Sustainable investment options and exclusions: Federal Court approves ASIC's first-ever civil penalty of $11.3 million for greenwashing conduct

What you need to know

• In ASIC v Mercer Superannuation (Australia) Limited [2024] FCA 850, the Federal Court has approved a civil penalty of $11.3 million arising from false or misleading representations to investors regarding ESG claims for sustainable superannuation products and associated exclusions.
• This is the first civil penalty obtained by ASIC for greenwashing in Australia.
• The Court determined the penalty based on the need for deterrence (general and specific), the course of conduct and totality principles applied to multiple contraventions and mitigating factors (including cooperation with the regulator and remedial and corrective action by Mercer).
• Further guidance is pending on civil penalties for greenwashing misconduct and the factors the Court will take into account – see our recent updates on the Vanguard and Active Super decisions.

What you need to do

• Ensure public statements about the 'green' or ESG credentials of financial products accurately reflect exclusions or other qualifications.
• Exclusions and other investment 'screening' or restrictions should be clearly defined (e.g. general, qualified or subject to materiality thresholds) and properly disclosed.
• Corporations should have a compliance framework and mechanism in place to ensure website information and videos promoting sustainable investment products are verified by their legal and compliance teams for accuracy, consistency with other documents (e.g. PDS) and that there are reasonable grounds for representations about the ESG attributes of those investment products.

Mercer's 'greenwashing' representations

Mercer Superannuation (Australia) Limited (Mercer) is trustee of the Mercer Super Trust, which, as at April 2023, had approximately 850,000 members with total assets under management valued at approximately $65 billion. Mercer had ultimate responsibility for the strategy and governance of the investments offered by the Mercer Trust.  Through the Mercer Super Trust, Mercer offered a range of superannuation investment options to investors, including a category of seven 'Sustainable Plus' investment options.

In November 2021, Mercer published a video about the 'Sustainable Plus' options on its website entitled 'Responsible and Sustainable Investing with Mercer'.  Between November 2021 and September 2022, the video was also accessible on Vimeo and Youtube.  The video included a statement that the 'Sustainable Plus' options went further than other options "in their commitment to sustainable investment" and excluded investment in alcohol, gambling and carbon intensive fossil fuels which were all deemed unsustainable.

In addition to the statement made in the video, Mercer published four similar statements regarding the nature of the 'Sustainable Plus' options on its website that were accessible to the public between January 2022 and March 2023 (together, the Five Representations). The 'Sustainable Plus' options were represented to "have a higher proportion of sustainability-themed assets" and exclude companies involved in alcohol production, carbon intensive fossil fuels and gambling.

Contrary to the Five Representations, Mercer was in fact investing in companies involved in and/or deriving profits from the gambling, alcohol and fossil fuel sectors in six of its seven 'Sustainable Plus' options.

On 21 July 2022, Market Forces, an environmental advocacy project, published two articles which identified potential greenwashing by Mercer, stating that it invested in companies involved in carbon intensive fossil fuels like thermal coal through its 'Sustainable Plus' options.

In response, on 21 July 2022, Mercer removed references to 'carbon intensive fossil fuels like thermal coal' from one of its website statements, but left the balance of the representation unchanged.

ASIC's case against Mercer

In February 2023, ASIC commenced proceedings against Mercer, the first ever court action filed by ASIC for alleged greenwashing conduct.

ASIC alleged that in making the Five Representations, Mercer was wrongly representing to current and potential investors that funds invested in the 'Sustainable Plus' options were not, and would not in the future be, invested in companies involved in and/or deriving profits from the production or sale of alcohol, from gambling, or from the extraction or sale of carbon-intensive fossil fuels.

ASIC sought declarations that Mercer had contravened sections 12DB(1)(a) and 12DF(1) of the ASIC Act, an order that Mercer pay pecuniary penalties in respect of those contraventions and adverse publicity orders.

