The Australian Securities and Investments Commission (Asic) has lodged civil penalty proceedings in the Federal Court against Vanguard Investments Australia, alleging misleading conduct in relation to claims about certain environmental, social and governance (ESG) exclusionary screens applied to investments in a Vanguard fund, according to the financial regulator’s website.

The 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 were screened against certain ESG criteria. The fund was marketed to investors seeking, among other things, securities with an ethically conscious screen.

Investments held by the fund were based on an index called the Bloomberg Barclays MSCI Global Aggregate SRI Exclusions Float Adjusted Index. Vanguard, according to the Asic website, claims the index excluded issuers with significant business activities in a range of industries, including those involving fossil fuels.

However, the Asic alleges that ESG research was not conducted over a significant proportion of issuers of bonds in the index and, therefore, the fund.

As of February 2021, the regulator alleges the index and the fund included issuers that violated the applicable ESG criteria, including, for the index, 42 issuers that collectively issued at least 180 bonds, and, for the fund, at least 14 issuers that collectively issued at least 27 bonds. 

The Australian regulator also alleges that these bonds exposed investor funds to investments that had ties to fossil fuels, including those with activities linked to oil and gas exploration.

“Investors are increasingly seeking investment options that exclude certain industries, and investors need to be able to rely on investment screens to help them make these choices,” says Sarah Court, the regulator’s deputy chair. “In this case, Vanguard promised its investors and potential investors that the product would be screened to exclude bond issuers with significant business activities in certain industries, including fossil fuels.

“We consider that the screening and research undertaken on behalf of Vanguard was far more limited than that being promised to investors, and we consider this constitutes another example of greenwashing.”