By Mark Bland, Amiinah Dulull and Geoffrey McCarthy

On 6 June 2024, the Federal Court in Australia largely found for ASIC in its case against the trustee of the superannuation fund Active Super (Australian Securities and Investments Commission v LGSS Pty Ltd [2024] FCA 587).

The judgment contains important developments in the application of the law of misleading or deceptive conduct to the field of responsible investment and it also challenges certain industry practices.

Surprisingly, it also quotes statements from the Trump-era US Department of Labor guidance on ESG investment considerations.

Unlike the Mercer and Vanguard cases, LGSS appears to have fully contested ASIC’s claims and has not publicly stated whether or not it will appeal the judgment.

This article briefly overviews the findings and then sets out 9 critical lessons for product issuers.

Findings

The trustee of Active Super (LGSS) was found to have made false or misleading representations and engaged in conduct liable to mislead the public by making representations that it would not make or hold investments in companies that:

• derive more than 10% of their revenue from gambling (Gambling Representation)
• derive any revenue from tobacco (Tobacco Representation)
• derive any revenue from oil tar sands projects (Oil Tar Sands Representations)
• derive one-third or more of their revenue from (Coal Mining Representations)

Further, it also made contraventions by representing that following Russia’s invasion of Ukraine, it would divest its Russian investments and not make or hold further investments in Russia, following Russia’s invasion of Ukraine (Russia Representation).

The alleged representations ranged from the emphatic website marketing imagery stating “no way” to gambling; to quotes in industry magazines; to PDSs; to more nuanced Responsible Investment Reports and its Sustainable and Responsible Investment Policy (SRI Policy).

ASIC was successful in all but the more nuanced representations, as they related to certain representations relating to the Tobacco, Russia and Oil Tar Sands Representations.

Reliance on third-party research (MSCI ESG Research (UK) Limited) was a factor in this case, like in ASIC’s proceedings against Mercer and Vanguard.

Many of the findings are assessments of what effect the representations would have on an “ordinary and reasonable member or prospective member of Active Super”.

The conduct occurred from 1 January 2021 to 30 June 2023 (noting ASIC’s INFO 271 – How to avoid greenwashing, was published in June 2022.) Nothing directly contradicts INFO 271, despite ASIC not being entirely successful in the proceedings.

9 Critical Lessons

1. It is misleading to invest in a company operating “lotteries” if “gambling” is excluded. This is because “lotteries” are a type of “gambling”, despite MSCI’s narrower definition of gambling and methodology.
2. It is not misleading to invest in a company providing packaging to tobacco companies, if “tobacco companies” and “tobacco manufacturing” are excluded, despite MSCI’s broader definition and methodology to the contrary.
3. Contraventions resulted from LGSS relying on the 2020 MSCI Report which (inexplicably) excluded PointsBet (which derives 100% of its revenue from gambling).
4. Except where it is expressly stated otherwise, statements about “excluding” investments in certain companies include investments made indirectly through a pooled fund, intentionally or inadvertently through index funds.
5. The words “not invest” and “eliminate” are unequivocal and are not consistent with exclusions being “guiding principles” or to be complied with on a “reasonable endeavours” basis.
6. Footnotes, asterisks and other language that consumers are familiar with to convey that claims are subject to specific limitations, can be effective in clarifying headline statements.
7. LGSS’s “overlay process” did not affect the distribution return from restricted companies and so the exposure to restricted companies was not off-set. Therefore, the overlay process was not effective to implement an exclusion.
8. Consumers would not assume that LGSS was reasonably relying on external data, without express statements to this effect.
9. Ongoing board engagement, governance and adequate resourcing of responsible investment practices are critical – LGSS staff found themselves doing “the best we could” to implement “the legacy of the values of certain . . . directors some years ago”.

Please refer to the judgment (linked above) for the full context to these lessons and contact us if you would like us to run the legal ruler over your disclosures and governance practices. In the absence of a clear taxonomy and mandated disclosures, disclosing responsible investment practices in a way consumers can understand is extremely difficult and extremely high risk.