Greenwashing – Clarity arrives with ASIC's first court regulatory enforcement outcome
02 April 2024
02 April 2024
Greenwashing is seen to be a prominent issue in the market, given the increased importance of sustainable product investment in recent times and entities working towards reaching net zero positions.
ASIC has increased its scrutiny of sustainability-related financial products since the introduction of INFO 271 in June 2022, which sets out questions for financial services providers to consider to help avoid misleading or deceptive practices when promoting their products and services.
ASIC's position is that greenwashing "erodes investor confidence in the market" and it has actively taken enforcement action through the infringement notices regime against participants in the financial services, superannuation and energy sectors.
To date, there are three ASIC test cases regarding alleged greenwashing. These are civil penalty proceedings commenced in the Federal Court of Australia in 2023 (in order of filing) against Mercer Superannuation (Australia) Ltd in February, Vanguard Investments Australia Ltd (Vanguard) in July and LGSS Pty Ltd (the trustee of the Active Super super fund) in August.
The law on misleading or deceptive conduct is not new but the concentrated attention from regulators on pursuing entities for greenwashing is.
The Vanguard proceeding is in relation to claims about ESG exclusionary screens applied to investments in one of Vanguard's funds, the Vanguard Ethically Conscious Global Aggregate Bond Index Fund (Fund).
Investments held by the Fund were based on an index, the Bloomberg Barclays MSCI Global Aggregate SRI ("Socially Responsible Investing") Exclusions Float Adjusted Index (Bloomberg SRI Index) which was claimed to exclude issuers with significant business activities in certain industries. The excluded securities were purportedly based on research and screening against ESG criteria relating to fossil fuels, alcohol, tobacco, gambling, military weapons, civilian firearms, nuclear power and adult entertainment.
This test case seeks to illustrate how important it is that potential investors can rely on investment screens to assist with their decision-making.
ASIC alleged, and Vanguard admitted for the most part, that during the period 7 August 2018 to 17 February 2021 certain statements in its PDSs and on its website conveyed the following representations:
ASIC also alleged, and Vanguard admitted in their entirety, that the same representations (save for the reference to the index) were conveyed in Vanguard's media release in respect of the launch of the Fund, an interview given by a manager of Vanguard with Finance News Network (FNN) that was published on YouTube and a presentation given by a manager at a FNN fund manager event a video of which was published on FNN's website.
The representations were misleading because:
The Court determined, and made declarations, that:
The four-step process that the Court endorsed for assessing misleading conduct in a greenwashing claim (the same as any other non-greenwashing claim) involved:
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, judged by reference to the relevant context. That context includes "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".
In this case, each of the alleged communications were considered in its context and surrounding circumstances. However, the allegations made by ASIC necessarily required a focus on each communication rather than the conduct of Vanguard considered as a whole.
The Court has yet to determine the pecuniary penalties in respect of the contraventions it has declared, and adverse publicity orders sought by ASIC which require the entities to disclose and publish any contraventions found. A hearing in relation to those issues is listed on 1 August 2024.
The Vanguard decision confirms ASIC's enforcement priority in this area and its stated vision that "only meaningful, responsible and transparent disclosure will effectively combat greenwashing practices".
However, the potential need for fund managers to undertake their own research and analysis to ensure that exclusionary screens are applied appropriately may result in higher costs and therefore higher fees on investment products.
While the risk of regulatory enforcement action is currently generating a lot of attention, companies involved in making or vetting statements about green credentials should also be mindful of the risk of class actions.
As discussed in our recent update, there are various features of greenwashing and climate-related claims that may lend themselves to class actions, although there are some substantial challenges for claimants as well.
The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to.
Readers should take legal advice before applying it to specific issues or transactions.