Further greenwashing enforcement in relation to sustainable funds in Australia

The Federal Court of Australia (the Court) has ruled in favour of the Australian Securities and Investments Commission (ASIC) in two recent cases relating to the way sustainable funds were marketed. One was against the Australian arm of the asset manager Vanguard, and the other against the pension fund Active Super. In both cases, ASIC alleged that the marketing material contained false or misleading representations and constituted conduct that was liable to mislead the public, in breach of the Australian Securities and Investments Commission Act 2001.  The Court agreed, and penalties will now be determined at hearing dates in August. These cases demonstrate the continued (and increasing) regulatory appetite for penalising conduct seen as greenwashing. 

Case against Vanguard

In marketing its Ethically Conscious Global Aggregate Bond Index Fund (Hedged) between August 2018 and February 2021, Vanguard had told potential investors that:

“(a) the Fund offered an ethically conscious investment opportunity; 

(b) before being included in the Fund, securities were researched and screened against applicable ESG criteria; and 

(c) securities that violated applicable ESG criteria were excluded or removed from the Fund.”

The description of “ethically conscious” was key. ASIC alleged that the representations set out above were false or misleading due to (i) significant limitations in the research and screening of securities against the applicable ESG criteria; (ii) the fact that a large proportion of securities in the Fund were from issuers who had not been researched or screened against the relevant criteria; and (iii) issuers that had violated the criteria were included in the Fund.

Three specific limitations in the research and screening were identified:

(a) Only companies (and generally only listed companies) were researched and screened against the ESG criteria. It was not the case that all relevant issuers of securities were screened;

(b) Where multiple issuing entities shared a stock exchange “ticker”, the ESG research was conducted only for the company with the largest debt outstanding; and 

(c) Companies with revenue from the transportation or exploration of thermal coal were excluded from the fossil fuel screening that was applied. 

ASIC alleged that the failures led to investments in certain fossil fuel companies. 

Vanguard admitted most of ASIC’s allegations (which was unsurprising given the fact it had self-reported the issue). However, there remained a dispute between the parties on issues relating to liability in relation to the Product Disclosure Statements and the content on Vanguard’s website in particular. The issue in dispute was whether the Product Disclosure Statements and Vanguard’s website conveyed that before being included in the Fund, all securities were researched and screened against applicable ESG criteria and, if they failed the screening were excluded or removed from the Fund, or whether this screening applied instead only to securities “issued by companies” and therefore did not apply to all securities in the Fund (e.g. those that were issued by governments). ASIC was not successful in arguing for the broader position. 

Case against Active Super

In June 2024, ASIC won its case against the trustee of the superannuation fund Active Super, which claimed in its marketing material that it had eliminated investments that posed too great a risk to the environment and the community, using language such as “eliminate”, “not invest” and the phrase “No Way”. As with Vanguard, Active Super made statements in a number of different forums - for Active Super, this included on social media, email and in a magazine. 

The Court found that from 1 February 2021 to 30 June 2023, Active Super invested in various securities that it had claimed were eliminated or restricted by ESG investment screens. The type of investments at issue included oil tar sands projects and coal mining.

These securities were held by Active Super both directly and indirectly (via managed funds or ETFs). The Court did not accept Active Super’s submission that a consumer would draw a distinction between holding shares in a company and indirect exposures, and said that the language used was unequivocal and could not be read subject to any provisos.

Commentary

ASIC’s focus on greenwashing is in line with its published 2023 enforcement priorities, and it has now brought three test cases on greenwashing over the last year (the third is against another pension fund, Mercer). This focus is indicative of a wider trend beyond Australia. 

In Europe, although no enforcement decisions have yet been announced, scrutiny of potential greenwashing has intensified. The European Banking Authority published a report this month on greenwashing monitoring and supervision, which reflects data collected on actual and potential alleged greenwashing. The report is helpful in highlighting where greenwashing issues have been arising, and therefore where future enforcement and litigation risk may lie.

In the UK, the FCA has also indicated that greenwashing is a priority, with anti-greenwashing guidance recently coming into force.  Greenwashing, and its importance in the wider priority of consumer protection, has clearly been a focus of the FCA for some time. It remains to be seen whether the FCA’s new secondary objective for competitiveness and growth will influence its approach to enforcement action in this area.