ESG Enforcement Tracker

Key facts:

Vanguard runs an investment fund called the Vanguard Ethically Conscious Global Aggregate Bond Index Fund. Investments held by the fund were based on a Bloomberg Socially Responsible Investing Index. The Index was claimed to exclude issuers with significant business activities in industries which had been screened against ESG criteria. The excluded industries included fossil fuels, alcohol, tobacco, gambling, military weapons and civilian firearms, nuclear power and adult entertainment.

ASIC launched civil penalty proceedings against Vanguard in July 2023. The proceedings alleged that, between August 2018 and February 2021, Vanguard had made a series of false or misleading representations stating that the fund offered an ethically conscious investment opportunity, that before being included in the fund, securities were researched and screened against ESG criteria, and that securities that violated ESG criteria were excluded or removed from the fund.

ASIC claimed these representations were false because of significant limitations in the screening of securities for inclusion in the fund. For example, the fund included issuers that violated applicable ESG criteria or had not been screened. As a result, Vanguard had breached Australian consumer investment legislation.

After proceedings were launched, Vanguard admitted most of ASIC’s allegations. A dispute remained about narrow issues regarding liability.

In March 2024, the Federal Court gave judgment. It found and made declarations that there had been breaches of sections 12DF and 12DB Australian Securities and Investments Commission Act 2001. This is ASIC’s first greenwashing court outcome.

In September 2024, the Federal Court ordered Vanguard to pay a penalty of AUS$12.9 million. In terms of loss and damages, it was held that the loss and damages manifested in the lost opportunity for investors to invest in accordance with their investment values, as opposed to financial loss to investors.

The judge accepted that the misrepresentations enhanced Vanguard’s ability to attract investors and enhanced Vanguard’s reputation as a provider of investment funds with ESG characteristics.

While there was no evidence of a deliberate conduct, the court held that:

• the contravening conduct was serious;
• the conduct continued for two and half years;
• it concerned a substantial investment fund;
• certain aspects of Vanguard’s conduct could properly be characterised as reckless, and
• senior employees were involved in the preparation of the misleading disclosure.

In terms of mitigation, the court noted Vanguard’s self report, its co-operation and its improved compliance procedures. Adverse publicity orders were also made.