Vanguard to pay multimillion-dollar fine over greenwashing conduct

The funds manager has been slapped with a court ordered penalty after it was found guilty of greenwashing its ethically sourced $1bn-plus index fund.

Global funds giant Vanguard has been slapped with a $12.9m fine by the Federal Court after it was found guilty of greenwashing earlier this year.

The Australian Securities & Investments Commission successfully sued Vanguard over claims its $1bn Ethically Conscious Global Aggregate Bond Index Fund misled investors about the environmental, social and governance screening criteria applied to it.

ASIC alleged, and Vanguard agreed, 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”, Federal Court judge Michael O’Bryan previously said.

On Wednesday, justice Michael O’Bryan ordered the fund to pay the $12.9m fine to the Commonwealth and said it would have to publish a notice on its websites, which appears immediately, with the title “notification of misconduct by Vanguard”.

ASIC secured a win in its first greenwashing court case. Sarah Court (ASIC Deputy Chair) and Joe Longo (ASIC Chair) pictured. Picture: NewsWire / Josie Hayden

Justice O’Bryan ordered the notice to be visible for 12 months.

ASIC deputy chair Sarah Court said the penalty imposed was the “highest yet for greenwashing conduct”.

“Vanguard admitted it misled investors that these funds 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.

“It is essential that companies do not misrepresent that their products or investment strategies are environmentally friendly, sustainable, or ethical. The size of the penalty should send a strong deterrent message to others in the market to carefully review any sustainable investment claims.”

In a statement on Wednesday, Vanguard said it cooperated with ASIC’s investigation after it self-reported to the regulator in 2021.

“Vanguard apologises to its clients for these errors, which were unintentional. Vanguard acknowledges the importance of accurate product and marketing information in helping consumers to make informed investment decisions,” the statement read.

“Following a self-initiated independent review of relevant internal processes, Vanguard has strengthened its procedures, governance, technology and training to reflect the high standards investors expect of Vanguard products and services.

“Payment of this penalty will not be borne by Vanguard Australia investors.”

Vanguard admitted most of ASIC’s allegations, except for a minor dispute about liability.

At a hearing in August, ASIC argued the court should fine Vanguard an aggregate sum of $21.6m for making misleading statements in its product disclosure agreements, in a media release, on its website, via an interview on YouTube and another interview.

Vanguard accepted that a substantial penalty ought to be imposed, but said it should be within the range of $9m and $11.25m which incorporated a 25 per cent discount for cooperation.

Justice O’Bryan said there was a distinction between the YouTube representations, interview on trade press FNN and media release representations that referred to the ESG screening of “all” securities in the fund, while the PDS and website statements were “less inaccurate” because they “referred to the ESG screening of securities in the fund that were issued by companies”.

Justice O’Bryan said it was an agreed fact between the parties that in the past several years, in Australia and globally, there has been “a significant increase in demand for, and investment in, investment products focused on ESG considerations”.

“Vanguard developed and promoted the Fund in response to market demand for investment funds having those characteristics. Those facts increase the seriousness of the misleading conduct,” he said

ASIC claimed investors lost the opportunity to invest based on their values, Justice O’Bryan said.

“Vanguard accepted that its conduct had the potential to cause harm to its investors, characterised as the loss of an opportunity to make a different purchasing choice, had the investors been provided with accurate information,” he said.

The number of investors in the Vanguard Ethically Conscious Fund grew from 12 investors in August 2018 to 959 investors in February 2021. The market value of the funds under management in the Fund as at June 30, 2021 was in excess of $1.1bn.

ASIC claimed that Vanguard gained a number of benefits from the representations, including being able to attract more investors to the fund and an “enhanced reputation” as a fund that provides opportunities to invest in funds with ESG credentials.

As well, it earned higher management fees compared with a fund that did not have ESG credentials.

The greenwashing conduct was found to have occurred between about August 7, 2018 and approximately February 17, 2021.