Vanguard hit with a record $12.9m penalty in a major ASIC win against greenwashing

After handing down a finding in March this year against Vanguard Investments Australia, a division of the US-based Vanguard Group, the Federal Court today issued its civil penalty which is even harsher than the $11.3 million penalty handed to MercerSuperannuation (Australia) in August.

The Mercer greenwashing penalty followed admissions by the financial services group that it made misleading statements about the sustainable nature of some of its superannuation products. It was described by ASIC at the time as “a landmark case both for ASIC and for the financial services industry”.

However, Vanguard’s charges relate to claims about environmental, social and governance (ESG) exclusionary screens applied to investments in Vanguard’s Ethically Conscious Global Aggregate Bond Index Fund between 2018 and 2021.

The Federal Court heard that the misleading claims by Vanguard appeared in 12 product disclosure statements and a media release, in addition to statements published on Vanguard’s website.

The claims were also made via a Finance News Network interview on YouTube and a presentation at a Finance News Network fund manager event which was published online.

ASIC had alleged that, by its own admission, Vanguard had misled investors on several claims that it would exclude investments from bond issuers with activities in certain industries, including fossil fuels.

Federal Court Justice Michael O’Bryan, in handing down the penalty, says that Vanguard’s contraventions "should be regarded as serious".

"Further, Vanguard benefited from its misleading conduct," he says.

"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.

“A significant proportion of securities in the fund were from issuers that were not researched or screened against applicable ESG criteria, and the fund included issuers that violated applicable ESG criteria.”

Justice O'Bryan says about 74 per cent of the securities in the fund by market value were not researched or screened against applicable ESG criteria.

Vanguard’s Ethically Conscious Global Aggregate Bond Index Fund had $1 billon in asset under management in February 2021, with the civil claim brough by ASIC relating to promotion of the fund between August 2018 and 17 February 2021.

While Vanguard admitted most of ASIC's allegations, O’Bryan says the fund manager had disputed “one issue concerning liability, and that issue was confined to representations in the product disclosure statements and representations on Vanguard's website”.

“Vanguard said that the product disclosure statements and the website did not represent that all securities in the fund were researched and screened against applicable ESG criteria,” he said.

“Rather, they only represented that securities issued by companies were researched and screened against applicable ESG criteria before being included in the fund.”

O’Bryan says he accepts Vanguard’s submissions on this disputed issue of liability.

However, the Federal Court judge handed down the $12.9 million penalty order, the highest of any fine issued for a greenwashing case in Australia.

“This is an important decision and the penalty imposed is the highest yet for greenwashing conduct,” says ASIC’s deputy chair Sarah Court.

“Greenwashing is a serious threat to the integrity of the Australian financial system and remains an enforcement priority for ASIC.

“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.”

Vanguard says it accepts the Federal Court’s ruling, adding that the group “takes its regulatory obligations and responsibilities to its clients seriously”.

“Vanguard has cooperated with ASIC throughout this matter since informing the regulator of the issue and its approach to rectification in 2021,” the company says.

“There were no findings of financial loss to investors. 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.”

Justice O’Bryan also ordered that Vanguard issue a written “adverse publicity order” within 30 days. A “Notification of Misconduct by Vanguard” also will appear on websites identified by the court for a period of 12 months detailing the court’s ruling.