Declarations of contravention

The Court made declarations that Mercer:

• contravened section 12DF(1), by misleading the public regarding the nature and characteristics of the financial services it provided through the 'Sustainable Plus' options by reason of the Five Representations; and
• contravened section 12DB(1)(a) by making false or misleading representations as to the standard, quality, value and grade of the 'Sustainable Plus' options as they existed at the time of Five Representations and in the future.

The Court was satisfied that the facts agreed to by the parties and the admissions made by Mercer provided a sufficient foundation for the declarations. The Five Representations were false or misleading because:

• the exclusion of investments in alcohol, gambling and carbon intensive fossil fuels in the Five Representations was conveyed in absolute terms, without any qualifications as to the materiality of any exposure to those sectors; and
• the exclusion was factually incorrect and, in so far as they related to future matters concerning excluded investments, Mercer did not have reasonable grounds for making such representations.

For certain asset classes in the Sustainable Plus options, Mercer in fact applied additional sustainability exclusions in relation to carbon intensive fossil fuels, alcohol production and distribution, and gambling. These exclusions were based on materiality exposure thresholds that permitted some limited investment in carbon intensive fossil fuels, alcohol and gambling below those thresholds.

Determining the civil penalty

The parties jointly submitted that Mercer should be ordered to pay a penalty of $11,300,000 for the admitted contraventions the subject of the declarations made by the Court.  The Court considered, among others, the following factors.

Nature and extent of the contravention

Although it it was not possible to ascertain the precise number of times that each of the Five Representations was actually viewed by a consumer, the parties nevertheless agreed that there were a large number of contraventions across four “courses of conduct” based on the time periods in which the representations were made.

The Court accepted the parties' joint submissions on applying the course of conduct and totality principles so that the multiple contraventions were not regarded as isolated but occurred repeatedly over an extended period and involved multiple representations about the ESG credentials of the Sustainable Plus options.  This also ensured that the same underlying conduct was not penalised more than once.

The $11.3 million amount was the total of penalties for four 'courses of conduct' based on four different time periods during each of which some or all of the Five Representations were made:

• the first course of conduct during the period 12 November 2021 to 25 January 2022 – $1 million;
• the second course of conduct during the period 25 January 2022 to 4 April 2022 – $2 million;
• the third course of conduct during the period 4 April 2022 to 22 July 2022 – $3.3 million; and
• the fourth course of conduct during the period 22 July 2022 to 1 March 2023 – $5 million.

Deterrence

The Court noted the following matters in support of the importance of the deterrence objective (general and specific) to which the Court is required to have regard in determining the appropriateness of any proposed pecuniary penalty:

• a significant and increasing number of Australian consumers take into account 'green' claims and ESG considerations when making investment decisions;
• greenwashing has the potential to reduce consumer confidence in 'green' or ESG claims, which undermines the efforts of businesses that are pursuing ESG goals accurately and fairly;
• greenwashing harms consumers by depriving them of information relevant to making choices in accordance with ESG and ethical values or objectives;
• false or misleading ESG claims may confer unfair competitive advantages on companies in marketing their financial products and services;
• greenwashing has been identified as a key regulatory and enforcement priority by ASIC and the ACCC, and the Senate Standing Committee on Environment and Communications is currently conducting an inquiry into it.

Circumstances of the contraventions

The Court held, on the basis of the agreed facts and Mercer's admissions, that Mercer's conduct was serious and arose from a failure to:

• implement adequate systems to ensure the ESG claims made in relation to its superannuation products were accurate and not false or misleading; and
• monitor and enforce sustainability exclusions.

The Court noted that, while Mercer took some corrective action in response to the issues brought to its attention by the Market Forces articles in July 2022, its review did not extend to a complete review of all Mercer's public statements made in relation to the Sustainable Plus options. More wide-ranging corrective action and a review of its ESG compliance were not undertaken until ASIC commenced the civil penalty proceeding.

