ASIC sues Vanguard over greenwashing allegations, warns more court action to come

The corporate regulator’s second greenwashing legal case accuses the fund giant of misleading investors with ‘ethically conscious’ fund claims, and signals further lawsuits to come.

The Australian corporate regulator is suing global fund giant Vanguard for allegedly engaging in greenwashing when it told investors its “ethically conscious” fund would exclude bonds of oil and gas companies when it did not.

It is the second greenwashing legal case from the Australian Securities & Investments Commission after it sued Vanguard’s rival Mercer earlier this year over similar allegations.

The proceedings follow warnings from the regulator in June 2022 about its intention to crackdown on misleading claims about financial products purporting to be ethical or socially responsible, showing it intends to take retrospective action and file more lawsuits in the near future.

“We have a number of matters under investigation and I would expect that there will be further court action in due course,” ASIC deputy chair Sarah Court said in an interview.

She said the case against Vanguard was an “important” case that “if successful” would send a strong message about its expectations, as marketing efforts targeting investors’ interest in ethical investments surged.

“Consumers and investors are increasingly interested in this area and increasingly choosing to put their money in particular funds … that they decide meet their particular set of values or ethical considerations,” she said.

“Vanguard said this is an ethically conscious fund. It was for investors that were seeking ethically conscious screening of their investments. It said highly expressly that it would exclude bonds that had significant business activities in fossil fuels.”

“Our position is that if a company seeks to make these kinds of claims to encourage people to invest, they have to be true. It’s as simple as that,” Ms Court said.

In the fourth intervention against the world’s second-largest asset manager – including close to $40,000 in fines for separate greenwashing-related conduct – ASIC filed the legal action on Monday seeking court orders requiring Vanguard to publicise its contraventions as well as a pecuniary fine.

Supporting documentation to ASIC’s suit shows Vanguard’s Ethically Conscious Global Aggregate Bond Index fund included companies that “violated the ESG criteria” set out in its product disclosure statement.

That included at least 14 bond issuers that collectively accounted for at least 27 bonds.

Contrary to what Vanguard claimed in the fund’s PDS, a media release, a presentation and an interview with Finance News Network, ASIC “alleges that this particular investment fund did have exposure to issuers of bonds that have very direct associations with fossil fuels,” Mr Court said.

Instead, ASIC says the exchange traded fund was exposed to oil and gas companies including the Abu Dhabi Crude Oil Pipeline (ADCOP), Chevron Phillips Chemical Co., Colonial Pipeline Co, Empresa Nacional del Petróleo SA (ENAP), and John Sevier Combined Cycle Generation.

Investments in the fund – which opened in 2018 – were based on an index that Vanguard claimed excluded issuers that did not meet its environmental, social and governance criteria.

In the various statements between at least August 7, 2018 and February 17, 2021, Vanguard explicitly told investors that meant it excluded bonds issued by companies with ties to fossil fuels, such as thermal coal, oil and gas, and nuclear power.

The reality, however, was that almost half of the bonds (46 per cent) came from issuers that were not researched or screened against the criteria.

On February 15, Vanguard halted trading on the product and issued a supplementary PDS warning investors that neither the index to which the fund was linked to, nor the fund, researched or screened all issuers for exclusions as it had previously claimed.

Instead, it only researches public companies, leaving out securitised bonds, those of private companies and those linked to government-related entities.

Vanguard’s new communication to investors also stated the research did not cover companies that derived revenue from the transportation or exploration of thermal coal.

Vanguard Apology

In a statement on Tuesday, Vanguard apologised and said it never intended to mislead investors, adding that in early 2021, it had also “self-identified and self-reported a breach” to the regulator regarding a “weakness” in “the product disclosure”.

“At the time, the description of the exclusionary screens did not provide a sufficiently detailed explanation that certain debt issuers lacking research coverage were still included in the benchmark,” the statement said.

“As a result, it is possible the portfolio held exposure to certain securities that may not have been reasonably expected by investors.”

“We have fully co-operated with ASIC’s queries on the matter since it was first self-reported. There was never any intention to mislead, but Vanguard recognises it has not lived up to the high standards it holds itself accountable to and apologises for the concern this matter may cause for our clients.”

In June 2022, ASIC flagged it would ramp up its efforts to police the sector, issuing an information paper with its expectations. Since then, the regulator has intervened over 35 times over misrepresentations of sustainability-related risks, credentials or strategies in the sector.

ASIC’s first greenwashing court action against Mercer in March is pursuing the firm for allegedly misleading consumers into thinking some of its super funds were more green than it was.

The landmark case alleges six of Mercer’s “sustainable” funds had invested in BHP shares despite stating the schemes excluded companies involved in the extraction or sale of fossil fuels.

“Greenwashing itself is not a new phenomenon. It’s really a form of misleading and deceptive conduct and there have been laws about those things for years, so this is not a new area of the law,” Ms Court said. Enforcement action is always going to be retrospective (and) we’ve said we would be moving from guidance into more direct enforcement action and that’s exactly what the case is that we’ve taken today.”

“If ASIC is successful, it should send a strong message to the industry about the use of investment screens and how they apply to particular investments,” Ms Court added.

ASIC’s legal action also comes just over a week after the Australian Competition & Consumer Commission set out its own expectations on the subject after it found 57 per cent of businesses in a sweep review were making potentially misleading environmental claims.

That guidance applies to all Australian companies, not just financial firms, when making environmental and sustainability claims.