On 28 March 2024, the Federal Court found that Vanguard Investments Australia Ltd (Vanguard) made false or misleading representations and engaged in conduct that was liable to mislead the public in relation to an “ethically conscious” fund offering in breach of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).
It remains to be seen what the Court will order in terms of pecuniary penalties and adverse publicity orders, which will be the subject of a further hearing on 1 August 2024. We are also awaiting the outcome of the two other civil penalty cases ASIC is pursuing against Mercer Superannuation (Australia) Limited (Mercer Super) and LGSS Pty Ltd (Active Super), which will inform ASIC and the ACCC’s enforcement approach going forward.
Key takeaways
This is ASIC’s first successful greenwashing civil penalty action and puts ASIC towards the top of the list of financial regulators globally taking enforcement action to combat greenwashing.
With the threat of regulatory action for greenwashing having now well and truly crystallised in Australia, it is more important than ever for organisations to have in place strategies to avoid or reduce the risk of greenwashing. See 'ASIC launches greenwashing court action against superannuation firm' and 'Summary of ASIC Guidance on ‘How to avoid greenwashing when offering or promoting sustainability-related products’' for previous updates where we outlined key issues that companies should consider when putting place strategies to avoid or reduce the risk of greenwashing.
Although there is an increasing amount of emerging legislation in this space, greenwashing cases are being brought under existing and established legislation for misleading and deceptive conduct. When promoting a financial product or service it has always been important to verify statements you make.
The civil penalty proceedings ASIC has brought against each of Vanguard, Mercer Super and Active Super relate to the purported application of exclusionary criteria for investment products. This highlights the importance of ensuring that: (i) all ESG-related claims can be substantiated; and (ii) the systems in place to implement advertised exclusionary screens in relation to investment products are appropriate (and that they are appropriately applied).
While the ACCC has yet to commence civil penalty proceedings in relation to greenwashing claims, we expect this decision will also inform the ACCC’s enforcement approach going forward, noting that greenwashing continues to be an ACCC compliance and enforcement priority this year.
The case ASIC brought and Vanguard’s admissions
ASIC alleged that during the period 7 August 2018 to 17 February 2021, Vanguard had - through 12 product disclosure statements (PDSs), a media release, website statements, a Finance News network interview on YouTube and a presentation at a Finance News Network Fund Manager Event which was published online - represented to potential investors that:
the Vanguard Ethically Conscious Global Aggregate Bond Index Fund (the Fund ) offered an ethically conscious investment opportunity and the Fund did this by seeking to track the return of the Bloomberg Barclays MSCI Global Aggregate SRI Exclusions Float Adjusted Index (Index );
before being included in the Index (and therefore the Fund), securities were researched and screened against applicable environmental, social and governance (ESG ) criteria; and
any securities that violated applicable ESG criteria (for example, those with significant business activities involving fossil fuels) were excluded or removed from the Index and therefore the Fund.
ASIC alleged that these representations were false or misleading because:
the screening of securities for inclusion in the Fund against the applicable ESG criteria had significant limitations, including that:
not all issuers of securities that were included in the Index were researched and screened against applicable ESG criteria (instead it was only companies and generally only publicly listed companies);
for companies with multiple issuing entities that shared a particular stock exchange “ticker”, ESG research was only conducted for the company with the largest debt outstanding (by market value); and
the fossil fuel screen, as in effect from 15 July 2020, did not screen for companies that derived revenue from the transportation or exploration of thermal coal;
a significant proportion of securities in the Fund were from issuers that had not been researched or screened against applicable ESG criteria. As of 12 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; and
the Index and the Fund included issuers that violated applicable ESG criteria.
Notably, Vanguard admitted to most of ASIC’s allegations, including that the statements it had made concerning the ESG screening process were false or misleading and (other than those statements contained in the PDSs and on Vanguard’s website - see further below) that the relevant statements were false or misleading for the reasons alleged by ASIC. The parties tendered an agreed bundle of documents and no witnesses were called to give evidence at the hearing on 8 March 2024.
The Court’s findings
Justice O’Bryan found that Vanguard made false or misleading representations that the Fund was of a particular standard, quality or grade or had certain performance characteristics or benefits in contravention of ss 12DB(1)(a) and (e) of the ASIC Act and engaged in conduct that was liable to mislead the public as to the nature, characteristics and suitability of the Fund contrary to s 12DF(1) of the ASIC Act.
Justice O’Bryan was satisfied by the admissions made and evidence filed that ASIC had established the contraventions admitted by Vanguard, with the result that there is little discussion in the judgment regarding the substance of the breaches.
