'Substantial' fine looms in landmark greenwashing case

Investment giant Vanguard is facing the prospect of multimillion-dollar fines approaching its entire yearly profit after admitting to misleading investors in a landmark greenwashing case.

The Federal Court ruled in March that Vanguard Investments Australia broke consumer laws by making misleading claims about ethical exclusions applied to one of its index funds.

Vanguard self-reported the breach and was pursued by the Australian Securities and Investments Commission in the first successfully resolved greenwashing civil action brought by the watchdog.

During a penalty hearing on Thursday, ASIC barrister Meg O’Sullivan KC said employees at Vanguard had been aware of potential issues with how companies were being screened for ethical exclusion but had failed to take action.

ASIC is seeking a penalty for the breach that Vanguard says approaches its entire annual profit, a figure that ranged from about $10 million 2018 to as much as $50 million in 2020.

“Vanguard is obviously a very large organisation; its parent company is obviously very large as well,” Ms O’Sullivan said.

“Vanguard’s submissions are noticeably silent on it being owned by one of the world’s largest investment management companies, with approximately $10 trillion I think in assets under management.

“(The court) has to consider the level of penalty that will have the necessary sting.”

In Vanguard submissions read to the court, the company said a fine that “would approach (our) entire annual profit is plainly a very substantial penalty”.

Justice Michael O’Bryan earlier found Vanguard contravened the ASIC Act numerous times through representations about environmental, social and governance screens applied to its Vanguard Ethically Conscious Global Aggregate Bond Index Fund.

The index claimed to exclude companies with significant business activities involving fossil fuels, alcohol, tobacco, gambling, military weapons and civilian firearms, nuclear power and adult entertainment.

But the court was told limitations on the screening of companies led to some being included in the index, including Abu Dhabi Crude Oil Pipeline, which may not have met the standards consumers could reasonably expect.

The breaches were made in 12 product disclosure statements, a media release, statements published on the company’s website, a Finance News Network interview on YouTube and a presentation that was posted online.

Justice O’Bryan on Thursday said the contraventions had the potential to affect the choice of consumers for whom making ethically conscious investments was important.

“That is a matter of significance, it’s not something you can quantify, not something you can value financially,” he said.

Vanguard barrister Philip Solomon KC said it was a matter of “sincere regret” to the investment firm that it misled consumers and he apologised unreservedly on behalf of the company.

“Vanguard Australia wishes to state clearly that it takes responsibility for making the misrepresentations,” he said.

“There will be a very substantial penalty.”

ASIC has pursued similar greenwashing proceedings against superannuation funds Mercer and Active Super.

Both of those companies have been found by the Federal Court to have misled consumers and are due to have penalties applied.

The Vanguard penalty hearing continues.