What you will learn from this post:
What is greenwashing?
Greenwashing is a term that has gained prominence in recent years, particularly as environmental, social, and governance (ESG) considerations have become increasingly important in the corporate world. At its core, greenwashing refers to the deceptive practice of portraying a company, product, or service as environmentally friendly or socially responsible when, in reality, it fails to uphold such standards. This tactic is often employed as a marketing strategy to capitalize on the growing consumer demand for sustainable and ethical practices.
Greenwashing can take various forms, from using eco-friendly imagery and buzzwords without substantive actions to manipulating data or cherry-picking information to create a misleading impression of sustainability. Companies engaged in greenwashing often exploit consumer interest in environmental issues to enhance their brand image or boost sales, without making genuine efforts to reduce their environmental impact.
Why is greenwashing becoming problematic for companies around the world?
As the global community intensifies its focus on sustainability, the exposure and condemnation of greenwashing practices have become essential in fostering genuine progress towards a more environmentally conscious future.
We recently provided an update on successful greenwashing claims around the world. These claims had one common denominator: the companies which engaged in greenwashing were ordered to pay fines, sometimes in the millions.
But in addition to the fines that companies have to pay, there are also other far-reaching consequences. To list but three negative consequences:
In short: you may get away with greenwashing for some time, but once you get caught, the consequences will have a severe impact on your business, both financially and overall.
Case study: What we can learn from the recent Vanguard case in Australia
The background to the Vanguard saga
Vanguard Investments Australia (Vanguard) highlights on its website that it is “one of the world’s largest investment management companies, offering a wide range of investment options, superannuation, and valuable insights to everyday investors and financial advisers,” with over 50 million investors and over A$10 trillion of assets. This among others includes the Vanguard Ethically Conscious Global Aggregate Bond Index Fund (Hedged), a fund the securities of which were supposedly screened against ESG criteria.
The Australian Securities & Investments Commission (ASIC) had already made it clear in June 2022 that it was not going to tolerate greenwashing. In a speech by ASIC Chair Joseph Longo at the Law Council of Australia Business Law Section Corporations Workshop, which the ASIC also published on its website, Longo among others highlight that:
We will be looking for funds and products that make misleading claims related to sustainability. Where we find wrongdoing, we will not hesitate to use our range of regulatory tools, including enforcement action.
Vanguard was on the receiving end of these regulatory tools: at the end of July 2023, the ASIC announced that it was formally commencing a greenwashing case against Vanguard. Here is an excerpt from the ASIC’s media statement:
ASIC alleges Vanguard made false and misleading statements and engaged in conduct liable to mislead the public in representing that all securities in the Vanguard Ethically Conscious Global Aggregate Bond Index Fund (Hedged) (Fund) were screened against certain ESG criteria. The Fund was marketed to investors seeking, amongst other things, securities with an ethically conscious screen. (emphasis added)
The extent of investments involved was significant: as at 26 February 2021, the total funds or assets under management of the Vanguard Ethically Conscious Global Aggregate Bond Index Fund was over A$1 billion. Given the popularity and size of the fund, one would assume that Vanguard had conducted all the required due diligence to ensure that all statements made were correct and that there was no possibility to even claim that Vanguard had mislead the public.
The decision by the Federal Court of Australia
Only about eight months after the ASIC’s announcement, on 28 March 2024, the ASIC could claim a victory in the case as the Federal Court of Australia found that Vanguard “contravened the law by making misleading claims about certain environmental, social and governance (ESG) exclusionary screens applied to investments in a Vanguard index fund.”
The findings by the Federal Court are significant and show that very thorough investigations were conducted, going beyond what was stated directly in the Vanguard Ethically Conscious Global Aggregate Bond Index Fund’s information. The Federal Court found that during a period of about three years, acted in contravention of the Australian Securities and Investments Commission Act 2001 by misleading the public as to the nature, the characteristics and the suitability for their purpose of the relevant financial services.
According to the Federal Court, the wrong representations were made by:
Vanguard has not be hit with a fine – just yet: the court matter has been listed for further hearing on 1 August 2024 at which the Federal Court will consider the appropriate penalty to impose for the conduct.
The take-aways: what we can learn from the Vanguard case
The reputational damage is massive
While the extent of the fine that Vanguard will be slapped with is still unknown at this point, the damage suffered is already enormous. It comes as no surprise that ESG-platforms such as ESG Today, Responsible Investor or CarbonCredits.com were all over the story of Vanguard being convicted. Newspaper outlets in Australia such as the Herald Sun, The Daily Telegraph and the Sydney Morning Herald also all appear to have found the story of great interest and reported in their print and digital editions as via video channels in the case of Sky News Australia, to give but one example.
Global news agencies such as Reuters also jumped on the story. And it is important to note that this is not the first time they reported on the issue. Vanguard had come under the crossfire since July 2023, when the ASIC made its announcement (see above). As such, the Financial Times and others already reported on the lawsuit a long time before verdict came out at the end of March 2024.
All of this consistently placed scrutiny on Vanguard. With the verdict out now, It is not surprising that everyone condemned Vanguard. Dirty Truth of Clean Investments: ASIC Triumphs in Historic Greenwashing Case, the title of a story by Finance Magnates, stands as an example for this, as does the “branding” of Vanguard as a “Greenwasher.”
The scrutiny undertaken goes beyond merely investment brochures
The conviction of Vanguard underscores the expanding scope of regulatory scrutiny when it comes to greenwashing. This case is significant not only for the issuance of Product Disclosure Statements (PDS) but also for the broader range of misleading communications identified by the court.
As highlighted above, investigations delved beyond traditional promotional materials like PDSs, extending scrutiny to various forms of public statements. Vanguard’s culpability was established through a comprehensive examination that encompassed
This clearly exemplifies a shift in regulatory focus towards a more holistic evaluation of communications surrounding investment offerings. By addressing not just printed materials but also digital media and spokesperson engagements, the court has sent a clear message about the importance of transparency and accuracy in all forms of public disclosures within the financial industry.
Increased regulatory scrutiny for Vanguard
The conviction of Vanguard is set to result in heightened regulatory scrutiny across jurisdictions where Vanguard operates. This landmark case has set a precedent and raised awareness about misleading environmental claims in financial products. As a consequence:
Potential civil suits by individual investors
While admittedly as of today, no such reports have emerged yet, following Vanguard’s conviction for greenwashing, there is a certain possibility that individual investors who feel misled may pursue civil suits against the company in Australia and elsewhere. This could manifest in several ways:
The outcome of the lawsuit against Vanguard and of civil suits could further hold Vanguard accountable for its misleading practices and provide affected investors with a means to seek restitution.
Conclusion
In conclusion, the ramifications of Vanguard’s conviction for greenwashing have already inflicted significant damage on the company. The negative media attention and resulting reputational damage alone are substantial indicators that greenwashing has not paid off for Vanguard.
