Vanguard Investments Australia has been ordered by the Federal Court to pay a $12.9 million penalty for making misleading claims about environmental, social and governance (ESG) exclusions. The penalty is the highest yet for 'greenwashing' conduct.

Vanguard was found to have made misrepresentations concerning its Ethically Conscious Global Aggregate Bond Index Fund.

Vanguard has admitted to misleading investors by claiming that these funds would be screened to exclude bond issuers with significant business activities in certain industries, including fossil fuels. However, this was not always the case. Approximately 74% of the securities in the Fund by market value were not researched or screened against applicable ESG criteria.

The misleading claims were made in a range of public communications, including 12 product disclosure statements, a media release, statements published on Vanguard’s website, a Finance News Network interview on YouTube, and a presentation at a Finance News Network Fund Manager Event which was published online.

As of 26 February 2021, the total funds or assets under management of the Vanguard Ethically Conscious Global Aggregate Bond Index Fund were over $1 billion. The Fund is a registered managed investment scheme, of which Vanguard is the Responsibility Entity and the Investment Manager.

"‘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 ASIC Deputy Chair Sarah Court. "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."

In his orders, Justice O’Bryan stated, "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."

He further noted, "By its misleading conduct, Vanguard misrepresented the “ethical” characteristics of the Fund. 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."

This outcome follows ASIC's successful greenwashing outcome in its civil penalty proceeding against Mercer Super, where the court ordered Mercer to pay a civil penalty of $11.3 million.