Summary
The Australian Securities and Investments Commission ("ASIC") has achieved another successful greenwashing enforcement outcome. On September 25, 2024, the Australian Federal Court ordered that Vanguard Investments Australia Ltd ("Vanguard") pay a significant penalty of AU$12.9 million (CDN$11.9 million) for misrepresentations relating to its Ethically Conscious Global Aggregate Bond Index Fund (the "Fund") and publish an adverse publicity notice on its website detailing its misconduct.1 ASIC touted this as "the highest [penalty] yet for greenwashing conduct" which should send a "strong deterrent message to others in the market to carefully review any sustainable investment claims."2
This penalty follows the liability hearing in March 2024 in which the Court found that Vanguard breached securities laws by making false or misleading representations about the environmental, social, and governance ("ESG") exclusionary screens applied to the Fund, including that this index Fund offered an investment opportunity that was ethically conscious and excluded companies with significant business activities in a range of industries, including fossil fuels, weapons and vice products. Vanguard admitted most of the allegations relating to inaccurate or misleading disclosure about the ESG exclusionary screens in its product disclosure statements, news releases, website, an executive interview on social media and in an online presentation.3 Our previous article with additional detail on the liability decision can be found here.
This decision follows a recent penalty of AU$11.3 million (CDN$10.4 million) against Mercer Superannuation (Australia) Limited for misleading statements about the sustainable characteristics of some of its investment products. Both of these cases demonstrate the continued resolve of ASIC to prosecute greenwashing which it sees as a serious threat to the integrity of the Australian financial system.
Penalty Determination
During the penalty hearing, ASIC proposed a penalty of AU$21.6 million, whereas Vanguard argued for a reduced penalty between AU$9 million and AU$11.25 million.4 The court considered various aggravating and mitigating factors in determining the appropriate penalty. Importantly, the Court applied a 25% discount to the penalty to reflect the high level of cooperation by Vanguard throughout the ASIC investigation and the proceedings.5
The factors considered by the Court, included:
- Seriousness of the contravention: The Court considered the nature and extent of the misconduct, including the number of misleading representations, the context that Vanguard developed and promoted this Fund in response to market demand for ESG investments, and the extent to which Vanguard applied the ESG screening.6 The Court noted that approximately 74% of the securities in the Fund by market value were not researched or screened against the ESG criteria.7 The Court considered the length of the misconduct (more than 2 and a half years) and the size of the Fund (approximately $1.1 billion and over one thousand investors).8 The Court also noted that Vanguard is one of the world's largest investment management companies with more than AU$10 trillion in assets under management.
- Involvement of Senior Management: The Court noted that senior employees—such as the Head of Product, Head of Product Strategy and Head of Product Management—were involved in the preparation of the misleading disclosure material.9
- Deliberateness of the misconduct: The Court found that although Vanguard's actions were not deliberate, its compliance failures amounted to allowing the representations with reckless disregard as to accuracy. The Court noted that Vanguard's desire to advertise its Fund as "ethically conscious" was more important than making sure that the composition of the Fund and the ESG screening were accurately disclosed to investors.10
- Harm and Benefit from the misconduct: ASIC did not allege that Vanguard's misconduct caused any financial loss to investors. However, the Court noted that Vanguard's conduct had the potential to harm investors by depriving them of the opportunity to make an investment choice in accordance with their values.11 Although there was no evidence that Vanguard gained any financial benefit in the form of fees or better returns from its misconduct, the Court found that the misrepresentations had the effect of enhancing Vanguard's reputation as a provider of "ethical" investment opportunities.
- Compliance Culture: Vanguard immediately halted trading in the Fund and self-reported to ASIC when the Head of Risk learned of the misrepresentations.12 Vanguard also took substantial steps to improve its compliance regime which included implementation of new policies and procedures for product disclosure statements were put in place to ensure compliance with regulatory disclosure obligations and prevent future misrepresentations.13 In addition, Vanguard conducted a review of similar Vanguard investments products that relied on ESG screening new policies and procedures.14
- Cooperation of Vanguard: Vanguard self-identified the contraventions and self-reported the issues to ASIC. In addition, Vanguard cooperated throughout the proceeding and the ASIC investigation by responding promptly to ASIC information and documents requests.15 Finally, Vanguard admitted virtually all of ASIC's allegations except one disputed allegation concerning the nature and scope of certain representations.
Key Takeaways
The importance of general deterrence of greenwashing by investment funds appears to have been a key driver in this result. The Court awarded a significant monetary penalty (the highest civil penalty in a greenwashing case in this jurisdiction to date) despite the high level of cooperation, self-identification and self-reporting by the entity and despite the lack of any financial harm to investors or financial benefit to Vanguard. The penalty greatly exceeded the revenue earned by Vanguard for managing the Fund (by at least 12 times) and was in the range of Vanguard's total annual profits during the relevant period even though the Fund represented a small proportion of its overall business (less than 1% in income and fund under management).16
Investment fund managers should:
- approach disclosures concerning ESG funds or ESG investment strategies with the same rigour applied to other fund disclosures required by securities laws;
- adopt detailed policies, procedures and controls to ensure ESG-related statements are accurate and complete and ensure adequate implementation through ongoing training of relevant personnel; and
- ensure compliance with any representations about how ESG factors will impact the investment selection process, including periodic review, testing and revision (if necessary).
- Comply with CSA Staff Notice 31-334 ESG-Related Investment Fund Disclosure dated March 7, 2024 (CSA Notice 31-334) in the case of investment funds offered by prospectus in Canada. The Canadian Securities Administrators (CSA) in CSA Notice 31-334 classify investment funds based on whether and how an investment fund considers ESG factors as part of its investment process. The CSA then sets out detailed and prescriptive guidance on what and how these types of funds—ESG Objective Funds, ESG Strategy Funds, ESG Limited Consideration Funds and Non-ESG Funds—should make disclosure about the use of ESG in fund names, prospectuses, sales communications and other disclosure. For more information, see our article on CSA Notice 31-334 here.
McCarthy Tétrault has also published supplemental guidance to assist managers with this topic here.
It will be interesting to see if Canadian securities regulators will also use enforcement proceedings to seek to improve compliance and deter greenwashing by investment fund managers.
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McCarthy Tétrault has leading securities litigation and securities regulatory and investment products practices and a multidisciplinary ESG and Sustainability team. We are especially well-equipped to provide investment fund clients with a full suite of advice and support to assist them in integrating ESG thinking into their organizational DNA. With a robust understanding of business, industry, and market drivers, we can deliver contextualized advice and guidance.
Footnotes
1. Australian Securities and Investments Commission v. Vanguard
Investments Australia Ltd (No 2), [2024] FCA 1086, Par. 1.
3. Par. 5.
4. Par. 10-11.
5. Par. 118.
6. Par. 48, 98 and 99.
7. Par. 111.
8. Par.113.
9. Par. 88 and 90.
10. Par. 82.
11. Par. 49 and 111.
12. Par. 97.
13. Par. 99.
14. Par. 86.
15. Par. 100.
16. Par. 117.
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