Loss or damage suffered or benefits obtained

The parties agreed and jointly submitted that it was not possible to identify any financial harms to individual consumers because it was not known:

• which consumers, if any, elected to become members of Sustainable Plus options on the basis of the Five Representations;
• what alternative choices they would have made had they known the true position; and
• the difference in performance of any relevant alternative superannuation fund.

As a consequence, there was no basis on which to assume the amount of any financial loss or damage to consumers. The parties also agreed that any consumers who relied upon the Five Representations when deciding to invest in the Sustainable Plus options were denied the opportunity to make an informed choice and ensure their money was not invested in the companies which the Sustainable Plus options were represented to have excluded.

It was also agreed that Mercer benefitted financially from its conduct at the detriment of its competitors, although it was not practicable to quantify those benefits. However, the Court noted a significant difference in the value and number of investors in the Sustainable Plus options from the start of the period when the statements were published to when they were finally taken down.

Cooperation

The Court found that the $11.3 million penalty was warranted in circumstances where Mercer showed significant cooperation with ASIC in terms of:

• agreeing to substantial proposed pecuniary penalties;
• taking remedial and corrective action regarding the ESG claims associated with the Sustainable Plus options;
• admitting to the contraventions at the earliest opportunity following the commencement of the proceeding; and
• reaching a resolution of the proceeding in the way most conducive to freeing up the resources of the Court and the regulator.

Mercer's remedial action

In useful guidance for superannuation companies, the Court looked favourably on the remedial action taken by Mercer after proceedings had commenced.  Specifically, Mercer removed the last two remaining erroneous statements and published a 'Sustainable Investments Information Booklet' that informed members that the 'Sustainable Plus' options may be exposed to excluded industries. The booklet listed new general exclusions that applied to direct holdings and new sustainability exclusions applicable to particular funds.

Mercer addressed the issues raised by the proceeding by ensuring that proper disclosure was made to existing and potential investors about its ESG exclusions policies and the possibility that some investment options might have some exposure to excluded companies and industries.

Adverse publicity order

The Court also ordered an adverse publicity order in the terms proposed by ASIC and Mercer.  The notice detailed Mercer's greenwashing conduct and the contraventions of the ASIC Act determined by the Court, and the $11.3 million civil penalty ordered by the Court.

The notice is required to be published for a six month period on Mercer's 'Sustainable Investing Webpage'. The notice includes this statement: "Mercer acknowledges the need for accurate disclosure concerning the sustainable nature and characteristics of its superannuation investment options. Mercer remains committed to delivering the best possible outcomes for members, underpinned by transparent and reliable information".

Regulatory enforcement horizon for greenwashing

Together with the Federal Court's recent findings of misleading or deceptive conduct in ASIC civil penalty proceedings against Vanguard Investments and Active Super, this decision confirms that great care should be exercised when vetting public statements about the 'green' or ESG credentials of financial products.

Corporations should have a compliance framework and mechanism in place to ensure all statements, whether they are made in product disclosure statements, annual reports, websites, promotional videos or elsewhere, are thoroughly checked by their legal and compliance teams.

The Mercer case also demonstrates for the first time the magnitude of the civil penalty that a company may face for engaging in greenwashing, and the mitigating factors that a court may take into account in determining a just and appropriate penalty.  Further guidance on civil penalty determination is pending from the hearings in the Vanguard and Active Super proceedings.  However, it should be noted that ASIC has various regulatory enforcement choices comprising not only civil penalty proceedings but also the infringement notice regime and enforceable undertakings where appropriate.

Although the three test cases against Mercer, Vanguard and Active Super are at the entity level, greenwashing conduct may also give rise to potential exposure to corporate trustee boards and senior management and their reliance upon investment subject matter experts (e.g. chief investment officer and sustainable investment manager). The FAR regime will also have implications for executives of super fund trustees as the March 2025 commencement date looms large concurrently with ASIC's continuing focus on greenwashing.

Authors: James Clarke, Partner Edmond Park, Partner Angela Pearsall, Partner and Phimister Dowell, Senior Associate.