Legal development

Federal Court approves ASIC's second civil penalty of $12.9 million for greenwashing conduct

By Edmond Park and James Clarke

26 September 2024

What you need to know

In ASIC v Vanguard Investments Australia Ltd (No 2) 2024 FCA 1086, the Federal Court ordered Vanguard Investments Australia to pay a $12.9 million civil penalty for making misleading claims about ESG exclusionary screens.
The Court highlighted the importance of cooperating with the regulator by applying a 25% discount, meaning the imposed civil penalty was almost half of what ASIC initially sought ($21.6 million).
Despite Vanguard's cooperation, this represents the highest civil penalty in a greenwashing case to date – see our recent update on the Vanguard liability decision here.

What you need to do

Ensure company materials and investment product disclosures in PDSs, media releases and on websites with ESG representations accurately reflect exclusions and screening against ethically conscious or socially responsible investing and other ESG-related criteria.
Review overall legal compliance systems (including verification procedures for disclosures in documents, websites and on social media), as weaknesses in this area may limit the ability to rely on mitigating factors in the determination of civil penalties.
Assess the value of self-reporting and cooperating with the regulator in circumstances where legal obligations may have been breached.

Vanguard penalty hearing

At the liability hearing earlier this year, Vanguard admitted most of ASIC's allegations relating to false or misleading representations in its Product Disclosure Statements, media releases, website, on social media and in a 'Finance News Network' presentation. The Court made declarations of contravention of sections 12DF and 12DB(1)(a) and (e) of the ASIC Act, reflecting the admitted and proven allegations that Vanguard's ethically conscious investment opportunities offered by the Vanguard Ethically Conscious Global Aggregate Bond Index Fund (Fund) tracked against a 'socially responsible investing' index and were not adequately screened against applicable ESG criteria (see our update here).

These proceedings focused on the imposition of an appropriate pecuniary penalty. ASIC sought a fixed aggregate sum of $21.6 million, while Vanguard accepted that a substantial penalty ought to be imposed, but that it should be in the range of $9 million to $11.25 million.

Ultimately, the Court determined that a total aggregate penalty of $12.9 million was appropriate, for 'five courses of conduct' which were identified based on the categories of contraventions. The breakdown of the penalty was:

an aggregate amount of $9 million in respect of the issue of the 12 PDSs for the Fund in 2018 and 2020;
an aggregate amount of $1.2 million in respect of the publication of the misleading representations concerning the Fund on Vanguard’s website from about 11 September 2018;
an aggregate amount of $1.2 million in respect of the publication of the media release concerning the Fund on or about 30 August 2018;
an aggregate amount of $750,000 in respect of the publication on YouTube from about 14 December 2018 of an interview given by a senior manager of Vanguard with FNN about the Fund; and
an aggregate amount of $750,000 in respect of the publication on the FNN website from about 14 December 2018 of the presentation given by Vanguard's senior manager about the Fund at a FNN Fund Manager event held on or about 5 December 2018.

Determining the civil penalty

The Court considered, among other things, the following factors.

The nature and extent of the contravention

This assessment required a quantification of the misconduct, including estimating the number of times the misleading representations were viewed by potential investors and the extent to which screening actually took place. Importantly, the Court found that 74% of securities in the Fund by market value were not researched or screened against applicable ESG criteria.

The circumstances in which the contraventions occurred

ASIC emphasised its strategic priorities by submitting that the representations had the distinguishing feature of being about "ethical" characteristics. This was reinforced by the agreed fact that there had been a significant increase in demand for, and investment in, investment products focused on ESG considerations, and Vanguard's marketing reflected that.

The loss and damage suffered because of the contravention

ASIC did not contend Vanguard's contraventions caused any financial loss to investors, but rather that the loss and damage was the loss of opportunity for investors to invest in accordance with their investment values, again emphasising general deterrence and the intent behind greenwashing-related regulatory litigation.

The benefits from the contravening conduct

While it was not shown Vanguard gained any financial benefit in the form of fees or better returns, the Court accepted that the misrepresentations enhanced Vanguard’s reputation as a provider of investment opportunities with ESG characteristics, as compared to what would have been the case if Vanguard had accurately disclosed the screening limitations and the Fund’s exposure to issuers engaged in the excluded industries.

