Greenwashing In A Sustainability-Driven Market

On 28 March 2024, Justice O’Bryan found that Vanguard Investments Australia Ltd (Vanguard) had acted in contravention of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) by making false or misleading representations to the public about screening processes they had in place to maintain a certain environmental, social and governance (ESG) standard for a Vanguard investment fund (Fund).

On 23 August 2023, Lavan published an article about ASIC’s application for civil penalty proceedings in the Federal Court of Australia against Vanguard, as a result of representations which Vanguard made to the public which were, allegedly, false or misleading, in the context of offering or promoting sustainability-related products. Lavan’s previous article also provided useful information about greenwashing and how to avoid it.

ASIC v Vanguard Investments Australia Ltd [2024] FCA 308 

In the judgment published by Justice O’Bryan on 28 March 2024, it was held that Vanguard had made false or misleading representations on a number of occasions which, variously, conveyed the following messages:

• That the Fund offered an ethically conscious investment opportunity (by seeking to track the return of the Index); and
• Before being included in the Fund, securities issued by companies were researched and screened against applicable ESG criteria, with any securities which violated the ESG criteria being excluded or removed from the Fund (Research and Screening Process).

Despite these representations, declarations were made by the Court to the following effect:

• Vanguard’s Research and Screening Process was subject to the following limitations:
  • The Entity Limitation: not all issuers of securities that were included in the Index were subject to the Research and Screening Process; rather, only companies (and generally only publicly listed companies) were;
  • The Ticker Limitation: where a company involved multiple entities issuing securities using a shared stock exchange “ticker”, the Research and Screening Process was only conducted in relation to the company with the largest debt outstanding (by market value), and then applied to all other companies with the same “ticker”; and
  • The Fossil Fuel Limitation: the fossil fuel screen, as in effect from 15 July 2020, did not cover companies that derived revenue from the transportation or exploration of thermal coal.
• a significant proportion of securities in the Fund were from issuers that were not the subject of the Research and Screening Process; and
• the Fund included at least 23 securities issued by companies that violated applicable ESG criteria.

The matter has been listed for a further hearing on 1 August 2024, at which any penalty and costs orders will be determined.

Greenwashing - ASIC’s role

In May 2023, the Australian Securities & Investments Commission (ASIC) released a report in which they expressed how they aim to ensure compliance with the law, promoting fair markets, and supporting transparent disclosure so that retain investors and financial consumers can make informed decisions. In practical terms, ASIC has undertaken reactive and proactive surveillance, including by:

• surveillance of the managed funds sector, including reviewing PDSs;
• surveillance of ESG-related disclosures in disclosure documents lodged with ASIC by companies raising capital from retail investors; and
• responding to reports of misconduct and breach reports.

The report includes data regarding the outcomes of ASIC’s surveillance activities, and the steps which ASIC will take to rectify any concerns it has regarding potential greenwashing activities (including by commencing civil penalty proceedings). ASIC’s intervention has assisted to prevent harm to investors, consumers and market integrity, and to deter greenwashing misconduct.

Lavan Comment

This Federal Court decision is a reminder of the importance of strict regulatory compliance for issuers promoting or offering sustainability-related products, within in a market where a continuous increase in demand for sustainability-related financial products is evident.  

If you think that greenwashing may be relevant to your business, or if you think that a greenwashing-related claim may affect you now or in the future, please do not hesitate to contact Cinzia Donald, Partner in Lavan’s Litigation and Dispute Resolution team.