Clifford Chance

ASIC took action against Vanguard and has been granted much of the declaratory relief it sought in its first greenwashing civil penalty litigation.

In Australian Securities and Investments Commission v Vanguard Investments Australia Ltd [2024] FCA 308, the Federal Court ruled that Vanguard breached both section 12DB and section 12DF of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act); that is, it made representations that were false and misleading and engaged in conduct that was liable to mislead the public.

The contraventions relate to Vanguard's Ethically Conscious Global Aggregate Bond Index Fund (Fund) that tracks the Bloomberg SRI Index (Index).

The case is a useful indication of what 'greenwashing' conduct may contravene the ASIC Act, although it does not expound on the legal tests under sections 12DB and 12DF.

What were the representations?

Vanguard represented that the Fund provided an ethically conscious investment opportunity, that securities were subject to ESG research and screening and that any securities which violated the ESG criteria were excluded or removed from the Index and therefore the Fund.

Those representations were made in the following communications between 2018 and 2021, which each constituted a separate contravention of the ASIC Act:

• Product Disclosure Statements for the Fund;
• a media release by Vanguard;
• statements on Vanguard's website;
• an interview with a Vanguard product manager that was published on YouTube; and
• statements made by a product manager of Vanguard at a fund manager event that were subsequently published online.

A takeaway from the case is that a representation may contravene the ASIC Act even if it is informal or made by a company employee. However, because Vanguard admitted liability, the Court neither provided reasons as to whether the facts met the legal thresholds, nor was it asked to make any findings about whether the Fund was an 'ethically conscious' product or not.

Until there is a case which clearly delineates what 'engaged in conduct' and 'made representations' mean in the context of sections 12DB and 12DF, companies should be careful to ensure consistent and accurate messaging around how a Fund (or other financial product) actually works.

What was false or misleading about Vanguard's representations?

Despite Vanguard's representations that ESG criteria was applied to the Fund, there were limitations to the research and screening that took place. Namely, ESG screening:

• was generally only conducted on publicly listed companies, not all securities;
• did not extend to companies further down in the supply chain, so companies that derived revenue from thermal coal were missed; and
• was not conducted on all companies that shared a stock exchange ticker, only on the company with the largest debt outstanding (by market value) for that ticker.

Justice O'Bryan did not need to determine whether the factual limitations of the ESG screening meant that Vanguard's representations were false or misleading, or that its conduct was liable to mislead.

Vanguard admitted liability and the case proceeded on an agreed statement of facts. His Honour did state, however, that 'misleading conduct' lies at the heart of the provisions, and that the concept will be interpreted consistently with existing case law. Causing confusion is insufficient, but a half-truth may be misleading. The fundamental question is whether an ordinary or reasonable consumer is likely to be led into error.

Issue in dispute:

As Vanguard substantially admitted its contraventions, the only issue in dispute was the breadth of some of the representations. The Fund included listed companies, unlisted companies, bonds, and securitised fixed rate bonds, so there was a question as to whether Vanguard had represented that all securities were screened or only companies. Justice O'Bryan undertook a factual, linguistic analysis to find that the PDS conveyed the representation that securities issued by companies were screened against ESG criteria, not that all securities were so screened. This representation was preferred as providing the appropriate context compared to the less formal representations.

Risks to companies that are highlighted by this case:

Vanguard did not have control over the ESG screening; that was applied to the Bloomberg SRI Index, which Vanguard's Fund followed. Even so, Vanguard was held to be responsible for the representations that it made to the public that ESG criteria had been appropriately applied to its Fund. This makes it clear that companies must fact-check information that is going to be used to characterise the nature or components of a Fund or other financial product. A similar issue has been raised by ASIC in an enforcement action against Northern Trust Asset Management involving a carbon emissions exclusion screen for an index fund; resulting in an infringement notice being issued.

Future of the case:

The Federal Court is scheduled to hear issues of civil penalties and costs in August 2024. That decision will clarify whether Vanguard's near-blanket admissions mitigate the severity of the consequences for greenwashing.