The only contentious aspect considered by the Court related to a reasonably narrow issue concerning liability. Specifically, with respect to the relevant statements contained in the PDSs and published on Vanguard’s website, Vanguard did not admit that those materials conveyed representations that all securities included in the Index and the Fund were screened against ESG criteria. Vanguard contended that those materials more narrowly conveyed that only securities issued by companies (i.e. not government bonds) were screened against ESG criteria. Although it did not materially affect the outcome of the case, the Court adopted Vanguard’s interpretation, criticising aspects of ASIC’s submissions. Specifically, the Court was critical of the fact that ASIC sought to rely on a fact sheet made by Bloomberg relating to the Index, The Court made clear that Vanguard could not be held liable for misleading statements in the Bloomberg fact sheet unless Vanguard adopted and repeated those statements. Justice O’Bryan commented that “seeking to rely on a statement made by a third party, Bloomberg, to “colour” and “contextualise” the impugned statements made by Vanguard” amounted to “an unhelpful blurring of the concepts of context and causation”.
A consistent (and likely persistent) regulatory trend around greenwashing
Australian enforcement activity
Notably, this was not the first civil penalty action taken by ASIC; it instituted its first case against Mercer Super in February 2023. Although the AFR reported on 7 December 2023 that ASIC and Mercer Super have agreed to a proposed $11.3 million penalty settlement in relation to statements on Mercer's website about its 'Sustainable Plus' investment options, this remains subject to final court approval. ASIC’s case against Active Super, which alleges misleading conduct and misrepresentations relating to claims it was an ethical and responsible superannuation fund, instituted on 11 August 2023, was heard on 25 and 26 March 2024 and judgment has been reserved.
ASIC continues to make clear that greenwashing is top of its regulatory agenda, having introduced INFO 271 in June 2022, which explains the framework it applies when testing “green” claims and indicates the issues that should be considered when offering or promoting sustainability-related products. ASIC has also listed “misleading conduct in relation to sustainable finance including greenwashing” as one of its enduring enforcement priorities in 2023 and 2024. Since October 2022, ASIC has actively taken enforcement action by issuing infringement notices to participants across the financial services, superannuation and energy sectors. That said, payment of an infringement notice does not amount to an admission of guilt or liability, which is why this first successful civil penalty action is so significant.
Outside of the financial sector, the Australian Competition and Consumer Commission (ACCC) has identified greenwashing as an area of concern in its 2024-25 compliance and enforcement priorities for the second year in a row. While the ACCC has yet to commence greenwashing proceedings, on 28 November 2023, it accepted a court-enforceable undertaking from yoghurt manufacturer, MOO, in respect of false and misleading claims that its product packaging was made from “100% ocean plastic”. Further, as we outlined in a previous update here , ACCC Chair Gina Cass-Gottlieb highlighted that “the ACCC has a number of in-depth greenwashing investigations including in the energy and consumer products sectors” . In December last year, the ACCC also published final guidance outlining the ACCC’s view of what businesses need to do when making environmental claims to comply with the Australian Consumer Law and the ACCC’s expectations for good practice. See for a previous update where we outlined the principles in the ACCC’s final guidance. The ACCC has made clear it will be undertaking enforcement, compliance and education activities where appropriate and has encouraged businesses to self-report if they become aware that they have made false or misleading environmental or sustainability claims.
The global perspective
Regulators globally continue to take action to combat greenwashing. The Securities and Exchange Commission (SEC) in the United States was first off the mark in May 2022 to charge BNY Mellon Investment Adviser (BNY) over misstatements and omissions about ESG considerations ( BNY paid US$1.5 million as a settlement penalty ). Then in November 2022, the SEC charged Goldman Sachs Asset Management, L.P. (GSAM) for policies and procedures failures involving two mutual funds and one separately managed account strategy marketed as ESG investments ( GSAM agreed to pay a US $4 million penalty ). Most recently, in September 2023, German asset manager, DWS Investment Management Americas Inc. agreed to pay a settlement sum of US$19 million for alleged greenwashing conduct . Each of these cases involved failures in relation to the implementation of policies and procedures, highlighting the importance of having a robust governance framework in place to mitigate the risk of misleading investors - including in relation to greenwashing.
Outside of the regulated context, the risk of class actions remains a live one as stakeholders continue to look for avenues to hold companies to account in relation to potentially misleading “green” claims, particularly in Europe. By way of example, on 20 March 2024, in a case brought by the Fossil Free Foundation, the District Court of Amsterdam found that KLM contravened EU consumer law by making misleading vague and general statements about how its flights were environmentally friendly, including that customers could “create a more sustainable future together with [us] ” and that KLM is “moving towards sustainable travel togethe r”. This Dutch case was the first successful greenwashing case in the aviation industry, which continues to be targeted globally. 2023 saw new cases commenced in the US against three airlines - KLM, Delta, and United - and the industry remains a focus in Australia (the aviation sector is a new ACCC priority this year). Despite being a private class action, the case against KLM nonetheless provides useful guidance for businesses on how regulators around the world might interpret and enforce greenwashing claims in the aviation industry.
For a practical overview of the rapidly evolving landscape of sustainability regulation, policy and practice, including in relation to climate litigation, please see Gilbert + Tobin x BWD Sustainability Insights .
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