ASIC wins first greenwashing case, but court rejects parts of claim

A Federal Court judge has rejected some elements of ASIC’s first greenwashing case, but handed the corporate watchdog a win in its bid to tackle companies which exaggerate climate credentials.

ASIC deputy chair Sarah Court. Picture: Aaron Francis/The Australian

Wholesale and retail investors who bought into Vanguard Investment Australia’s ethically sourced $1bn-plus index fund were misled by greenwashing claims, and the global funds giant will face a penalty hearing in August, the Federal Court has ruled.

The Australian Securities & Investments Commission has claimed a victory in the case, but judge Michael O’Bryan did not ­accept all of the regulator’s arguments, describing some of them as “conceptually flawed”.

Vanguard admitted to breaching the law by making false and misleading claims about environmental, social and governance screening applied to the Vanguard Ethically Conscious Global Aggregate Bond Index Fund.

ASIC alleged, and Vanguard agreed, that the composition of the fund was based on the Bloomberg SRI (socially responsible investing) Index.

The Bloomberg SRI Index was supposed to exclude securities related to fossil fuels, alcohol, tobacco, gambling, military weapons, civilian firearms, nuclear power and adult entertainment.

But “a significant proportion of securities in the index and the fund were from issuers that were not researched or screened against applicable ESG criteria”, Justice O’Bryan said.

ASIC deputy chair Sarah Court said that by Vanguard’s “own admission it misled investors on a number of its claims”.

“In this case, Vanguard promised its investors and potential investors that the product would be screened to exclude bond issuers with significant business activities in certain industries, including fossil fuels, when this was not always the case,” she said.

“As ASIC’s first greenwashing court outcome, the case shows our commitment to taking on misleading marketing and greenwashing claims made by com­panies in the financial services industry.”

While Vanguard admitted it contravened the law “numerous times” on 12 product disclosure statements, a media release, statements on a website and at event presentations, it said the statements on its PDSs were false “for reasons that are narrower” than ASIC claimed.

Justice O’Bryan said the issue in dispute was not the use of the phrase “ethically conscious” in connection with the fund was misleading, but whether the PDSs and the website conveyed a “further representation” that ESG screening was applied to all securities in the Bloomberg SRI index and the fund.

“It is that contention which I reject,” he said.

“ASIC submitted that the title and description of the fund as ‘ethically conscious’ conveyed the message that all securities in the fund … were the subject of ESG research and screening.

“In the relevant period, the PDSs issued in respect of units in the fund and Vanguard’s 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.

“The submissions advanced by ASIC in support of its contention that the PDSs and the website conveyed a representation that ESG screening was applied to all securities are strained and, in some instances, conceptually flawed.”