In the second action of its kind in less than two months, ASIC last Friday published three infringement notices against investment manager, Vanguard Investments Australia Ltd (Vanguard), for alleged ‘greenwashing’ behaviour. The infringement notices follow ASIC’s action against Tlou Energy in late October 2022.
The action relates to claims about the extent to which Vanguard products would be invested in companies linked to the tobacco industry. In taking action, ASIC Deputy Chair Sarah Court said: ‘Greenwashing is not limited to environmental claims but extends to misleading ethical propositions’.
ASIC is actively monitoring the market for false and misleading claims relating to environmental, social and governance (ESG) claims, and has stated that greenwashing is one of its key priorities. And rightly so. ESG investing is big business with an ever-increasing number of Australians demanding that their investments in superannuation or other funds are invested in a manner which is consistent with their environmental or ethical values.
Infringement notices against Vanguard
ASIC’s infringement notices against Vanguard relate to disclosures made in Product Disclosure Statements for the Vanguard International Shares Select Exclusions Index Fund, the Vanguard International Shares Select Exclusions Index Fund (AUD Hedged) and the Vanguard International Shares Select Exclusions Index Fund (NZD Hedged) (Funds).
One of the objectives of the Funds was to ‘exclude securities involved in the production, manufacturing, or significant sales of tobacco’. ASIC found this representation was potentially misleading because the underlying index which the Funds tracked only excluded securities involved in the production and manufacturing of cigarettes and other tobacco products, and did not exclude companies involved in the sale of such products.
ASIC therefore concluded that the representations made in the Product Disclosure Statements were liable to mislead in breach of s12DF of the ASIC Act.
Vanguard paid $39,960 in compliance with the infringement notices on 1 December 2022 on a no admission/liability basis.
The infringement notices against Vanguard represent the second action brought by ASIC for alleged ‘greenwashing’ behaviour. The first such action was published in late October against Tlou Energy for disclosures made in an ASX announcement which suggested that one of its energy assets would be ‘carbon neutral’ when, in fact, Tlou had yet to undertake adequate investigations to establish whether it was feasible to achieve carbon neutrality on the project.
We can expect to see further announcements from ASIC in this area in the coming months as ASIC has stated that it is currently investigating ‘a number of listed entities, super funds and managed funds in relation to their green credentials claims’. The recent increase in greenwashing actions is in line with ASIC’s warning to the market that ‘ASIC is actively monitoring the market for potential greenwashing and will take enforcement action, including Court action, for serious breaches’ and the announcement from November 2022 that ‘misleading conduct in relation to sustainable finance, including greenwashing’ would be a key focus area for its enforcement work.
To date, ASIC has chosen to exercise its powers by issuing infringement notices. As its approach in this area continues to evolve, we should expect to see ASIC seeking civil penalties for such conduct, particularly for serious misconduct. This is in addition to the work that the ACCC is doing in relation to greenwashing.
Where to next for potential greenwashing claims?
ASIC’s actions to date have focussed on two key examples of potentially misleading conduct: future environmental claims without a reasonable basis for making such claims (as in the case of Tlou Energy) and inaccurate ethical claims (in the case of Vanguard). ASIC will no doubt continue to its focus on these behaviours and may also look further into other areas of potentially misleading ESG claims going forward, including in relation to the following behaviours:
- where a product is marketed on a narrow set of attributes without attention to other important environmental issues (e.g. claims that certain tree planting schemes are ‘environmentally friendly’ in circumstances where the project may lead to broader environmental issues);
- environmental claims which are poorly defined or too broad to be properly understood by investors (e.g. claims that a product is ‘green’ without reference to any accepted taxonomy of ‘green’ products);
- references to certifications which may misrepresent to consumers that the product has undergone a legitimate and/or thorough environmental certification process; and
- true environmental claims relating to a product which distracts consumers from the potentially greater environmental impact of the category as a whole (e.g. claims by coal mining companies as to environmentally friendly projects which may detract from the broader environmental issues associated with the company’s activities).
Firms would be well advised to exercise additional caution when issuing financial products or making statements to the market which may be interpreted as an ESG claim, or risk becoming one of the many firms the subject of enforcement investigations for such conduct. In this context, some questions to consider before making sustainability or ethical related claims include:
- Am I satisfied with the work undertaken to verify the claim and is there sufficient evidence to support the specific claims made?
- Are headline claims consistent with the overall product investment strategy, or are they only a narrow feature (eg a fund directed at ‘social projects’ where only a small proportion of the fund is invested in social projects?)
- Is the terminology used vague and without adequate explanation (eg, references to investing in a socially responsible manner without explaining precisely how this is achieved?)
- Are qualifications to such claims sufficiently prominent?
- If the claim made is to future matters (eg the project will be carbon neutral), is the disclosure clear as to the grounds for making the statement and any assumptions made in respect of such future matter?
This article was written by Polat Siva, Partner and Brenton Pollard, Special Counsel.