Vanguard set to face penalty hearing over greenwashing case

Global fund giant Vanguard will face a penalty hearing after admitting it told investors one of its ‘ethical’ funds would exclude oil and gas companies when it did not.

ASIC deputy chair Sarah Court during the ASIC annual forum at the Sofitel in Melbourne. Picture: Aaron Francis

Global fund giant Vanguard is set to face a penalty hearing in July after admitting it told investors one of its ethically sourced funds would exclude bonds of oil and gas companies when it did not.

But, the corporate watchdog did not convince Federal Court judge Michael O’Bryan he should adopt their suggested “declarations” about Vanguard’s conduct, in what could be an issue for a key ASIC legal case amid its crackdown on greenwashing.

There was already talk of ASIC appealing Justice O’Bryan’s declarations in court before a lengthy argument between him and Meg O’Sullivan KC who appeared for ASIC.

“Part of ASIC’s case is there is a headline ‘ethically conscious’ representation being made,” Justice O’Bryan said.

“You could turn … misleading misrepresentations into ten if you tried hard enough. Vanguard accept (the) headline representation conveyed and accept it was wrong. Then you want some subsidiary points that all securities are (not) screened,” he said.

“That’s really what the fight is about. (Your) primary submission is ‘it’s not enough, they should have done more’. I just don’t see it really helps you on your secondary points.”

ASIC wants declarations, pecuniary penalties and adverse publicity orders made against Vanguard “in respect of conduct liable to mislead the public and/or false or misleading representations comprising statements” between August 2018 and February 2021, regarding its Ethically Conscious Global Aggregate Bond Index Fund.

The composition of the fund was based on a Bloomberg index, and ASIC claimed it misled investors by telling them the securities in the index and fund were “screened against applicable environmental, social and governance criteria”.

ASIC also alleged Vanguard misled investors by telling them “the index and the fund excluded securities that violated the applicable environmental, social and governance criteria” in product disclosure statements, a media release, statements on its website and in a presentation.

Ms O’Sullivan told the court she “disagreed” with Justice O’Bryan that ASIC took “a micro approach” in its case.

“We haven’t descended into the minutiae,” she said.

Ms O’Sullivan said Vanguard was screening about “about half” of the securities on the index.

“It was a significant limitation. Only half of the universe was being researched and screened according to the ESG criteria,” she said.

The Bloomberg Index is based on a parent index, but “purports to exclude securities based on research and screening against environmental, social and governance criteria”, according to ASIC’s statement.

It came after Justice O’Bryan told Ms O’Sullivan not to use analogies because they were “not helpful” and urged against falling into the “Taco Bell fallacy”.

“In this area of law, (be) wary about attributing certain assumptions to readers which are not generated by the text they are reading. It’s just their assumptions. They could make assumptions based on their own ethical framework,” he said.

Justice O’Bryan also criticised ASIC’s case for arguing about the context of certain words used in what they said were the misrepresentations.

“Sometimes language is really plain. Even for a mum and dad investor it seems pretty plain,” he said.

At the end of the hearing, Ms O’Sullivan indicated ASIC would prefer Justice O’Bryan to deliver his reasons for making Vanguard’s declarations.

Justice O’Bryan said he anticipated publishing his reasons by Easter.