Australian regulators won a A$12.9-million judgment against indexing giant Vanguard Investments Australia for greenwashing violations.
The Federal Court of Australia ordered the penalty against Vanguard for making misleading claims about the ESG exclusion screens that were applied to investments in the Vanguard Ethically Conscious Global Aggregate Bond Index Fund.
Back in March, the court found that Vanguard made false or misleading statements about the fund in product disclosure statements, a news release, material on the fund firm’s website, and in a fund manager interview and presentation that were posted online.
Among other things, it found that the index screens had “significant limitations,” that the screens weren’t applied to a “significant proportion” of the securities in the index and the fund, and that the fund included issuers that violated certain ESG criteria, including criteria regarding fossil fuels and alcohol.
“Vanguard’s contraventions should be regarded as serious. Vanguard’s misrepresentations concerned the principal distinguishing feature of the fund, being its “ethical” characteristics,” the court said in its ruling, adding that “Vanguard developed and promoted the fund in response to market demand for investment funds having those characteristics.”
It also said the fund firm benefited from its misconduct as “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.”
According to the court, at the penalty hearing, ASIC sought a A$21.6 million penalty, while Vanguard argued that a penalty in the range of A$9 million to A$11.25 million would be appropriate.
In setting the penalty, the court said that it applied a 25% discount from the penalty that would have been imposed, given the firm’s “high level” of cooperation with the regulator.
In a statement, Vanguard said it accepted the court’s ruling, and that the penalty will not be paid by its investors.
The firm also said it apologizes to its clients for its errors, which it described as unintentional.
“Vanguard acknowledges the importance of accurate product and marketing information in helping consumers to make informed investment decisions,” it said, adding that it has since strengthened its procedures, governance, technology and training to address the misconduct.
It also noted that it cooperated with the ASIC and that investors didn’t suffer any losses as a result.
“This is an important decision and the penalty imposed is the highest yet for greenwashing conduct. Greenwashing is a serious threat to the integrity of the Australian financial system, and remains an enforcement priority for ASIC,” said Sarah Court, deputy chair of the regulator, in a release.
“It is essential that companies do not misrepresent that their products or investment strategies are environmentally friendly, sustainable, or ethical. The size of the penalty should send a strong deterrent message to others in the market to carefully review any sustainable investment claims,” she added.