Greenwashing – ASIC court win reflects regulatory enforcement priority in the superannuation industry

What you need to know

• ASIC's focus on greenwashing as an enforcement priority continues with its latest successful case against LGSS Pty Ltd the trustee of Active Super (Active Super).
• The Federal Court found that Active Super made false or misleading representations to members and potential members of the super fund by promoting "green" or ESG credentials that it did not invest in certain sectors or activities, when in fact it did.
• This decision follows the recent judgment against Vanguard Investments and provides further guidance on the types of representations that are likely to attract the regulator's attention and that a Court is likely to consider to constitute greenwashing.
• Further clarification is pending on the magnitude of civil penalties a Court is likely to impose for greenwashing contraventions, and how deterrence and relevant mitigating factors are weighed in deciding the appropriate penalty.

What you need to do

• Ensure claims about ESG-related investing are consistent, verifiable and accurately reflect the implementation of exclusions or restrictions.
• Regularly review and monitor ESG or sustainable/responsible investment policies and practices, and ensure they are aligned with investment decisions and disclosures (including in annual reports, PDSs, media releases, statements on websites, social media platforms and in other communications with members).
• Companies employing researchers to restrict or eliminate certain types of securities through ESG investment screens should be clear that the methodology adopted and definitions used align with what an ordinary and reasonable consumer would understand the terms in question to mean.
• The need for accuracy, consistency and reliability of a superannuation fund's information will become even more important in view of the proposed new laws regarding mandatory standards for sustainability and climate related financial disclosures.

Greenwashing – an enforcement priority in the superannuation sector

ASIC has said greenwashing remains a key focus in 2024 and it will continue to monitor the superannuation sector (amongst others) for misleading greenwashing claims.

ASIC's position is that, if trustees are making ESG related claims to attract potential members – whether they are aspirational statements, targets, active stewardship commitments, investment descriptions or representations about a fund's sustainable investment strategies and objectives – those claims need to be backed with evidence and transparent about their basis.

Since the introduction of ASIC's Information Sheet INFO 271 in June 2022, ASIC has increased its scrutiny of misleading or deceptive practices of entities promoting financial products and services.

The Active Super decision (ASIC v LGSS Pty Ltd [2024] FCA 587) is one of three civil penalty proceeding test cases commenced by ASIC in the Federal Court of Australia in 2023, the others being the recent Vanguard decision (see our summary here) and the case against Mercer Superannuation (Australia) Ltd (proceeding VID 117/2023).

ASIC's case against Active Super

ASIC claimed that Active Super represented that it did not invest in certain sectors or activities that were contrary to its "Sustainable and Responsible Investment" (SRI) policy, such as gambling, tobacco, Russia, oil tar sands and coal mining, when in fact it did, either directly or through its holdings in various investment funds.

The statements ASIC relied on were published on Active Super's website, in its SRI policy, in its reports and factsheets, on its social media platforms and in an email sent from Active Super to its members. In addition there were statements published in Investment Magazine that were attributed to Active Super's CEO

ASIC alleged that, by making false or misleading representations about its investments' ESG credentials in various documents and communications, such as reports, newsletters and on its website, Active Super:

• engaged in conduct that was liable to mislead the public as to the nature, the characteristics and the suitability of Active Super's financial services in breach of section 12DF(1) of the ASIC Act; and
• made false or misleading representations that Active Super's financial services were of a particular standard, quality or grade, and had certain performance characteristics or benefits, in breach of section 12DB(1)(a) of the ASIC Act.

Alleged false or misleading representations

ASIC alleged, and Active Super contested or sought to clarify, that during the period 1 February 2021 to 30 June 2023 the following representations were made:

• that it would not make or hold investments in companies that derive more than 10% of their revenue from gambling or any revenue from tobacco;
• that following Russia's invasion of Ukraine, it would divest its Russian investments and make or hold no further investments in Russia;
• that it would not make or hold investments in companies that derive any revenue from oil tar sands projects; and
• that it would not make or hold investments in companies that derive one-third or more of their revenue from coal mining.

ASIC also alleged, and Active Super denied, that its conduct occurred "in trade or commerce", because it is a not-for-profit trustee company operating to make profits for its members.

Determining the contraventions

The four-step process that the Court applied to determine whether the alleged conduct was misleading or deceptive involved:

• identifying with precision the alleged contravening conduct;
• considering whether the identified conduct was conduct "in trade or commerce";
• considering what meaning that conduct conveyed; and
• determining whether the conduct in light of that meaning was misleading or deceptive or likely to mislead or deceive – it is not necessary to prove an intention to mislead or deceive or that the conduct in question actually misled or deceived anyone, but rather that it had the tendency to lead a person exposed to the conduct into error.

The third and fourth steps require the Court to consider objectively the conduct as a whole and its effect on the state of mind of the ordinary and reasonable members of the relevant class of persons to whom the conduct was directed (here the members or prospective members of the fund), judged by reference to the relevant context. That context includes "the immediate context (including all the words in the document or other communication and the manner in which those words are conveyed, not just a word or phrase in isolation) and the broader context of the relevant surrounding facts and circumstances".

