ASIC has lodged civil penalty proceedings in the Federal Court against Vanguard Investments Australia, alleging misleading conduct in relation to claims about certain environmental, social and governance (ESG) exclusionary screens applied to investments in a Vanguard fund.
ASIC alleges Vanguard made false and misleading statements and engaged in conduct liable to mislead the public in representing that all securities in the Vanguard Ethically Conscious Global Aggregate Bond Index Fund (Hedged) (Fund) were screened against certain ESG criteria. The Fund was marketed to investors seeking, amongst other things, securities with an ethically conscious screen.
Investments held by the Fund were based on an index called the Bloomberg Barclays MSCI Global Aggregate SRI Exclusions Float Adjusted Index (Index). Vanguard claimed the Index excluded issuers with significant business activities in a range of industries, including those involving fossil fuels.
However, ASIC alleges that ESG research was not conducted over a significant proportion of issuers of bonds in the Index and therefore the Fund.
As at February 2021, ASIC alleges the Index and the Fund included issuers that violated the applicable ESG criteria, including:
- for the Index, 42 issuers which collectively issued at least 180 bonds; and
- for the Fund, at least 14 issuers that collectively issued at least 27 bonds.
ASIC alleges that these bonds exposed investor funds to investments which had ties to fossil fuels, including those with activities linked to oil and gas exploration.
ASIC Deputy Chair Sarah Court said ‘We know that investors are increasingly seeking investment options that exclude certain industries, and investors need to be able to rely on investment screens to help them make these choices.
‘In this case, 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.
‘We consider that the screening and research undertaken on behalf of Vanguard was far more limited than that being promised to investors, and we consider this constitutes another example of greenwashing.’
ASIC alleges Vanguard misled the public in Product Disclosure Statements published between 7 August 2018 to 17 February 2021, a media release issued in August 2018, in statements on its website, statements made in an interview with Finance News Network and statements made in a presentation at a Finance News Network Fund Manager Event, both of which were recorded and published online.
‘ASIC will continue its focus on alleged greenwashing conduct and we continue to stress to the financial services industry that if exclusions in investments are promised, these exclusions need to be applied and promises upheld,’ concluded Ms Court.
ASIC has issued over $140,000 in infringement notices in response to concerns about alleged greenwashing, including three infringement notices totalling $39,960 against Vanguard for separate greenwashing conduct (22-336MR).
ASIC is seeking declarations and pecuniary penalties from the Court. ASIC also seeks orders requiring Vanguard to publicise any contraventions found by the Court.
The date for the first case management hearing is yet to be scheduled by the Court.
Background
As at 26 February 2021, the total funds or assets under management of the Vanguard Ethically Conscious Global Aggregate Bond Index Fund was over $1billion.
The Fund is a registered managed investment scheme, of which Vanguard is the Responsibility Entity and the Investment Manager. The Fund comprises the ETF, AUD Hedged, and NZD Hedged classes of units.
ASIC’s Information Sheet 271 (INFO 271) provides information for responsible entities of managed funds and super fund trustees about how to avoid greenwashing when offering or promoting sustainability-related or ethical products and investments.
ASIC’s Report 763 outlines ASIC regulatory interventions made between 1 July 2022 and 31 March 2023 in relation to greenwashing concerns.
ASIC’s Moneysmart website has a range of tools and resources to help people understand money and how to manage it. Find out more about ESG investing is and how it works.
Companies that ASIC alleges investor funds were exposed to:
Abu Dhabi Crude Oil Pipeline LLC (ADCOP) – ADCOP is an entity that is 100% owned by ADNOC, the state-owned oil company of Abu Dhabi. This entity is Involved in the transportation of oil through a pipeline which transports oil from Abu Dhabi to the shipping export terminal.
Chevron Phillips Chemical Co. LLC – Through subsidiaries and equity affiliates, Chevron Phillips Chemical manufacture and market a wide range of petrochemicals.
Colonial Pipeline Co – Colonial Pipeline Co operates a pipeline system for refined oil products in the US.
Empresa Nacional del Petróleo SA (ENAP) – ENAP is a company owned by the State of Chile. ENAP’s main line of business is the exploration, production, refining and marketing of hydrocarbons and their by-products, including through exploration wells known as hydraulic fracturing.
John Sevier Combined Cycle Generation LLC – John Sevier Combined Cycle Generation LLC engages in electricity generation. The company operates a gas fired plant called John Sevier Combined Cycle Plant, a 871-megawatt facility that uses natural gas or no. 2 fuel oil for combustion.
The above summaries are taken from company annual reports and other publicly available information.
Editor's note 1:
The matter has been listed for a case management hearing on 25 August 2023.
Editor's note 2:
The matter has been listed for a further case management hearing on 27 November 2023.
Editor's note 3:
On 5 October 2023, ASIC filed an Amended Originating Process and a Statement of Claim. Download the Amended Originating Process and Statement of Claim.
Editor's note 4:
The matter has been listed for a further case management hearing on 7 December 2023.
Editor's note 5:
The matter has been listed for a hearing on liability on 8 March 2024.
Editor's note 6:
The hearing on liability concluded on 8 March 2024. Judgment has been reserved.