ASIC’s second win for greenwashing civil penalty proceedings: a record $12.9 million penalty against Vanguard

On 25 September 2024 the Federal Court of Australia ordered Vanguard Investments Australia (Vanguard) to pay a pecuniary penalty of $12.9 million for making misleading claims about environmental, social and governance (ESG) exclusionary screens. This decision against Vanguard marks the Court’s highest penalty imposed for greenwashing conduct to date. 

The Federal Court’s decision is ASIC’s second successful greenwashing action, following the $11.3 million civil penalty ordered against Mercer Super in August this year (see our article here, which also compares enforcement activity against greenwashing internationally).This article serves as an important reminder on Australia’s regulatory emphasis combatting greenwashing practices and provides useful guidance for businesses on how the Court determines the size of appropriate civil penalties for greenwashing.

ASIC’s civil proceedings against Vanguard 

The penalty follows Vanguard’s admission to engaging in conduct that was liable to mislead the public, and to making representations that were false or misleading, in relation to the purported ESG screens which were applied in the Vanguard Ethically Conscious Global Aggregate Bond Index Fund (Hedged) (Ethically Conscious Fund). ASIC has reported that the total funds or assets under this fund was over $1 billion (as of 26 February 2021). 

The Federal Court found that Vanguard contravened ss 12DF and 12DB(1)(a) and (e) Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) by making false or misleading statements about its Ethically Conscious Fund, through various public representations that: 

• the Ethically Conscious Fund offered an ethically conscious investment opportunity and it did this by seeking to track the return of an index; 
  
  
• before being included in the index, the Ethically Conscious Fund securities were researched and screened against applicable ESG criteria; and 
  
  
• securities that violated applicable ESG criteria were excluded or removed from the Ethically Conscious Fund.

The Court found these representations were misleading as: 

• not all securities in the Ethically Conscious Fund were screened against ESG criteria;
  
  
• a significant proportion of securities in the Ethically Conscious Fund were from issuers that were not researched or screened against applicable ESG criteria; and 
  
  
• the Ethically Conscious Fund included issuers that violated applicable ESG criteria.

Further, Justice O’Bryan noted that the representations were made with reckless disregard to their accuracy, particularly where the persons involved in the preparations were aware of the ESG screening limitations, and that: 

“…the desire to promote and market the Fund as “ethically conscious” took priority over ensuring that the composition of the Fund, and the extent of ESG screening, was accurately disclosed”.  

Penalty calculation 

In calculating the appropriate penalty to serve the public policy purposes of general and specific deterrence, Justice O’Bryan considered the following matters articulated by the Honourable Justice French, as he then was, in PC v CSR Ltd [1991] ATPR 41-076 (known as the ‘French Factors’): 

• the nature and extent of the contraventions;
  
• the circumstances in which the contraventions occurred;
  
• the loss and damage suffered; 
  
• the benefit obtained by Vanguard;
  
• the deliberateness of the contravention;
  
• the contrition and cooperation by Vanguard;
  
• Vanguard’s history of contraventions for engaging in similar conduct;
  
• the involvement of Vanguard’s senior management in the contravention;
  
• the compliance culture of Vanguard; and
  
• the size and financial position of Vanguard.

Having considered the French Factors, Justice O’Bryan accepted that a 25% discount ought to be imposed, to reflect the high level of cooperation that Vanguard had shown in ASIC’s initial investigation and in this proceeding. 

His Honour also provided useful guidance into the application of theoretical maximum penalties available under statute. In this case, the maximum penalties for each contravention were:

• $2.1 million for each contravention occurring wholly or partly before 13 March 2019; and
  
• $25.6 million for each contravention occurring wholly on or after 13 March 2019.

His Honour noted that as Vanguard contravened the ASIC Act each time a potential investor viewed the relevant representation the theoretical maximum penalty calculable was in the billions of dollars. 

Justice O’Bryan observed that the theoretical maximum penalty provides a ‘yardstick’ which must be balanced with all other relevant factors and cited the Full Court’s decision in Reckitt Benckiser, which found that in the case of a disproportionately large maximum penalty (in that case in the trillions of dollars), that the appropriate range for penalty in the circumstances is best assessed by reference to other factors, as there was no meaningful overall maximum penalty given the very large number of contraventions over a long period of time. 

Going forward and what it means for business operating in Australia 

ASIC’s second win to a greenwashing civil penalty action demonstrate the regulator’s commitment to tackle greenwashing as an enforcement priority.

We expect that in addition to Mercer and Vanguard, the regulator will continue to focus on addressing greenwashing misconduct through surveillance and enforcement activities against Australian businesses and asset managers, with future enforcement action anticipated. (For more information, see also ASIC’s Report 791 which outlines ASIC’s regulatory greenwashing interventions made between 1 April 2023 and 30 June 2024). 

To avoid greenwashing penalties, businesses should ensure that any environmental or sustainability claims they make are able to be supported by fact. Should your business require advice on how to mitigate these risks and to ensure compliance with greenwashing regulation, please reach out our experts listed in this article.