An Australian federal court has imposed a record A$12.9m fine on Vanguard Investments Australia for misleading claims about the ethical standards of its Vanguard Ethically Conscious Global Aggregate Bond Index Fund.
According to ESG Today, launched in 2018, this fund was advertised as avoiding investments in sectors like fossil fuels, alcohol, and tobacco, aligning itself with the Bloomberg Barclays MSCI Global Aggregate SRI Exclusions Float Adjusted Index, which purportedly excludes issuers heavily involved in these areas.
However, the Australian Securities & Investments Commission (ASIC) unveiled that a substantial portion of the bond issuers within the fund had not undergone ESG research, resulting in investments linked to entities such as Chevron Phillips Chemical and Abu Dhabi Crude Oil Pipeline. This exposure was contrary to the ethical claims made by Vanguard, leading to ASIC initiating legal action in 2023.
In the early stages of 2021, Vanguard had self-identified discrepancies in its descriptions of the fund’s exclusionary screens, which were provided by the index and reflected in Vanguard’s own disclosures. The investment manager acknowledged that these descriptions did not adequately clarify that some debt issuers without research coverage were included in the benchmark. Consequently, the fund contained securities that investors might not have anticipated.
Justice O’Bryan of the federal court described Vanguard’s actions as “serious” contraventions, emphasizing that the misleading claims revolved around the fund’s principal “ethical” characteristics. “Vanguard’s misrepresentations concerned the principal distinguishing feature of the Fund, being its ‘ethical’ characteristics. Vanguard developed and promoted the Fund in response to market demand for investment funds having those characteristics,” Justice O’Bryan stated. He noted that 74% of the securities in the fund by market value had not been screened against the claimed ESG criteria, benefiting Vanguard by enhancing its ability to attract investors and bolster its reputation in ESG investment funds.
This court decision is part of a broader initiative by ASIC to combat greenwashing in the financial sector. Previous cases have targeted entities like Mercer Superannuation and Active Super, following warnings from ASIC Chair Joseph Longo about the regulator’s focus on misleading sustainability claims.
ASIC Deputy Chair Sarah Court remarked on the significance of the ruling, highlighting its role in upholding the integrity of the Australian financial system. “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,” she noted.
The court’s decision marks a pivotal moment in the regulatory oversight of ethical investment claims, serving as a stark reminder to fund managers about the severe repercussions of misleading investors about the sustainability of their investment products.
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