The Australian Securities and Investments Commission (ASIC) has claimed its first legal ‘greenwashing’ scalp after a muted court win against Vanguard last week over a global bond fund offered on both sides of the Tasman.
In a release, the Australian financial regulator says Federal Court Justice O’Bryan found the global passive investment firm breached the “ASIC Act numerous times when it made false or misleading representations about the ESG exclusionary screens that were applied to the Vanguard Ethically Conscious Global Aggregate Bond Index Fund”.
However, the result rests mainly on a Vanguard confession with the judge knocking back a key ASIC allegation, which may have a bearing on the penalty.
“Vanguard admitted to engaging in conduct that was liable to mislead the public and that it had made representations that were false or misleading,” in product disclosure statements as well as marketing and media materials for the ESG-screened global bond fund, the release says.
ASIC lodged the case almost nine months ago, claiming Vanguard misled investors in the Ethically Conscious Global Aggregate Bond Index Fund – including a NZ dollar-hedged version used by some KiwiSaver providers – over the extent of sector exclusions in the strategy and underlying MSCI index.
About half of the fixed income securities by number, and almost three-quarters by value, in the fund were not screened for exposure to sectors such as fossil fuels, pornography or tobacco, ASIC found.
But while Justice O’Bryan confirmed the breaches as admitted by Vanguard, he rejected a claim by the regulator that some disclosure materials led investors to infer that all securities in the fund and index were subject to ESG screens rather than only corporate bonds.
Corporate bonds represented about half of the Vanguard fund portfolio with 90 per cent of those company fixed income securities screened as per the stated ESG filters.
“The issue in dispute is not whether the use by Vanguard of the phrase ‘ethically conscious’ in connection with the Fund was misleading. That has been admitted by Vanguard,” O’Bryan says in the ruling. “The issue in dispute is only 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.
“… Underlying ASIC’s submissions was an unhelpful blurring of the concepts of context and causation.
“In my view, none of the so-called contextual matters relied on by ASIC altered the plain meaning of the impugned statements in Vanguard’s PDSs and on its website, which were to the effect that securities issued by companies were researched and screened against applicable ESG criteria, and that securities issued by companies that violated those criteria were excluded or removed from the Bloomberg SRI Index and therefore the Fund.”
Nonetheless, ASIC deputy chair, Sarah Court, said the ruling was a landmark for the regulator and serves as a warning to the wider fund industry.
“… the case shows our commitment to taking on misleading marketing and greenwashing claims made by companies in the financial services industry,” Court said. “It sends a strong message to companies making sustainable investment claims that they need to reflect the true position.”
Vanguard will face a penalty hearing in August.
While the case marks ASIC’s inaugural greenwashing court win, the regulator is also pursuing Mercer Australia through the legal system over similar breaches.
The Australian corporate cop filed the Mercer claims in February last year, alleging dozens of stocks held in the multi-manager’s ‘Sustainable Plus’ funds contravened the stated ESG policies.