The Australian Securities and Investments Commission (ASIC) has started civil penalty proceedings against Vanguard Investments Australia in regards to claims about environmental, social and governance (ESG) screens applied to investments in a Vanguard fund.
The corporate regulator alleged Vanguard made false and misleading statements and engaged in misleading conduct when stating all securities in the Vanguard Ethically Conscious Global Aggregate Bond Index Fund and exchange-traded fund were screened against certain ESG criteria.
ASIC stated investments held by the fund were based on the Bloomberg Barclays MSCI Global Aggregate SRI Exclusions Float Adjusted Index and Vanguard claimed this index excluded issuers with business activities in a number of industries, including those involving fossil fuels.
It also alleged the ESG research did not fully cover all the bond issuers in the index and therefore some of those in the fund, and, as at February 2021, 42 issuers in the index, which collectively issued at least 180 bonds, and 14 issuers in the fund, which collectively issued at least 27 bonds, violated the applicable ESG criteria.
As such, it alleged these bonds exposed investor funds to investments with ties to fossil fuels, including activities linked to oil and gas exploration.
It added Vanguard allegedly misled the public in product disclosure statements (PDS) published between 7 August 2018 and 17 February 2021, a media release issued in August 2018, in statements on its website and during an interview with an online news service and at an event hosted by the news service.
Commenting on the proceedings, Vanguard stated it had self-identified and self-reported in early 2021 that the descriptions of the exclusionary screens published by the index provider and within its PDS for the fund “were not sufficiently detailed”.
“At the time, the description of the exclusionary screens did not provide a sufficiently detailed explanation that certain debt issuers lacking research coverage were still included in the benchmark. As a result, it is possible the portfolio held exposure to certain securities that may not have been reasonably expected by investors,” the firm said in a media statement.
“The issue was self-identified and self-reported to ASIC, and as soon as the disclosure weakness was identified, Vanguard acted swiftly to inform investors and enhance the disclosure.
“There was never any intention to mislead, but Vanguard recognises it has not lived up to the high standards it holds itself accountable to and apologises for the concern this matter may cause for our clients.”
It added it has since updated the PDS for the fund twice with a more thorough description of the benchmark index methodology and greater detail as to how the exclusionary screens are implemented.
The date for the first case management hearing, which is to take place in the Federal Court, is yet to be scheduled and ASIC is seeking declarations, pecuniary penalties and orders requiring Vanguard to publicise any contraventions found by the court.
