Greenwashers Beware: Federal Court Of Australia Finds Civil Liability In Investment Fund Greenwashing Case - Corporate Governance

A recent decision of the Federal Court of Australia involving Vanguard Investments Australia ("Vanguard") highlights some of the legal risks associated with marketing environmental, social and governance ("ESG")-friendly investment products.¹ The decision has been touted by the Australian Securities and Investments Commission's ("ASIC") as confirmation of its first successful prosecution in a civil "greenwashing" proceeding based on misrepresentations in an investment fund's investor communications.

The case arose after Vanguard discovered that its Ethically Conscious Global Aggregate Bond Index Fund (the "Fund") included several investments that should have been screened and excluded under the Fund's publicly-stated investment criteria. After Vanguard self-reported the issue to the ASIC, the ASIC commenced a civil proceeding against Vanguard in respect of the issuance and sale of the Fund's securities between August 2018 and February 2021. As at February 2021, the Fund had more than AUD $1 billion in funds under management.

In the decision, the court found that, despite promising investors that the Fund did not invest in issuers with significant business activities involving fossil fuels, weapons and vice products (such as tobacco, gambling, and adult entertainment) in 12 product disclosure statements including in the investment strategy and investment return objective of the Fund, a news release about the Fund's launch, statements made on its website, and statements made by an executive in a media interview, the Fund was in fact invested in several issuers engaged in oil and gas business activities. In the proceeding, the ASIC alleged that each of those communications involved the making of a false or misleading representation or engaging in conduct that was liable to mislead the public and that, as at February 2021, approximately 46% of the Fund's securities had not been screened by Vanguard, representing approximately 74% of the Fund's market value.

Vanguard had admitted most of the ASIC's allegations, but disputed certain issues concerning its liability. In the result, although the court found that Vanguard is liable for some of its public disclosure statements regarding the Fund's ESG investment screening, Vanguard prevailed in establishing that there is no liability for other statements, including statements made by third parties concerning the Fund.

The court's decision requires Vanguard and the ASIC to return to court on August 1, 2024 for a hearing to determine the penalty. One issue that we will be watching for is to see whether, in setting the penalty, the court will give Vanguard credit for self-reporting its disclosure issues for the Fund to the ASIC and for cooperating with the ASIC by not disputing the key facts during the court proceedings.

In Canada, the Canadian Securities Administrators have published guidance regarding their expectations concerning ESG-focused investment funds (see CSA Staff Notice 81-334, which was first published in January 2022 and revised earlier this month). McCarthy Tétrault has also published supplemental guidance to assist managers with this topic (see Navigating the ESG landscape: Practical insights for investment fund managers). Although Canadian courts and securities regulators are not bound by decisions of the Australian courts, the decision in Vanguard's proceedings could be instructive of how Canadian courts would treat a similar fact pattern here in Canada.