Thursday 3rd October 2024
ASIC (and courts) to funds: Practice the ESG you preach and stop virtue signalling
It doesn't matter whether funds mislead investors with intent or not, and it doesn't matter if other parties were partly to blame. The authorities have had enough of the excuses, and they're lobbing record fines at transgressors.
A four-month crackdown by the corporate regulator on false and misleading ESG claims is sending shockwaves through the funds management and superannuation industries, with a series of eight-figure fines delivering a clear message that funds need to practice what they preach… or stop preaching.
Recently the Federal Court lobbed a $12.9 million penalty at Vanguard for making misleading claims about the ESG screens used in its “ethically conscious” bond fund, after the provider admitted promoting it to investors based on the exclusion of fossil fuels despite most of the holdings not being screened against the applicable criteria.
This comes after Mercer was fined $11.3 million for a similar offence in August, with the institutional money manager failing to exclude carbon intensive fossil fuels, alcohol production and gambling in some of its superannuation options after promoting itself as “deeply committed to sustainability”.
In June, the $13.5 billion Active Super was also found guilty of faking its ESG credentials, with a slick marketing campaign claiming investments in Russia were “out” and there was “no way” it would invest in oil and gambling proving to be false.
The push marks a turning point for ASIC on its ESG monitoring activities. Not only is the corporate regulator cracking down on greenwashing, but the federal courts are agreeing with its view that the burgeoning problem needs to be curtailed.
Weasel words
Clearly, hollow virtue signalling from funds will no longer be tolerated by ASIC. But what the regulator and the courts really want both fund managers and super funds to know is that excuses no longer work.
Active Super tried to wriggle out of trouble by arguing that the offending investments were through pooled funds like ETFs, and that investors should be able to “draw a distinction” between that and direct exposure. In other words, that members should be smart enough to know that it was only being partially honest.
Federal Court Judge Justice O’Callaghan wasn’t having it. “If such a consumer was told, as they were told, that there was “No way” that [Active Super trustee] LGSS would invest in tobacco or gambling, he or she would not search around for some investment policy that might qualify such statements,” he said.
Vanguard admitted its own contraventions but rejected ASIC’s claims that it was “reckless”, arguing that executives weren’t aware of its ESG screening limitations. The courts disagreed, noting they had “ample information” after receiving emails from Responsible Investment Association Australasia explaining the broader problem.
Both of these funds were entitled to defend the respective charges against them, but the refusal of ASIC to accept the excuses and a stiff-armed response from the courts sends a clear message.
Mercer differed in that they issued a full mea culpa to ASIC’s charges, but showed a disregard for the seriousness of the contraventions in the court’s view. When two published articles first highlighted its ESG fabrications, Mercer responded by removing just seven words (“carbon intensive fossil fuels like thermal coal”) from one website statement, while ignoring a host of other offending material. At the time Mercer’s CEO was quoted as saying: “I don’t think the ‘greenwashing’ topic is going away…”
Mercer didn’t make excuses because ASIC had it bang-to-rights. But it committed an even worse sin in the court’s view: it knew the team was fudging the ESG credentials and didn’t do near enough to stop it.
Comms is key
Mercer’s apparent laziness notwithstanding, it doesn’t seem like any of these contraventions were intentional. More likely they were a combination of sloppy operational work and poor communications between investment and marketing teams.
Across the operational spectrum, fund managers and super funds will need to be aware that while ESG is rife with grey areas, the connection between what they say and what they do needs to be clear.
The regulator, and the Federal Court, no longer cares for petty vindication and shifty mitigation. If funds continue fudging their ESG credentials, there won’t be room for excuses.
Product manager wasn’t in the loop? Doesn’t matter. Outsourced ESG screener didn’t do its job? Your fault.
Marketing team overzealous?
That’ll cost you $10 million and change, plus a reputational gut-punch.
