Nearly 75% of securities in fund called ethical were not researched or screened, judge finds
The Federal Court imposed on Vanguard Investments Australia a record $12.9m penalty for making misleading claims about environmental, social, and governance (ESG) exclusionary screens, applied to investments in the Vanguard Ethically Conscious Global Aggregate Bond Index Fund.
Sarah Court, deputy chair of the Australian Securities and Investments Commission (ASIC), called this an important ruling, given that the court-imposed fine was the largest yet for greenwashing. She expressed hopes that this significant penalty would deter other market participants from repeating Vanguard’s example and would push them to review sustainable investment claims carefully.
The ASIC considers greenwashing conduct an enforcement priority and a serious threat to the integrity of Australia’s financial system, Court emphasised in the ASIC’s media release.
“Vanguard admitted it misled investors that these funds would be screened to exclude bond issuers with significant business activities in certain industries, including fossil fuels, when this was not always the case,” Court noted in the media release. “It is essential that companies do not misrepresent that their products or investment strategies are environmentally friendly, sustainable, or ethical.”
The Bloomberg Barclays MSCI Global Aggregate SRI Exclusions Float Adjusted Index formed the basis of the investments held by the Vanguard Ethically Conscious Global Aggregate Bond Index Fund, the ASIC’s media release explained.
Though Vanguard claimed that the index excluded only companies with significant business activities in a range of industries, including those involving fossil fuels, it admitted that certain securities in the index and the fund came from issuers that it failed to research or to screen against applicable ESG criteria, the media release said.
Judge’s findings
Justice Michael O’Bryan deemed Vanguard’s breaches serious, given that its misrepresentations involved the fund’s “ethical” characteristics, which were its main distinguishing features. This misleading conduct benefited Vanguard, O’Bryan found.
Vanguard developed and promoted the fund in response to market demand for investment funds to possess such characteristics, O’Bryan said. Vanguard failed to research or to screen about 74 percent of the securities in the fund, O’Bryan added.
“The misrepresentations enhanced Vanguard’s ability to attract investors to the Fund, and enhanced Vanguard’s reputation as a provider of investment funds with ESG characteristics, as compared to what would have been the case if Vanguard had accurately disclosed the ESG screening limitations and the Fund’s exposure to issuers engaged in the excluded industries,” O’Bryan concluded.
