In a significant development for Environmental, Social, and Governance (ESG) compliance, the Federal Court recently imposed a record $12.9 million penalty against Vanguard Investments Australia (Vanguard) for misleading consumers about certain funds that would be screened to exclude bond issuers with significant business activities in certain industries.
Previously, the Federal Court found that Mercer Superannuation (Australia) Limited (Mercer) was liable for pecuniary penalties totalling $11.3 million, for misleading consumers about the nature and characteristics of financial services that it offered through seven different “Sustainable Plus” investment options.
These decisions represent the first greenwashing cases brought by the Australian Securities and Investments Commission (ASIC) and underscore the critical importance of accurate ESG claims, given the growing regulatory scrutiny businesses face when promoting sustainability-related products and services.
The Vanguard Investments case
The $12.9 million penalty imposed on Vanguard is the highest yet for greenwashing conduct, with the Federal Court finding the company admitted it misled investors regarding its Vanguard Ethically Conscious Global Aggregate Bond Index Fund (Fund).
Despite the company claiming that the Fund would be screened to exclude bond issuers with significant business activities in certain industries, including fossil fuels, ASIC revealed that approximately 74 per cent of the securities in the Fund by market value were neither researched nor screened against the applicable ESG criteria. Vanguard benefitted from this misleading conduct as the misrepresentations enhanced its ability to attract investors and its reputation as a provider of investment options with ESG characteristics.
What happened in the Mercer greenwashing case
Between November 2021 and March 2023, Mercer promoted seven “Sustainable Plus” investment options on its website, claiming they excluded investments in industries such as alcohol production and sale, gambling and carbon-intensive fossil fuel extraction or sale.
However, six of these investment options did include investments in these excluded industries, contradicting Mercer’s ESG claims. The Court found these representations to be false and misleading.
Mercer admitted to violating sections 12DB(1)(a) and 12DF(1) of the Australian Securities and Investments Commission Act 2001 by making misleading statements about its financial services. Mercer co-operated with ASIC by agreeing to pay a substantial pecuniary penalty and cover ASIC’s costs of $200,000.
The Court emphasised that Mercer’s misleading claims constituted “greenwashing”, or the practice of making exaggerated or false environmental claims to appear more sustainable or ethical. While the statutory maximum penalty could have been over $20 million per contravention, the agreed penalty of $11.3 million was deemed appropriate given Mercer’s co-operation and corrective actions.
Key takeaways for businesses
The Mercer and Vanguard cases set important precedents for ASIC’s approach to greenwashing enforcement. Companies making ESG-related claims must ensure they are accurate, verifiable, and transparent to avoid regulatory action and protect their reputation in an increasingly eco-conscious market.
Greenwashing is now firmly in the crosshairs of Australian regulators, and businesses that fail to comply could face substantial penalties, as seen in these landmark rulings.
It serves as a powerful reminder for businesses, particularly those in financial services, that greenwashing is a key regulatory focus for both ASIC and the Australian Competition and Consumer Commission (ACCC). With a Senate inquiry into greenwashing underway, companies must ensure their ESG claims are specific, transparent, and substantiated by evidence.
How to avoid greenwashing claims
ASIC Deputy Chair Sarah Court described greenwashing as a “serious threat” to the Australian financial system and emphasised that greenwashing remains an enforcement priority for ASIC.
To avoid greenwashing and stay off the regulators’ radar, companies should:
- Be precise and clear: Avoid vague or unsubstantiated terms such as “green” or “sustainable.” Claims should be specific, measurable, and verifiable.
- Substantiate claims with evidence: ESG claims should be backed by robust documentary evidence. Maintaining records of this evidence is crucial in case of an audit or inquiry.
- Ensure transparency: Be open about the environmental and social impacts of products, including their sourcing, durability, and emissions. Provide clear information on compliance with labour, environmental, and ethical standards.
- Work with third-party certifiers: Partnering with reputable certification bodies can help substantiate ESG claims. However, businesses must ensure they accurately convey the meaning and scope of any certification.
Transparency is key
Business promoting ESG values or “green” products and services must ensure that their claims are accurate and verifiable. Vague or unsubstantiated claims can easily lead to regulatory scrutiny and penalties so claims about sustainability must be specific and supported by data or documentation.
Greenwashing has become a focal point for Australian regulators like ASIC and the ACCC. Small and medium businesses, like their larger counterparts, must be able to substantiate any ESG-related claims with clear, documented evidence. This includes keeping records of sourcing materials, environmental impacts, or any certifications. Without this proof, businesses risk being accused of misleading consumers.
Penalties for greenwashing can be severe and proportionate to the scale of the business. Non-compliance could lead to financial penalties, as well as costs related to adverse publicity orders or legal fees.
Finally, a greenwashing scandal can damage consumer trust, leading to long-term harm. Companies that are found to be misleading consumers about their ESG credentials may face backlash not just from regulators, but from their customer base, resulting in lost business opportunities.
Being aware that any misleading ESG claims – intentional or not – could result in significant penalties and damage to their reputation as well as establishing internal checks to review the accuracy of their sustainability claims before publishing them, will help protect your business.
By Joanne Jary, Partner, Caitlin Waldron, Senior Associate, and Anneliese Castle, Undergraduate, at Holding Redlich
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