ASIC commences proceedings against Vanguard Investments

Further to our series of articles on ESG, on 24 July 2023 ASIC commenced proceedings seeking declarations, pecuniary penalties and adverse publicity orders against Vanguard Investments Australia Ltd (Vanguard) alleging misleading conduct in relation to claims about the applicability of environmental, social and governance (ESG) criteria applied to investments in an investment fund offered by Vanguard.

These types of claims are commonly known as ‘Greenwashing’ claims which were considered in our article earlier this year which can be found here.

The fund

In or around August 2018, the Vanguard Ethically Conscious Global Aggregate Bond Index Fund (Hedged) (Fund) commenced operation. The Fund enabled investors to invest directly in the securities that comprise the Fund.

The composition of the Fund is based on an index called the Bloomberg Barclays MSCI Global Aggregate SRI Exclusions Float Adjusted Index (Index), which is administered and made available to Vanguard by Bloomberg Index Services Limited (Bloomberg).

The Index purported to exclude securities based on research and screening against ESG criteria. The ESG research of the securities in the fund was performed by an external organisation and then provided to Bloomberg for use in the Index.

The representations

Between approximately August 2018 and February 2021, it is claimed that Vanguard published 12 product disclosure statements (PDSs) for the Fund which were made available to the public.

Each of these PDSs is said to have contained statements materially similar to the following:

Environmental, social, and ethical considerations

Vanguard does not take into account labour standards, environment, social or ethical consideration when selecting, retaining or realising investments in the Fund to track the performance of the benchmark index. Vanguard has engaged Bloomberg Barclays to provide an index of securities for the Fund that excludes companies with significant business activities involving fossil fuels, alcohol, tobacco, gambling, military weapons and civilian firearms, nuclear power and adult entertainment.

1. A majority of the PDSs are said to have been directed readers to Bloomberg’s website for details about the index, which included a facts sheet about the index.
2. It is alleged that an earlier version of the facts sheet, issued in 2018, stated that the Index “follows the same general criteria as the Bloomberg Barclays Global Aggregate Float-Adjusted Index, but removes issuers with evidence of owning fossil fuel reserves or are involved in certain controversial business lines.
3. A later facts sheet, issued in 2020, is also alleged to have stated that the Index “removes issuers with ties to thermal coal, oil and gas or are involved in certain controversial business lines. The index also excludes issuers with very severe ESG Controversies or Red Flags.”
4. During the relevant period, Vanguard also allegedly made similar statements about the ESG screening of the securities in the Fund in an interview with the Finance News Network.
5. Ultimately, ASIC allege Vanguard conveyed that:
   1. before being included in the Index, and the Fund, securities were screened to assess their applicability against certain ESG criteria; and
   2. securities that did not meet the ESG criteria were excluded from their inclusion in the Index, and therefore the Fund.
6. ASIC, in their Concise Statement, allege that contrary to the representations made by Vanguard the ESG screening for the Index had various limitations with the effect that a significant proportion of the bonds in the Index and the Fund were from issuers that were not screened against the applicable ESG criteria.

Relief sought by ASIC

ASIC seeks:

1. declarations that Vanguard has engaged in conduct, in trade or commerce, that is liable to mislead the public as to the nature, the characteristics, the suitability for their purpose or the quantity of any financial services;
2. declarations that Vanguard has in trade or commerce, in connection with the supply or possible supply of financial services, or in connection with the promotion by any means of the supply or use of financial services:
   1. made a false or misleading representation that services are of a particular standard, quality, value or grade; or
   2. made a false or misleading representation that services have sponsorship, approval, performance characteristics, uses or benefits.
3. an order pursuant to s 12GBB(1) of the ASIC Act that Vanguard pay pecuniary penalties in respect of those contraventions; and
4. adverse publicity orders pursuant to s 12GLB(1) of the ASIC Act.

Lessons to be learnt

This is a timely reminder to financial services providers that ASIC is actively pursuing claims for Greenwashing and to take care with  the representations that they make with respect to their various financial offerings.

Products that claim to have been subjected to and screened according to various ESG criteria need to be assessed to ensure their compliance with the ESG criteria lest they run the risk of misleading investors and an investigation and prosecution by ASIC.

Financial services provides must be vigilant in ensuring that all ethically conscious offerings have been properly screened and researched and that statements made with respect to these offerings properly reflect the reality of their composition and that there is evidence to prove they are true.

If you would like further information, please do not hesitate to contact Susan Goodman.

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Authored by:

Susan Goodman, Partner
Ahmed El-Jaam, Lawyer