The Court held that:

• ASIC was entitled to declarations as to contraventions of sections 12DF(1) and 12DB(1)(a) on the basis that the representations in relation to exclusions applied to gambling, Russian entities, oil tar sands investments and coal mining were misleading or deceptive;
• the impugned conduct was "in trade or commerce" on the basis that nothing turns on the fact that the trustee is a not-for-profit company, especially where it is the corporate trustee of a superannuation fund and operates and manages the fund with a view to making profits for the members of the fund; and
• the corporate trustee's function also involved engaging in promotional activities in relation to or for the purpose of the supply of services to existing or prospective members of the fund, including making statements to promote the fund's ESG credentials or objectives.

Gambling

Active Super argued that the divestment of companies that derived more than 10% of their revenue from gambling was discretionary under the SRI policy. Nonetheless, the Court found Active Super's representations in relation to gambling were misleading because:

• the use of diagrams and critical language such as "not invest", "No Way" and "eliminate" was unequivocal and did not leave room for any exceptions or qualifications including using best endeavours not to invest in gambling;
• ordinary reasonable consumers were unlikely to read the details of the SRI policy after being exposed to such unambiguous language and in the absence of any indicators such as a footnote or asterisk with specific limitations or qualifications; and
• no ordinary reasonable consumer would have drawn the distinction between holding shares in a company deriving revenue from gambling and indirect exposure to such a company through pooled funds, and then read the exclusions and restrictions represented as subject to the proviso that there was a way to invest in such a company by investing indirectly in it.

The Court construed "gambling" by reference to the Macquarie Dictionary definition to include lottery tickets as well as casinos, pokie machines and online sports betting agencies. Active Super had used an ESG research provider to identify companies to be placed on the "Investment Restrictions List". For reasons that were not explained, that restricted list excluded lottery companies from the definition of gambling.

Russia

Active Super's representations that it would not make investments in Russia and subsequent statements that, among other things, Russia was "out" were found to be misleading because:

• the statements were not directed towards processes that had begun and commitments as to future decisions (as Active Super had argued); and
• instead, the language used suggested Active Super no longer held those positions, despite continuing to have exposure to investments in Russia during the relevant period.

There was one exception to those findings, relating to a statement in the SRI policy which indicated that the trustee would not make investments in Russia but there might be situations where it would not be possible for the trustee to avoid indirect investments in restricted companies. The latter qualifying item was found not to be misleading as it conveyed that Active Super may have indirect exposure to Russian investments through pooled funds.

Oil tar sands projects and coal mining

For both oil tar sands projects and coal mining, Active Super argued that:

• its direct holdings were not inconsistent with the alleged representation which, when read in light of the SRI policy, conveyed that Active Super restricted investment in companies that derived more than 33.3% of their revenue from oil tar sands projects and with such companies it would consider whether to divest its holding; and
• its indirect holdings were not inconsistent with the alleged representation, given they were held through a pooled fund.

The Court rejected those submissions and found the alleged representations to be misleading and deceptive on the basis that:

• ordinary reasonable consumers were unlikely to read the SRI policy after being exposed to unqualified language such as "eliminate investment in oil tar sands" and in the absence of any indication of specific limitations or qualifications; and
• no ordinary reasonable consumer would have drawn the distinction between direct and indirect holdings, and then read the exclusions as not applying to investing indirectly via pooled funds.

The Court also rejected submissions by Active Super regarding its investments in coal mining on the basis that they flew in the face of unequivocal statements that Active Super would not actively make such investments.

Tobacco

The Court found that Active Super did not make misleading representations in relation to its investments in companies with exposure to the tobacco industry on the basis that:

• it invested in companies that were involved in the manufacture and sale of packaging to tobacco companies, and did not derive any revenue from the manufacture or production of tobacco; and
• the ordinary reasonable consumer would not regard an investment in a company that derived between 1.5% and 11% of its revenue from supplying packaging to tobacco companies as being a "tobacco company" or a company engaged in the manufacture or production of tobacco but instead as a packaging company, and therefore outside of the screening criteria to identify restricted companies.

Enforcement landscape for superannuation funds

The Court has yet to determine the relief sought by ASIC in this case and in the similar Vanguard and Mercer cases. In each case, ASIC seeks pecuniary penalties in respect of the contraventions the Court has found, injunctive relief and adverse publicity orders which would require the entities to disclose and publish any contraventions found.

When the Court does determine the relief in each of these cases, we expect this will include clarification on the magnitude and range of civil penalties a Court is likely to impose for greenwashing contraventions, and how deterrence (both general and specific) and relevant mitigating factors are taken into account when a Court exercises its discretion.

While regulatory enforcement action is currently a key risk area, superannuation trustees making statements about the "green", ESG or SRI credentials of their investments should also be mindful of the risk of class actions and the potential impact that breaches of directors' duties may have on corporate trustee boards.

Want to know more?

• Greenwashing – Clarity arrives with ASIC's first court regulatory enforcement outcome (2 April 2024)
• More greenwashing and other climate-related class actions on the horizon in Australia (14 March 2024)
• Climate-related litigation risk management (18 October 2023)