Vanguard Australia has been fined $12.9 million for making misleading claims about its ESG screening, after three-quarters of the securities in the fund having not been researched or applied to an ESG screen.
The penalty comes after the Federal Court found in March that Vanguard contravened the law by making misleading claims for its $1 billion Ethically Conscious Global Aggregate Bond index fund, after ASIC commencing legal action against the passive investing giant in 2023.
In a judgement published on Thursday morning, Justice Michael O’Bryan said approximately 74 per cent of the securities in the fund by market value had not been researched or screen against an applicable ESG criteria.
Vanguard was lambasted by Justice O’Bryan who said the contraventions “should be regarded as serious”.
“Vanguard’s misrepresentations concerned the principal distinguishing feature of the fund, being its ‘ethical’ characteristics,” Justice O’Bryan said.
“Vanguard developed and promoted the fund in response to market demand for investment funds having those characteristics.”
The fund was based on the Bloomberg Barclays MSCI Global Aggregate SRI Exclusions Float Adjusted Index.
The judgement noted that concerns were raised by the Responsible Investment Association Australasia after Vanguard approached them for certification of the product, and RIAA identified there were no socially responsible investing (SRI) screens applied across to the non-corporate securities in the fund.
Despite these concerns being raised, Vanguard had made ESG claims about the fund in 12 product disclosure statements, a media release, media interviews, and statements on Vanguard’s website.
Despite the harsh criticism from the justice, a 25 per cent discount was applied to what would have been otherwise imposed to reflect the “high level of cooperation” Vanguard showed during ASIC’s investigation and the court proceedings.
“In setting a discount at that level, I am mindful of the desirability of encouraging the 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,” the judgement said.
Justice O’Bryan noted the penalty exceeds Vanguard’s annual profit for the whole of its business in FY18 ($10.7 million) and was similar to annual profit for FY19 ($13 million).
Additionally, the justice noted the fund was a relatively small part of Vanguard’s overall business, being less than 1 per cent in terms of both income and funds under management.
“I consider that an aggregate penalty of this size is proportionate and strikes an appropriate balance between deterrence and oppressive severity,” Justice O’Bryan said.
“In aggregate, it is an amount that is many multiples of the total revenue earned by Vanguard from managing the fund during the relevant period, and many multiples of the annual revenue earned by Vanguard from managing the fund after the end of the relevant period.”
In a media statement, Vanguard said it accepts the judgement and takes its regulatory obligations and responsibilities to its clients seriously, and that payment of the penalty will “not be borne” by Vanguard Australia investors.
The fund said it had strengthened its procedures, governance, technology and training following a self-initiated independent review.
“Vanguard has cooperated with ASIC throughout this matter since informing the regulator of the issue and its approach to rectification in 2021,” Vanguard said.
“There were no findings of financial loss to investors. Vanguard apologises to its clients for these errors, which were unintentional. Vanguard acknowledges the importance of accurate product and marketing information in helping consumers to make informed investment decisions.”
The corporate regulator has ramped up its enforcement activity over greenwashing in the past few years, highlighting it as a key strategic priority.
The Vanguard penalty comes just weeks after Mercer Super was fined $11.3 million for making misleading statements about the sustainable nature and characteristics of some of its superannuation investment options, off the back ASIC proceedings.
In June, the court found Active Super had made misleading claims about its about ESG and Russian investments.
