Vanguard self-report of greenwashing led to smaller fine, experts say

Vanguard’s Australian unit self-reported its own regulatory breach that led to three greenwashing infringement notices issued by the securities watchdog last week.

The pre-emptive move by the US asset manager likely led to a much smaller fine, experts say, while the Australian Securities and Investments Commission (ASIC) is using the infringement to send a clear message to the industry on its enforcement priorities, which may include further greenwashing infringement notices this year.

Angela Ashton, Sydney-based director and founder of investment consultancy Evergreen Consultants, said the meagre amount of the fine, which amounted to A$39,960 ($26,873), was probably a reflection of Vanguard’s decision to voluntarily report the breach to the regulator.

“If this had been found by ASIC and Vanguard had not self-reported, then the fine would have likely been much bigger,” said Ashton.

The greenwashing involved three funds under the Vanguard International Shares Select Exclusions Index Funds, which were structured to exclude companies that were involved in significant tobacco sales but tracked an index that did not actually have that specific exclusion.

Vanguard described this as an “inadvertent error” in its product disclosure statements arising from an “unintended misdescription” of the exclusionary screens applied to the funds, according to a company spokesperson.

The person said that the error “did not result in any adverse financial impacts on investors” and that it “self-reported” the issue to the regulator. “ASIC has at no stage suggested that the error arose otherwise than inadvertently,” the spokesperson noted.

The product disclosure statements for the three funds were amended on May 19 this year, according to ASIC records.

The severity of the greenwashing in this instance is not considered to be particularly egregious, according to experts, but the regulator appears eager to make a statement with this first infringement notice directed at a fund firm, especially as it involves a large global manager like Vanguard.

“Even though it was a self-reporting of a technical breach, ASIC has gone out on the front foot and said we will definitely be looking at [greenwashing] hard,” said Ashton.

The message that fund firms need to take away from the Vanguard case is that ASIC is going to be looking very carefully for indications of greenwashing and are willing to use infringement notices to enforce its stance on the malpractice, she added.

ASIC last month identified greenwashing as one of its enforcement priorities for 2023, after rolling out regulatory guidance on greenwashing for funds earlier this year.

The US fund firm announced it was pulling out of the Net Zero Asset Managers Initiative last week, less than two years after signing up to the coalition of over 290 members managing a combined $66tn in assets.

Vanguard claimed its participation in the NZAM had led to “confusion about the views of individual investment firms”, and that its decision to leave the initiative was motivated by a desire to provide “clarity our investors desire about the role of index funds”.

Vanguard has faced criticism in recent years for its lacklustre net zero commitments and continued investment in fossil fuels, with a Morningstar report in July pointing out that the firm had committed 0 per cent of its active in-house assets to net zero.

It was also identified in April as the second-largest investor in Chinese coal among fund firms, after only BlackRock.

Vanguard’s recent tobacco-related greenwashing infringement in Australia comes amid a flurry of ASIC regulatory actions in the past couple of months.

Jim Bulling, Melbourne-based financial services partner at law firm K&L Gates, said there have been “in excess of 20 announcements” from ASIC over the past six weeks addressing enforcement actions on financial services firms that address a range of priorities.