On Tuesday, the Australian Securities and Investments Commission (ASIC) announced that it had commenced civil penalty proceedings in the Federal Court against Vanguard Investment Australia over allegations of greenwashing.
The regulator has accused Vanguard of misleading conduct in relation to claims made about certain environmental, social and governance (ESG) exclusionary screens applied to investments in the Vanguard Ethically Conscious Global Aggregate Bond Index Fund (Hedged).
The fund, which is a registered managed investment scheme, comprises an ETF, AUD Hedged, and NZD Hedged classes of units and had over $1 billion in assets as of 26 February 2021.
ASIC alleged that Vanguard made false and misleading statements and engaged in conduct liable to mislead the public in representing that all securities in the fund were screened against certain ESG criteria.
Investments held by the fund were based on the Bloomberg Barclays MSCI Global Aggregate SRI Exclusions Float Adjusted Index, which Vanguard had claimed excluded issuers with significant business activities in a number 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 this index and, as a result, Vanguard’s fund.
ASIC claimed that, as of February 2021, the index and the fund included issuers that violated the applicable ESG criteria. For the index, this included 42 issuers which collectively issued at least 180 bonds, and for the fund, at least 14 issuers which collectively issued at least 27 bonds.
According to the regulator’s allegations, these bonds exposed investor funds to investments with ties to fossil fuels, including those with activities linked to oil and gas exploration.
“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,” ASIC deputy chair Sarah Court said in a statement.
“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 has issued more than $140,000 in infringement notices in response to concerns about alleged greenwashing, including three infringement notices totalling almost $40,000 against Vanguard for separate greenwashing conduct in December last year.
The regulator also commenced civil penalty proceedings in the Federal Court against Mercer in February, marking the first time it had taken an Australian entity to court regarding alleged greenwashing conduct.
In its latest case against Vanguard, ASIC said it was seeking declarations and pecuniary penalties from the court, as well as orders requiring Vanguard to publicise any contraventions found by the court.
“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,” Ms Court concluded.
Vanguard responds
In a statement issued shortly after ASIC’s announcement on Tuesday, Vanguard noted that it had identified and self-reported a breach to the regulator in early 2021 in relation to the product disclosure for the Vanguard Ethically Conscious Global Aggregate Bond Index Fund and ETF.
“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 (PDS) were not sufficiently detailed,” the investment manager said.
“At the time, the description of the exclusionary screens did not provide a sufficiently detailed explanation that certain debt issuers lacking research coverage were still included in the benchmark. As a result, it is possible the portfolio held exposure to certain securities that may not have been reasonably expected by investors.”
As soon as the disclosure weakness was identified, Vanguard said that it acted swiftly to inform investors and enhance the disclosure. The investment manager said that it had fully cooperated with ASIC’s queries on the matter since it was first self-reported.
“There was never any intention to mislead, but Vanguard recognises it has not lived up to the high standards it holds itself accountable to and apologises for the concern this matter may cause for our clients,” Vanguard said.
