Vanguard Australia has been hit by a fine equivalent to almost half its 2022 financial year annual profit over previously agreed greenwashing breaches in an ‘ethically conscious’ global bond fund marketed on both sides of the Tasman.
The A$12.9 million penalty handed to Vanguard in the Australian Federal Court last week tops the A$11.3 million charge levied against Mercer in August over similar environmental, social and governance (ESG) product mishaps.
In setting the fine, Federal Court judge, Justice O’Bryan, noted the Australian arm of the NZ$10 trillion plus passive investment giant made some “reckless” claims in marketing materials over the green content of its Vanguard Ethically Conscious Global Aggregate Bond Index Fund.
And errors in more formal product disclosure statements for the fund – while falling short of recklessness – “revealed a very substantial failure in Vanguard’s practices with respect to legal compliance”, the judge said in the ruling.
As at the end of August this year, the NZ dollar-hedged version of the ‘ethically conscious’ bond fund – issued under the Trans-Tasman Mutual Recognition (TTMR) regime – reported more than NZ$1 billion under management – including almost NZ$790 million in the wholesale class.
In a statement, the Financial Markets Authority (FMA) said Vanguard had met its obligations under TTMR to the NZ market via official disclosures.
“NZ investors are deemed to be properly notified by the Disclose Register filing,” the FMA release says.
The statement says Vanguard had also been “proactive” in fronting with the NZ regulator on the ASIC charges as well as subsequent changes to the product.
“We note details of these steps are contained in the most recent judgment,” the FMA says. “We consider that issuers using the mutual recognition regime or offering products directly into the New Zealand market should take note of the decisions made in this matter and take steps to ensure their own processes are adequate to be able to substantiate claims that they are making about the nature and quality of their investment products.”
The Court found the index manager in breach of Australian Securities and Investments Commission (ASIC) legislation in March this year for misleading investors about the extent of exclusions in the ‘ethically conscious’ fixed income vehicle.
Despite claiming ethical purity, almost three-quarters of the underlying securities in the fund “were not researched or screened against applicable ESG criteria”, the ruling says.
Furthermore, the Vanguard fund “ESG criteria had severe limitations” while some securities even fell foul of those restrictions during August 2018 to February 2021.
Sarah Court, ASIC deputy chair, said in a statement: “This is an important decision and the penalty imposed is the highest yet for greenwashing conduct. Greenwashing is a serious threat to the integrity of the Australian financial system, and remains an enforcement priority for ASIC.”
The ‘ethically conscious’ global bond vehicle attracted more than A$1.1 billion from 1,000 or so clients including KiwiSaver and other NZ institutional investors during the breach period. However, Vanguard booked losses on the fund over those years.
ASIC, which prosecuted the case amid a slew of other greenwashing actions, was seeking a fine of more than A$18 million for the Vanguard breaches in a range that had a “theoretical maximum pecuniary penalty in the billions of dollars”, the ruling says.
“In the present case, the maximum penalty that may be imposed for the admitted contraventions is so high as to be practically meaningless,” Justice O’Bryan said.
The ruling cites several Vanguard internal documents including an email from then senior Australian executives Rachel White and Balaji Gopal to the manager’s global investment committee: “Vanguard has an opportunity to help shape this [ESG] trend and differentiate itself with a clear message and a low cost offer in Australia and New Zealand (‘NZ’), where investors are increasingly seeking products and investments that reflect their ESG values.”
Justice O’Bryan said despite several warnings from internal staff and third-party researchers that the Vanguard fund might’ve not been true-to-label, executives pushed ahead with the launch.
“I infer that the desire to promote and market the Fund as ‘ethically conscious’ took priority over ensuring that the composition of the Fund, and the extent of ESG screening, was accurately disclosed,” he said in the penalty ruling last week.
Vanguard Australia reported a profit of A$26.1 million in the financial year ending December 31, 2022, on income of A$300.5 million: the ‘ethically conscious’ global bond fund “earned revenue of $1,345,096 and incurred a net loss of $2,303,934” over the same period, the court document shows.
In addition to the fine, Vanguard must publish a ‘notification of misconduct’ on its website for a 12-month period.
As at the end of August this year, the NZ dollar-hedged version of the ‘ethically conscious’ bond fund reported more than NZ$1 billion under management – including almost NZ$790 million in the wholesale class.
The Vanguard fund is issued under the Trans-Tasman Mutual Recognition (TTMR) regime.
In a statement, the Financial Markets Authority (FMA) said Vanguard had met its obligations under TTMR to the NZ market via official disclosures.
“NZ investors are deemed to be properly notified by the Disclose Register filing,” the FMA release says.
Vanguard had also been “proactive” in fronting with the NZ regulator on the ASIC charges as well as subsequent changes to the product.
“We note details of these steps are contained in the most recent judgment,” the FMA says in the statement. “We consider that issuers using the mutual recognition regime or offering products directly into the New Zealand market should take note of the decisions made in this matter and take steps to ensure their own processes are adequate to be able to substantiate claims that they are making about the nature and quality of their investment products.”