ASIC Lodges Civil Penalty Proceedings Against Vanguard Investments Australia Over Alleged ESG Misleading Conduct

ASIC, the Australian Securities and Investments Commission, has taken decisive action by lodging civil penalty proceedings in the Federal Court against Vanguard Investments Australia. The regulatory body alleges misleading conduct related to certain environmental, social, and governance (ESG) exclusionary screens applied to investments in a Vanguard fund.

Misleading Statements and Ethical Screening

According to ASIC, Vanguard Investments made false and misleading statements and engaged in conduct that could mislead the public. The allegations pertain to Vanguard's representation that all securities in the Vanguard Ethically Conscious Global Aggregate Bond Index Fund (Hedged) underwent screening against specific ESG criteria. The Fund was marketed to investors who sought securities with an ethically conscious screen.

The investments held by the Fund were based on the Bloomberg Barclays MSCI Global Aggregate SRI Exclusions Float Adjusted Index (Index). Vanguard claimed that the Index excluded issuers with significant business activities in various industries, including those related to fossil fuels.

ASIC Deputy Chair Sarah Court - “We consider that the screening and research undertaken on behalf of Vanguard was far more limited than that being promised to investors, and we consider this constitutes another example of greenwashing.”

Companies Allegedly Exposing Investor Funds

According to ASIC's findings, investor funds were exposed to the following companies with ties to fossil fuels:

1. Abu Dhabi Crude Oil Pipeline LLC (ADCOP) – 100% owned by ADNOC, the state-owned oil company of Abu Dhabi. Involved in the transportation of oil through a pipeline from Abu Dhabi to the shipping export terminal.
2. Chevron Phillips Chemical Co. LLC – Involved in manufacturing and marketing a wide range of petrochemicals through subsidiaries and equity affiliates.
3. Colonial Pipeline Co – Operates a pipeline system for refined oil products in the US.
4. Empresa Nacional del Petróleo SA (ENAP) – Owned by the State of Chile, ENAP is engaged in the exploration, production, refining, and marketing of hydrocarbons and by-products, including through exploration wells known as hydraulic fracturing.
5. John Sevier Combined Cycle Generation LLC – Engaged in electricity generation through a gas-fired plant called John Sevier Combined Cycle Plant, which uses natural gas or no. 2 fuel oil for combustion.

Limited ESG Research and Violated Criteria

However, ASIC alleges that ESG research was not conducted over a significant proportion of bond issuers in the Index and, consequently, the Fund. As of February 2021, the Index and the Fund included issuers that violated the applicable ESG criteria. Specifically:

• The Index had 42 issuers that collectively issued at least 180 bonds violating the criteria.
• The Fund had at least 14 issuers that collectively issued at least 27 bonds, also in violation.

ASIC highlights that these bonds exposed investor funds to investments tied to fossil fuels, including activities linked to oil and gas exploration. This contradictory situation raises concerns over the reliability of the screening process.

Greenwashing Allegations and Misleading Disclosures

In response to the allegations, ASIC Deputy Chair Sarah Court emphasized that investors are increasingly seeking options that exclude certain industries. Thus, they must be able to rely on accurate investment screens to make informed choices. Vanguard promised its investors and potential investors that the Fund would exclude bond issuers with significant business activities in certain industries, including fossil fuels. However, ASIC asserts that the screening and research undertaken by Vanguard fell short of the promised standards, constituting an example of greenwashing.

The alleged misleading conduct is evident in various Vanguard communications, including

• Product Disclosure Statements published between 7 August 2018 and 17 February 2021,
• a media release issued in August 2018,
• statements on its website
• statements made in an interview with Finance News Network at a Finance News Network Fund Manager Event, both of which were recorded and published online.

The ASIC concise statement can be accessed here and outlines the facts giving rise to the claim.

Regulatory Focus and Penalties

ASIC has been actively pursuing greenwashing conduct and has already issued over $140,000 in infringement notices to address such concerns, including three infringement notices amounting to $39,960 against Vanguard for separate greenwashing conduct.

In response to the current situation, ASIC is seeking declarations and pecuniary penalties from the Court. Additionally, they are seeking orders that require Vanguard to publicize any contraventions found by the Court. The Court's first case management hearing date is yet to be scheduled.

Background and Resources

As of 26 February 2021, the total funds or assets under management of the Vanguard Ethically Conscious Global Aggregate Bond Index Fund exceeded $1 billion. The Fund is a registered managed investment scheme, with Vanguard serving as the Responsibility Entity and Investment Manager. It comprises the ETF, AUD Hedged, and NZD Hedged classes of units.

For responsible entities of managed funds and super fund trustees, ASIC's Information Sheet 271 (INFO 271) provides valuable guidance on avoiding greenwashing when offering or promoting sustainability-related or ethical products and investments. Moreover, ASIC's Report 763 outlines regulatory interventions related to greenwashing concerns made between 1 July 2022 and 31 March 2023.

On its Moneysmart website, ASIC provides a range of tools and resources to help people understand money management, including information on ESG investing.

Conclusion

ASIC's actions against Vanguard Investments Australia underscore the significance of transparency and adherence to ESG criteria in investments. For investors seeking ethical options, it is crucial that promised exclusions are diligently applied, and the integrity of investment screens is upheld. The outcome of the civil penalty proceedings will further shape the landscape of ethical investing in Australia.

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