ASIC secures milestone victory against Vanguard in greenwashing test case

Marking a significant milestone in ASIC’s test cases concerning greenwashing, the Federal Court of Australia in Australian Securities and Investments Commission v Vanguard Investments Australia Ltd [2024] FCA 308 found that Vanguard Investments Australia Ltd (Vanguard) made misleading environmental, social, and governance (ESG) claims relating to one of their funds.

This decision coincides with the recent release of the draft Treasury Laws Amendment Bill, which introduces new standards for sustainability and climate-related financial disclosures, including assurance requirements. These amendments are expected to be integrated as reporting obligations in the Corporations Act 2001 (Cth) and the Australian Securities and Investment Commission Act 2001 (Cth) (Act), and will increase the level of ESG scrutiny companies will face.

In-house counsel and boards must place ESG-related risks high on their agenda, as the legal and regulatory landscape increases.

Background

Between 2018 and 2021, Vanguard actively promoted a fund (Fund) that tracked the Bloomberg SRI Index (Index); an index co-developed by Bloomberg and Vanguard. Vanguard represented that before securities were included in the Index, and therefore the Fund, they were researched and screened against applicable ESG criteria (ESG criteria). The screening was intended to identify and then exclude companies heavily involved in activities such as fossil fuels, alcohol, tobacco, gambling, military and civilian weapons, nuclear power, and adult entertainment (Excluded Investments).

In early 2021, Vanguard self-identified and then self-reported itself to ASIC after discovering that its descriptions of the screening process did not clarify that certain Excluded Investments were not researched and screened and remained in the Index and Fund.

Following Vanguard’s self-report, ASIC initiated proceedings in 2023, alleging that due to the above-mentioned flaws in the research and screening process, the Fund held securities that investors would not have expected based on the Fund’s ethical promise. Vanguard admitted to most of ASIC’s allegations, but the parties remained in dispute over a narrow range of issues concerning liability.

False or misleading representations

Since the Fund’s launch in 2018, Vanguard made various representations (Representations) including that the Fund was ideal for “Investors seeking exposure to a diversified portfolio of international fixed interest securities with an ethically conscious screen…”. These Representations were made in several communications, including Product Disclosure Statements (PDS), a media release, Vanguard’s website, and messages on the Finance News Network.

However, as Vanguard acknowledged, limitations in the research and screening process meant not all securities included in the Index, and therefore the Fund, were evaluated against the ESG criteria; only a subset of mostly publicly listed companies underwent scrutiny. As at 12 February 2021, approximately 46% of the securities in the Fund had not been screened, with Excluded Investments, including Chevron Phillips Chemical and Abu Dhabi Crude Oil Pipeline, representing about 74% of the Fund’s market value. Consequently, ASIC alleged Vanguard’s Representations of Fund’s ESG criteria to be false or misleading.

Relevant law

Section 12DB of the Act relevantly provides:

“(1) A person must not, 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:

(a) make a false or misleading representation that services are of a particular standard, quality, value or grade;

…

(e) make a false or misleading representation that services have sponsorship, approval, performance characteristics, uses or benefits;

…

(2) Conduct:

…

(c) in relation to a disclosure document or statement within the meaning

of section 1022A of the Corporations Act;

…”.

Section 12DF of the Act relevantly provides:

“(1) A person must not, in trade or commerce, engage in conduct 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.”

Decision

The approach endorsed by the court to evaluate false or misleading representations involved four steps:

1. Precisely identifying the alleged violation, including representation-related actions.
2. Assessing whether the pinpointed action constitutes “trade or commerce” related conduct.
3. Determining the implications or message conveyed by the conduct.
4. Deciding if the conduct, in view of its conveyed meaning, is misleading, deceptive, or prone to mislead or deceive.

There was no contention that Vanguard’s Representations were made in relation to trade or commerce, particularly in the context of providing financial services. Moreover, the court acknowledged Vanguard’s own admission of the flaws in its research and screening process, finding Representations of the Fund as “ethically conscious” misled the public about the Fund’s attributes, suitability for ethical investment, and overall service standards. These Representations violated two sections of the Act: Section 12DF, regarding the misleading of investors about the Fund’s nature and suitability, and Section 12DB, pertaining to making false claims about service standards.

However, the court ultimately rejected ASIC’s contention that Vanguard’s PDSs and website represented that ESG screening was applied to all securities in the Index and the Fund. Despite admitting to making misleading Representations, Vanguard argued, and the court agreed, that while its messaging may have implied a broader application of ESG criteria, the Representations did not specifically state that all securities in the Index and the Fund were subject to research and screening.

Although not all of ASIC’s submissions were accepted, Vanguard could not negate the overarching finding of misleading investors about the Fund’s ethical nature. This judgment marks a milestone in the landscape of ESG fraud, sending a strong message about the seriousness with which greenwashing is viewed by regulatory authorities. Looking forward, this judgment foreshadows increased scrutiny of businesses’ ESG claims by ASIC, stricter regulatory standards, and enhanced due diligence requirements.

The case is set to proceed further on 1 August 2024 to deal with penalties and an adverse publicity order.

Key Takeaways

• This judgment marks a significant milestone in ASIC’s greenwashing test cases against Vanguard, Mercer and LGSS (the trustee of the Active Super Fund). Businesses can expect to see an increase in ESG litigation and regulatory investigations as ASIC continues to clamp down on greenwashing and other types of ESG fraud.
  
  

• ASIC’s victory in this case will inevitably embolden private parties looking to bring ESG-related civil proceedings, whether as an individual action or a class action. As an example, such actions might arise where an investment has been made on the basis of positive ESG representations, the investment loses value, and the investor discovers that the ESG representations were false or misleading and then seeks to recover its loss on the basis that it would not have made the investment but for the ESG representations.  
  
  
• The judgment must be considered alongside the impending Treasury Laws Amendment Bill. This confluence marks a new chapter in corporate responsibility and paves the way for a more aggressive stance against greenwashing. In-house counsel and boards should be aware that ESG-related misrepresentations will likely face similar scrutiny and legal consequences.

• In-house counsel should ensure that personnel across all levels of the organisation understand the nuances of ESG representations and application of relevant laws, such as misleading and deceptive conduct, to prevent liability arising at the coalface of the business.

• In-house counsel should ensure that personnel are aware of the ACCC’s eight principles to guide businesses’ ESG claims, being:
  • Make accurate and truthful claims.
  • Have evidence to back up the claims.
  • Do not hide or omit important information.
  • Explain any conditions or qualifications on the claims.
  • Avoid broad and unqualified claims.
  • Use clear and easy-to-understand language.
  • Visual elements should not give the wrong impression.
  • Be direct and open about your sustainability transition.

• ASIC’s guidance on greenwashing, ACCC’s draft guidance and the broader ESG trends should be incorporated into training sessions and workshops which are delivered regularly to staff at the coalface. In evaluating whether a representation might be false or misleading, consider the representation in the light of the court’s four-part test (see above).

• Given the evolving ESG landscape, boards and in-house counsel need to play a more central, proactive and strategic role; they must not only ensure compliance but also become the guiding light for integrating sustainability practices within their organisations. This involves staying abreast of legal and policy developments, understanding the nuances of ESG reporting, and advising the board of their responsibilities and securing their buy-in to minimising ESG-related breaches, adopting a top-down approach.