The Federal Court of Australia has ordered Vanguard Investments Australia to pay a $12.9 million penalty for making misleading claims about its environmental, social, and governance (ESG) exclusionary screens. These screens were applied to investments in the Vanguard Ethically Conscious Global Aggregate Bond Index Fund.
The Australian Securities and Investments Commission (ASIC) Deputy Chair, Sarah Court, emphasised the significance of the decision, noting that the penalty is the highest imposed so far for greenwashing. “Greenwashing is a serious threat to the integrity of the Australian financial system and remains a top enforcement priority for ASIC,” she said.
Vanguard admitted to misleading investors by claiming the fund would exclude bond issuers involved in industries such as fossil fuels, a practice that was not consistently applied. Sarah Court 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.”
Justice O’Bryan commented on the seriousness of Vanguard’s misconduct, stating that the company misrepresented the fund’s “ethical” characteristics, which were its main selling point.
“By its misleading conduct, Vanguard misrepresented the ‘ethical’ characteristics of the Fund. Approximately 74% of the securities in the Fund by market value were not researched or screened against applicable ESG criteria. Further, Vanguard benefited from its misleading conduct. The misrepresentations enhanced Vanguard’s ability to attract investors to the Fund, and enhanced Vanguard’s reputation as a provider of investment funds with ESG characteristics, as compared to what would have been the case if Vanguard had accurately disclosed the ESG screening limitations and the Fund’s exposure to issuers engaged in the excluded industries,” O’Bryan said.
The misleading claims were disseminated across various public platforms, including product disclosure statements, a media release, Vanguard’s website, and even a Finance News Network interview.
The Fund’s investments were based on the Bloomberg Barclays MSCI Global Aggregate SRI Exclusions Float Adjusted Index. Vanguard had asserted that the Index excluded companies with significant activities in various industries, including fossil fuels. However, it has since admitted that some securities within both the Index and the Fund came from issuers that were not properly researched or screened against the stated ESG criteria.
As of 26 February 2021, the Vanguard Ethically Conscious Global Aggregate Bond Index Fund had over $1 billion in assets under management. The Fund is a registered managed investment scheme, with Vanguard serving as both the Responsible Entity and the Investment Manager. It includes the ETF, AUD Hedged, and NZD Hedged classes of units.
Vanguard’s case follows a similar greenwashing penalty imposed on Mercer Super, which was fined $11.3 million earlier this year.
