of a company (or other entity) misleading people into believing that they are being more environmentally friendly, sustainable, or ethical than they actually are. A link to our previous report can be found here.

Since then, ASIC has made it clear that it is increasing its scrutiny of sustainability-related financial products and will actively take enforcement action to ensure that greenwashing does not erode investor confidence in the market.

To date, ASIC has commenced three test cases regarding greenwashing – these cases involve Vanguard Investments Australia Ltd (Vanguard), Mercer Superannuation (Australia) Limited (Mercer Super) and LGSS Pty Ltd (the trustee of Active Super) (Active Super). We are still awaiting the outcome of the Mercer Super and Active Super cases, however last week, the Federal Court delivered its judgement in respect of the Vanguard case.

On 28 March 2024, the Federal Court found that Vanguard had made false or misleading representations and engaged in conduct that was liable to mislead the public in relation to its “ethically conscious” fund offering in breach of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).

The Vanguard case is ASIC’s first successful greenwashing civil penalty action and importantly, sets the tone of what’s to come.

The Vanguard case 

On 24 July 2023, ASIC commenced proceedings against Vanguard, the responsible entity of an investment fund called the Vanguard Ethically Conscious Global Aggregate Bond Index Fund (Hedged) (Fund).

The Fund offered an ethically conscious investment opportunity to investors, who could invest directly in the securities that comprised the Fund.

The composition of the Fund was based on the Bloomberg Barclays MSCI Global Aggregate SRI Exclusions Float Adjusted Index (Index), which purported to exclude securities based on research and screening against an ESG criteria. The ESG criteria related to fossil fuels, alcohol, tobacco, gambling, military weapons, civilian firearms, nuclear power and adult entertainment.

ASIC alleged that between 2018 and 2021, Vanguard made representations to the effect that:

1. the Fund offered an ethically conscious investment opportunity;
2. before being included in the Fund, securities were researched and screened against the ESG criteria; and
3. securities that violated the ESG criteria were excluded or removed from the Fund.

The representations were alleged to have been made to the public in various ways, including via product disclosure statements, a media release, statements published on Vanguard’s website, an interview given by a manager of Vanguard and a presentation given by a manager of Vanguard.

ASIC alleged that the above representations were false or misleading, because:

1. the research and screening of securities for inclusion in the Fund against the ESG criteria had significant limitations which were not disclosed, namely:
   1. not all issuers of securities that were included in the Index were researched and screened against the ESG criteria, and only companies, and generally only publicly listed companies, were researched and screened against the ESG criteria;
   2. for companies with multiple issuing entities that shared a particular stock exchange “ticker”, the ESG research was not conducted on each such entity – rather, the ESG research was only conducted for the company with the largest debt outstanding (by market value) and that research was then applied to all other companies with the same ticker; and
   3. the fossil fuel screen did not cover companies that derived revenue from the transportation or exploration of thermal coal;
2. a significant proportion of securities in the Fund were from issuers that had not been researched or screened against the ESG criteria; and
3. the Fund included issuers that violated the ESG criteria.

ASIC also took issue with the fact that the Fund name containing the phrase, “Ethically Conscious”, which it alleged further reinforced the misleading representations.

Vanguard admitted to most (but not all) of ASIC’s allegations and on 28 March 2024, the Federal Court found that Vanguard had made false or misleading representations about the research and screening process applied to the investments in the Fund. The Court made declarations that Vanguard had engaged in conduct in relation to financial services that was liable to mislead the public as to the nature, characteristics and suitability for their purpose of those financial services (in contravention of s 12DF(1) of the ASIC Act) and was false or misleading in that it represented that the Fund and interests in it were of a particular standard, quality or grade, and had certain performance characteristics or benefits (in contravention of s 12DB(1)(a) and (e) of the ASIC Act).

We do not yet know what the Federal Court will order in terms of pecuniary penalties and adverse publicity orders against Vanguard – such penalties and orders will be the subject of a further hearing on 1 August 2024. Once those penalties and orders are determined, we will have a better idea of the range of civil penalties a Court is likely to impose for greenwashing, although we do expect they will be significant. The outcome of the Mercer Super and Active Super cases will also be relevant in this regard.

Takeaway messages

1. The Vanguard decision confirms that ASIC is continuing to place significant attention on greenwashing and that ASIC surveillance is likely to intensify going forward. The decision also confirms the Courts’ willingness to find in favour of greenwashing claims. We expect to see an increase in ESG litigation and regulatory investigations as ASIC continues to focus on greenwashing and other types of ESG fraud.
2. It is clear that the threat of regulatory action for greenwashing has fully crystalised and entities must place ESG-related risks high on their agenda. It is therefore crucial that entities ensure that all ESG-related claims and representations are substantiated and made on reasonable grounds. Where an exclusionary criterion for investment products is used, entities must ensure that the systems they put in place to implement exclusionary screens are appropriate (and appropriately applied). Entities must also ensure that they stay true to label when using ESG-related titles, and ensure they live up to the reasonable expectations of third parties.
3. The need for accuracy and reliability of information will become even more important in light of the recent release of the draft Treasury Laws Amendment Bill (Bill). The Bill proposes new standards for sustainability and climate-related financial disclosures, and contemplates the introduction of mandatory climate-related disclosure requirements under the ASIC Act and Corporations Act 2001.
4. Last year we reported that the ACCC had signalled that it will be investigating a number of businesses for potential greenwashing. Whilst the ACCC has not yet commenced any civil penalty proceedings, the outcome of ASIC’s test cases will likely influence the ACCC’s approach going forward. Whilst the ACCC has encouraged businesses to self-report, stating that businesses who cooperate and advise of any issues will be considered more favourably than those who wait for the ACCC to unearth problems, the Vanguard decision indicates that self-reporting is not a “get out of jail free card” – Vanguard had in fact self-identified and self-reported itself to ASIC in 2021. Entities should not rely on the hope of leniency for self-reporting and should instead focus on early prevention.