ASIC takes Vanguard to court alleging greenwashing over 'Ethically Conscious' fund

One of the country's largest exchange-traded fund providers has been accused of greenwashing by the corporate watchdog, which alleges Vanguard Investments Australia engaged in misleading conduct in its claims about certain environmental, social and governance (ESG) exclusionary screens for one of its funds.

A Vanguard Investments Australia spokesperson says the breach in product disclosure for the Vanguard Ethically Conscious Global Aggregate Bond Index Fund and ETF was self-identified and self-reported in early 2021.

Today that ETF alone is worth $705 million.

The Australian Securities and Investments Commission (ASIC) announced it had lodged civil penalty proceedings in the Federal Court against the company, alleging the fund was marketed to investors seeking, amongst other things, securities with an ethically conscious screen. 

Investments held by the Fund were based on an index called the Bloomberg Barclays MSCI Global Aggregate SRI Exclusions Float Adjusted Index (Index). Vanguard claimed the Index excluded issuers with significant business activities in a range of industries, including those involving fossil fuels. 

However, ASIC alleges that ESG research was not conducted over a significant proportion of issuers of bonds in the Index and therefore the Fund.  

As at February 2021, ASIC alleges the index and the fund included issuers that violated the applicable ESG criteria, including 42 issuers for the index and 14 issuers for the fund.

ASIC alleges that these bonds exposed investor funds to investments which had ties to fossil fuels, including those with activities linked to oil and gas exploration. 

"We know that investors are increasingly seeking investment options that exclude certain industries, and investors need to be able to rely on investment screens to help them make these choices," says ASIC deputy chair Sarah Court.

"In this case, Vanguard promised its investors and potential investors that the product would be screened to exclude bond issuers with significant business activities in certain industries, including fossil fuels. 

"We consider that the screening and research undertaken on behalf of Vanguard was far more limited than that being promised to investors, and we consider this constitutes another example of greenwashing."

ASIC alleges Vanguard misled the public in product disclosure statements (PDS) published between 7 August 2018 to 17 February 2021, a media release issued in August 2018, in statements on its website, statements made in an interview with Finance News Network and statements made in a presentation at a Finance News Network Fund Manager Event, both of which were recorded and published online.  

"ASIC will continue its focus on alleged greenwashing conduct and we continue to stress to the financial services industry that if exclusions in investments are promised, these exclusions need to be applied and promises upheld," Court says.

A spokesperson for Vanguard says as soon as the disclosure weakness was identified, Vanguard acted swiftly to inform investors and enhance the disclosure. 

"We have fully cooperated with ASIC’s queries on the matter since it was first self-reported," the spokesperson says.

"There was never any intention to mislead, but Vanguard recognises it has not lived up to the high standards it holds itself accountable to and apologises for the concern this matter may cause for our clients.   

Vanguard requested a trading halt on the ETF share class of the fund on 15 February 2021, which was lifted the following day once an announcement had been made as well as a unit holder notice.

"Vanguard contacted clients who made applications into the funds during this February 15-16 period and offered them the opportunity to withdraw their application. Where clients elected to proceed with a purchase, Vanguard provided a right to return the product and be repaid the application amount for a one-month period," the spokesperson explains.

"The Supplementary PDS (SPDS) for the ETF and the PDS for the funds were updated and issued on 17 February and 18 February 2021 respectively with an enhanced and more thorough description of the benchmark index methodology including greater detail in how the exclusionary screens were implemented."

In the two years that followed, Vanguard appointed a head of ESG product, and introduced additional compliance and product resourcing in the product disclosure and oversight teams. The group also claims to have enhanced its disclosure due diligence process and investing in improved technology to support product disclosure statement production.

ASIC is seeking declarations and pecuniary penalties from the court, as well as orders for Vanguard to publicise any contraventions found by the court.

To date the watchdog has issued more than $140,000 in infringement notices in response to concerns about alleged greenwashing, including three infringement notices totalling $39,960 against Vanguard for separate greenwashing conduct.

In February the regulator undertook its first ever court action over alleged greenwashing conduct, pertaining to "Sustainable Plus" options for Mercer Super members.