Vanguard Investments Australia has been ordered pay a AU$12.9 million penalty for making misleading claims about environmental, social and governance (ESG) exclusionary screens, which were applied to investments in the Vanguard Ethically Conscious Global Aggregate Bond Index Fund.
Authorities found that approximately 74% of the securities in the fund by market value were not researched or screened against applicable ESG criteria.
As of 26 February 2021, the total funds or assets under management of the Vanguard Ethically Conscious Global Aggregate Bond Index Fund was over $1 billion. 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.
“Vanguard misrepresented the “ethical” characteristics of the Fund”
The Australian Federal Court’s order follows ASIC’s 2023 complaint. The financial watchdog celebrated the milestone with ASIC Deputy Chair Sarah Court saying: ‘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.
“Vanguard admitted it misled investors that these funds would be screened to exclude bond issuers with significant business activities in certain industries, including fossil fuels, when this was not always the case. 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.”
Australian Federal Court Justice O’Bryan said “Vanguard’s contraventions should be regarded as serious. 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.
“By its misleading conduct, Vanguard misrepresented the “ethical” characteristics of the Fund. Approximately 74% of the securities in the Fund by market value were not researched or screened against applicable ESG criteria. Further, Vanguard benefited from its misleading conduct. 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.”
27 out of 180 bonds exposed investors with ties to fossil fuels
According to the complaint, 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 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. Vanguard claimed the Index excluded issuers with significant business activities in a range of industries, including those involving fossil fuels.
ASIC, however, found that ESG research was not conducted over a significant proportion of issuers of bonds in the index and therefore the fund, which allegedly included issuers that violated the applicable ESG criteria, as of February 2021.
The Australian regulator found that the index included at least 180 bonds (from 42 issuers) and the fund included at least 27 bonds (from 14 issuers) that exposed investor funds to investments with ties to fossil fuels, including those with activities linked to oil and gas exploration.
