Request Free Trial

Australian regulator posts greenwashing warning following victory against Vanguard

Australian financial services regulator ASIC says the Federal Court ruling that Vanguard had broken the law said “sends a strong message to companies making sustainable investment claims” (Photo: Lisa Maree Williams/Bloomberg)
Australian financial services regulator ASIC says the Federal Court ruling that Vanguard had broken the law said “sends a strong message to companies making sustainable investment claims” (Photo: Lisa Maree Williams/Bloomberg)

Financial watchdog ASIC wins its first civil action for greenwashing, as Australia’s Federal Court rules against asset manager Vanguard over misleading claims

Australia’s financial services regulator, ASIC, has put the asset management sector on notice after securing victory in its civil greenwashing case against Vanguard.

On March 28, Australia’s Federal Court ruled that passive fund management giant Vanguard had contravened the law on multiple occasions with misleading claims about ESG screening it applied to its Vanguard Ethically Conscious Global Aggregate Bond Index Fund. 

The fund’s investments, worth over $1bn as of February 26, 2021, were based on the Bloomberg Barclays MSCI Global Aggregate SRI Exclusions Float Adjusted Index, a benchmark that includes various types of bonds from developed and emerging markets.

According to an ASIC statement following the Federal Court ruling, Vanguard “had claimed the index excluded only companies with significant business activities in a range of industries, including those involving fossil fuels, but has admitted that a significant proportion of securities in the index and the fund were from issuers that were not researched or screened against applicable ESG criteria”.

In early 2021, the asset manager reported itself to ASIC: “While the fund was managed by Vanguard in alignment with the index methodology, Vanguard identified that the descriptions of the exclusionary screens published by the index provider and within Vanguard’s product disclosure statement were not sufficiently detailed,” Vanguard said in a 2023 statement. “As a result, it is possible the portfolio held exposure to certain securities that may not have been reasonably expected by investors.”

At a court hearing on March 8 2024 Vanguard admitted to having misled the public. 

The Federal Court found that between August 2018 and February 2021, Vanguard had contravened the Australian Securities and Investments Commission Act 2001 on numerous occasions, including in a statement published on its website, in a media release, and in an interview with Australian news outlet Finance News Network. 

“Vanguard promised its investors and potential investors that the product would be screened to exclude bond issuers with significant business activities in certain industries, including fossil fuels, when this was not always the case,” said ASIC deputy chair Sara Court after the verdict was handed down.

Warning to other asset managers

ASIC said that the court’s decision “sends a strong message to companies making sustainable investment claims”. The court will decide the penalty to be imposed on Vanguard at a hearing in August.

“This should sound a warning to other asset managers who are playing fast and loose with claims that their funds are ‘green’ or ‘sustainable’,” Lara Cuvelier, sustainable investments campaigner at non-profit Reclaim Finance, tells Sustainable Views.

Besides Vanguard, ASIC is also pursuing two Australian pension schemes, the Mercer Super and the Active Super, for alleged greenwashing. The outcomes of these cases have yet to be finalised.

“The law has lagged behind the heightened focus on ESG,” says Angela Pearsall, partner at law firm Ashurst. “Regulators do recognise that the disclosure frameworks for ESG-related matters are evolving,” she adds. The European Commission and the International Sustainability Standards Board both published new climate-related disclosure requirements last year that apply to asset managers.

Emerging new standards around the world such as the ISSB’s will “give us a baseline for globally aligned reporting requirements”, Pearsall adds. “That should make it a bit more straightforward for asset managers to be analysing different companies and their positions on sustainability and climate-related risks and opportunities.”

Rising sustainability obligations could translate into asset managers charging bigger fees, according to an Ashurst briefing published after the verdict. The need for fund managers to carry out the required research and analysis to ensure their exclusionary screens are correctly applied “may result in higher costs, and therefore higher fees, on investment products”, it says.

European regulators ‘should take note’

ASIC isn’t the only regulator ramping up efforts to combat greenwashing. From May 31, the UK Financial Conduct Authority’s anti-greenwashing rule will come into force, which will aim to ensure any sustainability-linked claims made by FCA-authorised firms about their products and services are fair, clear and not misleading.

The European parliament, meanwhile, adopted its position on the proposed EU Green Claims Directive in March, which will oblige businesses to submit evidence to nationally appointed verifiers regarding green claims about their products or services. Companies face fines of up to 4 per cent of annual revenue for failing to comply.

Meanwhile, campaigners continue to allege greenwashing by the world’s biggest asset managers. In March, Reclaim Finance accused five large firms of greenwashing their passive funds. The non-profit noted that 70 per cent of the passive funds managed by these companies making claims about their sustainability were exposed to companies developing new fossil fuel projects.

“European regulators should take note,” Reclaim Finance’s Cuvelier says. “European investors and pension savers are being misled.” 

According to ESG data company RepRisk, there was a 70 per cent increase in the number of climate-related greenwashing incidents in the banking and financial services sector between September 2022 and September 2023. 

“This ruling is one of the clearest signals yet to Australian asset managers that those who don’t take greenwashing seriously risk reputational and financial consequences,” RepRisk chief commercial officer Alexandra Mihailescu Cichon tells Sustainable Views. “Actions taken by regulators on this scale underline the seriousness with which rising greenwashing in financial services is being taken.”

Jessye Waxman, senior campaign strategist at US non-profit the Sierra Club, tells Sustainable Views that “other regulators absolutely should take ASIC’s cue”, and highlights that the US Securities and Exchange Commission is finalising rules to combat greenwashing by streamlining which funds can label and market themselves as ESG, as well as standardising the information these funds would have to disclose.

“Retail investors rely heavily on labels – and marketing – to make investment decisions,” says Waxman. “Having regulation that simplifies that process for everyday investors is critical so investors can make the investment decisions that align with their financial interests, risk tolerance and values.”

A service from the Financial Times