Investment giant Vanguard will be forced to pay $12.9 million after admitting it misled investors over one of its "ethical" funds, in a landmark greenwashing case.
The Federal Court ruled in March Vanguard Investments Australia broke consumer laws by making misleading claims about ethical exclusions applied to one of its funds, which managed more than $1.1 billion investments.
Justice Michael O'Bryan on Wednesday handed down the fine and ordered the firm to publish a notice to consumers informing them of the outcome and Vanguard's conduct.
Vanguard was also ordered to pay the legal costs of the Australian Securities and Investments Commission, which pursued the case after the company self-reported the breach.
ASIC's Sarah Court said the fine should deter others from misleading sustainable investment claims. (Diego Fedele/AAP PHOTOS)
Justice O'Bryan earlier found Vanguard contravened the ASIC Act numerous times through representations about environmental, social and governance (ESG) screens applied to its Vanguard Ethically Conscious Global Aggregate Bond Index Fund.
The index claimed to exclude companies with significant business activities involving fossil fuels, alcohol, tobacco, gambling, military weapons and civilian firearms, nuclear power and adult entertainment.
But the court was told limitations on the screening of companies led to some being included in the index, such as Abu Dhabi Crude Oil Pipeline.
"Vanguard benefited from its misleading conduct," Justice O'Bryan said in Wednesday's judgment.
"The misrepresentations enhanced Vanguard's ability to attract investors to the fund, and enhanced Vanguard's reputation as a provider of investment funds with ESG characteristics."
The desire by some of Vanguard's staff to promote the fund as "ethically conscious" took priority over ensuring the claims were accurate, Justice O'Bryan said.
There was no suggestion consumers incurred any financial loss as a result of the conduct, but ASIC argued investors had been denied the opportunity to invest in accordance with their values.
ASIC deputy chair Sarah Court called greenwashing a serious threat to the integrity of the Australian financial system and an enforcement priority for the watchdog.
Vanguard's fund was supposed to exclude companies with significant fossil fuels businesses. (Mick Tsikas/AAP PHOTOS)
"The penalty imposed is the highest yet for greenwashing conduct," Ms Court said.
"It is essential that companies do not misrepresent that their products or investment strategies are environmentally friendly, sustainable, or ethical.
"The size of the penalty should send a strong deterrent message to others in the market to carefully review any sustainable investment claims."
It was agreed Vanguard's contraventions were not deliberate, but the court found some of the contravening conduct was reckless with respect to the company's legal obligations.
ASIC had been seeking a penalty of $21.6 million, which Vanguard lawyers argued at a penalty hearing in August could comprise most, if not all, of the company's net annual profit.
The company's annual profit for the 2021 financial year was roughly $21.6 million and for 2022 was about $26.1 million.
Vanguard argued a penalty in the range of $9 million to $11.25 million, including a 25 per cent discount for co-operation, would be more appropriate.
Justice O'Bryan said the penalty he imposed striked an appropriate balance between deterrence and oppressive severity.
Vanguard accepted the ruling and said payment of the penalty would not be borne by investors.
"Vanguard apologises to its clients for these errors, which were unintentional," it said in a statement.Â
"Vanguard acknowledges the importance of accurate product and marketing information in helping consumers to make informed investment decisions."
In August, Mercer Superannuation was fined $11.3 million by the court following a successful greenwashing case, which was the first to be brought by ASIC.