In the first Australian decision relating to Greenwashing claims, the Federal Court of Australia has declared that Vanguard Investments Australia (Vanguard) breached misleading and deceptive conduct laws through representations it made about the environmental credentials of its product Vanguard Ethically Conscious Global Aggregate Bond Index Fund (VEFI).[1] The decision comes after Vanguard admitted to the breaches earlier in March, while Vanguard’s penalty will be decided in August.

 

Background

Vanguard is one of the largest and most well-known suppliers of securities in Exchange-Traded Funds (ETFs), including both Managed Funds and Index Funds. In broad terms, Index Funds attempt to follow the index (stock market performance) of an industry or sector by compiling large amounts of securities (i.e., shares in companies, bonds, etc. from that sector) into a single security purchasable on the stock market.

Vanguard began advertising VEFI as an ‘ethically conscious’ index fund in August 2018, before VEFI was launched on the Australian Securities Exchange in September that year. ASIC later commenced proceedings against Vanguard in July 2023 for statements made between 2018 and 2020 about VEFI being an ethically conscious investment opportunity.[2] ASIC alleged Vanguard falsely claimed VEFI screened securities based on economic, social and governance (ESG) criteria and excluded securities that contribute significantly to the fossil fuels, alcohol, tobacco, gambling, military weapons, civilian firearms, nuclear power or adult entertainment industries[3].

 

The misleading conduct

Vanguard admitted that it engaged in misleading conduct in relation to financial services, in contravention of 12DB and 12DF of the Australian Securities and Investments Commission Act 2001 (Cth).[4]

Vanguard admitted that its claims about VEFI being ‘ethically conscious’ were misleading because the research and screening of securities for the Fund was subject to three limitations:

1. Firstly, Vanguard admitted that not all issuers of securities included in the Index were researched and screened against the ESG criteria. Generally, only publicly listed companies were subject to research and screening, whilst certain other securities were not researched or screened.[5]
2. Secondly, for companies with multiple issuing entities that shared a particular stock exchange “ticker”, the ESG research was not conducted on each entity. Rather, the ESG research was only conducted for the company with the largest debt outstanding and was applied to all other companies with the same “ticker”.[6]
3. Finally, VEFI’s ESG screening did not cover companies that derived revenue from the transportation or exploration of thermal coal; in fact, as at February 2021, 46% of the securities held by the Fund were not subject to ESG screening and those securities amounted to 74% of the market value of the Fund.[7]

VEFI therefore included a significant proportion of issuers of securities that in fact were not researched or screened against applicable ESG criteria, and furthermore included some 167 securities that violated the applicable ESG criteria[8].

 

Conclusion

The judgment signals the first greenwashing decision in an Australian court and is a win for ASIC. It is therefore a reminder that (as we discussed in July last year) claims that a business’ goods or services are environmentally friendly and/or ethically conscious are subject to laws relating to misleading and deceptive conduct. As such, businesses need to take care that their claims are truthful and can be substantiated.

If you have any concerns about your environmental or sustainability claims, do not hesitate to contact us.

 

Authors: Michael Daniel, David Stano and Jacinta Milenkoski

Image Credit: Maxim Hopman via Unsplash

Notes:

[1] ASIC v Vanguard Investments Australia Ltd [2024] FCA 308 (ASIC v Vanguard)

[2] ASIC v Vanguard, [6], [72]

[3] ASIC v Vanguard, [30]

[4] Australian Securities And Investments Commission Act 2001 (Cth), s 12DB, s 12DF

[5] ASIC v Vanguard [31]

[6] Ibid.

[7] ASIC v Vanguard [31], [70]

[8] ASIC v Vanguard, Orders, [1]