Greenwashers Beware: Federal Court Of Australia Finds Civil Liability In Investment Fund Greenwashing Case – Corporate Governance

A recent decision of the Federal Court of Australia involving
Vanguard Investments Australia
(“Vanguard“) highlights some of the
legal risks associated with marketing environmental, social and
governance (“ESG“)-friendly investment
products.¹ The decision has been touted by the Australian
Securities and Investments Commission’s
(“ASIC“) as confirmation of its first
successful prosecution in a civil “greenwashing”
proceeding based on misrepresentations in an investment fund’s
investor communications.

The case arose after Vanguard discovered that its Ethically
Conscious Global Aggregate Bond Index Fund (the
“Fund“) included several investments
that should have been screened and excluded under the Fund’s
publicly-stated investment criteria. After Vanguard self-reported
the issue to the ASIC, the ASIC commenced a civil proceeding
against Vanguard in respect of the issuance and sale of the
Fund’s securities between August 2018 and February 2021. As at
February 2021, the Fund had more than AUD $1 billion in funds under
management.

In the decision, the court found that, despite promising
investors that the Fund did not invest in issuers with significant
business activities involving fossil fuels, weapons and vice
products (such as tobacco, gambling, and adult entertainment) in 12
product disclosure statements including in the investment strategy
and investment return objective of the Fund, a news release about
the Fund’s launch, statements made on its website, and
statements made by an executive in a media interview, the Fund was
in fact invested in several issuers engaged in oil and gas business
activities. In the proceeding, the ASIC alleged that each of those
communications involved the making of a false or misleading
representation or engaging in conduct that was liable to mislead
the public and that, as at February 2021, approximately 46% of the
Fund’s securities had not been screened by Vanguard,
representing approximately 74% of the Fund’s market value.

Vanguard had admitted most of the ASIC’s allegations, but
disputed certain issues concerning its liability. In the result,
although the court found that Vanguard is liable for some of its
public disclosure statements regarding the Fund’s ESG
investment screening, Vanguard prevailed in establishing that there
is no liability for other statements, including statements made by
third parties concerning the Fund.

The court’s decision requires Vanguard and the ASIC to
return to court on August 1, 2024 for a hearing to determine the
penalty. One issue that we will be watching for is to see whether,
in setting the penalty, the court will give Vanguard credit for
self-reporting its disclosure issues for the Fund to the ASIC and
for cooperating with the ASIC by not disputing the key facts during
the court proceedings.

In Canada, the Canadian Securities Administrators have published
guidance regarding their expectations concerning ESG-focused
investment funds (see CSA Staff Notice 81-334, which was first
published in January 2022 and revised earlier this month). McCarthy
Tétrault has also published supplemental guidance to assist
managers with this topic (see Navigating the ESG landscape: Practical insights
for investment fund managers). Although Canadian courts and
securities regulators are not bound by decisions of the Australian
courts, the decision in Vanguard’s proceedings could be
instructive of how Canadian courts would treat a similar fact
pattern here in Canada.

We’re Here to Help

McCarthy Tétrault has leading national ESG and Sustainability and Securities Regulatory and Investment Funds
(SRIP) groups. We are especially well-equipped to provide
clients with a full suite of multidisciplinary advice and support
to assist them in integrating ESG and Sustainability thinking and
reporting into their organizational DNA. With a robust
understanding of business, industry, and market drivers, we can
deliver contextualized advice and guidance.

Footnote

1. Australian Securities and Investments Commission
v. Vanguard Investments Australia Ltd., [2024] FCA
308.

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