Vanguard misled investors about its ethical fund, Federal Court finds

Fund management giant Vanguard misled investors about its $1 billion ethical fund, the Federal Court has ruled in a major win for the corporate regulator in its crackdown on greenwashing.

The Australian Securities and Investment Commission launched legal action against Vanguard, alleging it had not screened all securities in its Ethically Conscious Global Aggregate Bond Index Fund against environmental, social and governance (ESG) criteria as it had claimed.

ASIC secured a major court victory after the Federal Court found Vanguard engaged in misleading conduct because its sustainable fund exposed investors to companies with links to fossil fuels, oil and gas exploration.

Vanguard, which has $11 trillion in assets under management globally, had claimed the index did not invest in bond issuers with significant business activities in a range of industries including fossil fuels.

However, the corporate regulator found the index fund was exposed to activities linked to gas and exploration with 42 companies who issued at least 180 bonds having breached ESG criteria between August 2018 and February 2021. They included companies such as Abu Dhabi Crude Oil Pipeline and Chevron Philips Chemical, according to ASIC.

This is the second time ASIC has taken action against Vanguard over greenwashing claims, having slapped the fund manager with a $40,000 fine in 2022 over disclosure documents for another fund that claimed to exclude companies involved in significant tobacco sale.

“Vanguard, in trade or commerce, engaged in conduct in relation to financial services that was liable to mislead the public as to the nature, characteristics and the suitability for the purpose of those financial services, and thereby contravened … the Australian Securities and Commission Act,” Justice Michael O’Bryan said on Thursday morning.

Vanguard declined to comment after O’Bryan handed down his judgement in Melbourne, and pointed to a statement it issued last year, noting the fund manager had self-identified and self-reported a breach to ASIC.

Vanguard said in a statement: “At the time, the description of the exclusionary screens did not provide a sufficiently detailed explanation that certain debt issuers lacking research coverage were still included in the benchmark. As a result, it is possible the portfolio held exposure to certain securities that may not have been reasonably expected by investors.

“The issue was self-identified and self-reported to ASIC, and 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,” it said.

ASIC deputy chair Sarah Court said the regulator’s first greenwashing court victory showed its commitment to taking on misleading marketing claims. “It sends a strong message to companies making sustainable investment claims that they need to reflect the true position,” Court said.

ASIC has identified greenwashing as a top enforcement priority for 2024.

The decision comes just months after ASIC successfully pursued retail superannuation giant Mercer for misleading members about the sustainability of its investments.

Mercer is expected to pay an $11.3 million fine after the regulator alleged the super fund manager claimed its Sustainable Plus fund excluded companies that were involved in fossil fuels, while it was actually investing in companies such as AGL Energy, BHP and Whitehaven Coal.

It also claimed its ethical fund did not invest in alcohol producers and gambling companies, although it held shares in both the sectors including casino operator Crown Resorts and beer maker Heineken.

ASIC has identified greenwashing, which it defines as “the practice of misrepresenting the extent to which a financial product or investment strategy is environmentally friendly, sustainable or ethical” as a top enforcement priority for 2024.

Court earlier this year said the regulator would focus on net-zero statements and targets made without merit; the use of words like carbon-neutral, clean and green without basis; and inaccurate labelling or vague terms in sustainability-related funds.

Australian Shareholders Association chief executive Rachel Waterhouse said the ruling underlined the importance of ensuring investors are given what they have been promised.

“We consider [ESG] claims would induce investment from those looking for a fund that aligns with their ethics and values,” Waterhouse said. “In order to maintain confidence in long-term investments, fund managers need to make sure what you see is what you get.”

The case against Vanguard will return to court in August for a penalties and costs hearing.

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