The deliberateness of the contraventions

The Court found Vanguard's actions were not deliberate. However, the Court found that aspects of Vanguard's compliance with legal obligations under the ASIC Act "substantially failed" to the point of allowing statements to be made with reckless disregard to their accuracy.

The conduct of senior management

The Court observed that while there was little evidence to ascertain the precise role and tasks undertaken by senior management, it was sufficient to find that senior employees were involved in the preparation of disclosure material relating to the Fund that was misleading. However, that finding did not extend to the senior employees being aware of the misleading character of the misrepresentations.

Size and financial position of Vanguard

The Court noted that Vanguard, a wholly owned subsidiary of The Vanguard Group Inc, is one of the world's largest investment management companies and has more than $10 trillion in assets under management.

Compliance culture

The Court found Vanguard had taken substantial steps to improve its compliance systems to avoid repetition of the impugned conduct in the future. The improvements included introducing new policies and procedures for the preparation of PDSs, creating new dedicated product disclosure roles in Vanguard's disclosure team, introducing a new "Disclosure Working Group" governance body and implementing training protocols on the end-to-end PDS process.

Cooperation and contrition

The Court was satisfied that Vanguard cooperated fully with the regulator, as it self-identified and self-reported the issues, as well as admitted ASIC's allegations, save for one disputed issue concerning the nature and scope of certain representations.

Deterrence and weighing the factors

Taking the above factors into account, the Court found the need for deterrence was heightened by:

the seriousness of the contravention;
the length of the contravening conduct (over 2 years);
the substantial size of the investment fund (more than $1.1 billion in FUM) and having close to one thousand investors;
the disregard to the accuracy of the information conveyed; and
the involvement of senior employees in the preparation of misleading disclosure material relating to the Fund.

In contrast, these factors were balanced against:

Vanguard's (unsuccessful but notable) attempts to ensure the representations accurately reflected the fact that ESG screening of securities was limited to securities issued by corporates;
Vanguard's swift response in halting the trading of the investment product when it became aware of the misrepresentations;
Vanguard's cooperation with ASIC in the investigation and litigation phases; and
taking substantial steps to improve its compliance procedures.

Notably, the Court applied a 25% discount to the final total aggregate sum of $12.9 million to reflect the high level of cooperation that Vanguard showed throughout the initial investigation and these proceedings. The Court also noted "the desirability of encouraging cooperation of contraveners in proceedings such as these, where such cooperation reduces the cost and burden of the proceeding to the Court, ASIC and the community".

All of the above factors were relevant to the Court's determination of an aggregate penalty that was proportionate and struck "an appropriate balance between deterrence and oppressive severity".

Adverse Publicity Order

Similarly to the Mercer judgment (see here), in addition to the pecuniary penalty, the Court ordered Vanguard to publish an adverse publicity notice on its website, informing the public of its misconduct and the overall total civil penalty.

This notice has to be maintained on specific webpages for 12 months and appear immediately upon access.

What next?

Along with the $11.3 million civil penalty in the Federal Court's decision in ASIC v Mercer, there are now two major greenwashing cases which confirm ASIC's willingness to pursue its strategic goals and seek heavy penalties for those engaging in greenwashing. While the civil penalty outcome in the Active Super case is still pending, what is clear is that these test cases have largely been a success for ASIC.

ASIC has highlighted the importance of this decision in pursuing its strategic objectives in relation to greenwashing, noting that "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".

The Vanguard case provides further insight into what factors the Courts will take into account in greenwashing cases. These factors include the Courts' willingness to apply discounts to cooperative respondents, but also their focus on companies having compliance policies and the involvement of senior management.

Corporations should remain vigilant about the potential consequences of failing to have adequate compliance frameworks and mechanisms to ensure the ESG, "ethical" or "socially responsible" characteristics of their investment products are thoroughly checked by their legal and compliance teams.

Want to know more?

Authors: Edmond Park, Partner; James Clarke, Partner and Peter Fountotos, Lawyer.