Active Super ‘greenwashing’ liability decision: key takeaways

By Jacob Uljans, Hamish McNair and Harvey Duckett

The Federal Court has handed down a significant decision in the ‘greenwashing’ space, finding that superannuation trustee LGSS Pty Ltd (LGSS), as trustee of Active Super (Active Super), made false and misleading representations in connection with the environmental, social and governance (ESG) characteristics of its direct and indirect investments. The penalty to be imposed for these contraventions will be the subject of a further, separate hearing.

Key points and practical takeaways

We are expecting to see continued enforcement action by the Australian Securities and Investments Commission (ASIC) in connection with misleading representations in sustainable finance (including greenwashing), given this remains a key enforcement priority for the regulator. This decision provides useful insight into how the courts might receive parties’ arguments in future actions, as well as practical steps industry participants can take to reduce the risk that the statements they make do not fall foul of sections 12DB or 12DF of the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act).

The Active Super decision is an interesting one given the diverse range of issues that were in dispute on liability, some of which are similar to those regularly confronted by issuers of ESG financial products. It is also the first occasion that ASIC’s contention that a representation that certain industries (such as tobacco) are screened out also represents that material suppliers to those excluded industries are similarly subject to exclusionary screening has been tested in court.

The main takeaways from the decision are as follows:

Representations are construed broadly

The key question is what an ordinary and reasonable investor would interpret a particular representation to mean, which is construed broadly. ASIC and the courts have little tolerance for pedantic or legalistic interpretations of what particular words mean.

Do what you say you will do

If you make unequivocal statements regarding the ESG characteristics of particular investments, ASIC and the courts will strictly hold you to those representations. If you do not have the means to comply with the representations you intend to make, change the wording to reflect the reality. Unqualified marketing-driven representations that all securities relating to particular industries are excluded investments carry inherent risk. If exclusionary screens are applied based on a third party’s methodology, that methodology should be clearly disclosed.

Ensure that representations made to prospective investors are consistent across all publications

If you make headline representations regarding ESG matters, there is minimal scope for those representations to be watered down or qualified in separate publications or policies, even where these are also provided or otherwise made available to the investor before they act on the representation.

Exercise caution and undertake appropriate due diligence when relying on third-party sources to implement ESG policies

It is common industry practice to engage the assistance of professional third-party ESG research firms to implement ESG investment policies; however, it is critical that the approach and processes adopted by these third parties matches any representation that is made to prospective investors. Appropriate due diligence must be undertaken to obtain a detailed understanding of how all ESG-related processes work in practice to avoid any variation between what has been represented and what is done in practice.

Take care when investing in adjacent industries or suppliers to ESG-excluded industries

While in this case ASIC was unsuccessful in persuading the Court that investments in packaging companies that derived substantial revenue from supplying packaging to tobacco companies were investments in ‘tobacco companies’, it is possible that in a different case, involving different representations, a different conclusion could be reached.

The decision is another timely reminder for fund trustees and other parties involved in the promotion of ESG financial products to pay very close attention to the marketing of such products’ ESG characteristics and to ensure that any statements regarding exclusionary screening applied to fund investments are factually accurate and appropriately qualified.

Hall & Wilcox has deep and extensive experience advising fund trustees in relation to disclosure and marketing materials for financial products in the ESG space, as well as acting in ‘greenwashing’ regulatory investigations and enforcement actions.

Factual background and parties’ positions

Active Super (previously known as the Local Government Superannuation Scheme) is an ‘open fund’ which (during the period of time relevant to the decision) managed approximately $13.5 billion in superannuation assets for around 89,000 members.

ASIC commenced the proceeding in August 2023, alleging that between 1 February 2021 and 30 June 2023 (Relevant Period), LGSS misrepresented that it would not make or hold investments in:

• companies deriving more than 10% of their revenue from gambling (Gambling Representations);
• companies deriving any revenue from tobacco (Tobacco Representations);
• companies deriving any revenue from oil tar sands projects (Oil Tar Representations); or
• companies deriving one-third (33.3%) or more of their revenue from coal mining (Coal Mining Representations).

ASIC also alleged that, from May 2022 until the end of the Relevant Period, Active Super represented that following Russia’s invasion of Ukraine, it would divest Russian investments, and make or hold no further investments in Russia (Russia Representations)

The representations were, variously, published across a number of mediums – including on Active Super’s website, in reports and factsheets, on social media platforms, in an email sent to existing members, and in an article published by Investment Magazine, and in its ‘Sustainable and Responsible Investment Policy’ (SRI Policy).

ASIC contended that the representations were misleading because LGSS had made investments for Active Super which were, in fact, contrary to them.

LGSS took a broad approach to their defence to ASIC’s allegations and its primary position was that representations relied on by ASIC were not, in fact, conveyed. LGSS alternatively argued that if the Court found that the representations were made:

• they were not made ‘in trade or commerce’;
• LGSS did not engage in conduct contrary to the representations; and
• they were representations as to future matters and LGSS had a reasonable basis for making them.

Court’s decision

With the exception of the Tobacco Representations, and those of the Russia Representations and the Oil Tar Representations contained in Active Super’s SRI Policy, the Court found that LGSS had conveyed the representations and, in doing so, contravened sections 12DB and 12DF of the ASIC Act.

Overview of the Court’s key reasoning

In trade or commerce?

The Court squarely rejected LGSS’s submission that its alleged statements were not made in ‘trade or commerce’. It found that each of the statements made ‘were, and were intended, to promote LGSS’s supply of services to actual or potential members and were ‘obviously’ in trade or commerce.

The Court confirmed the largely well-accepted view that the mere fact of a trustee company operating as a not-for-profit company will not – without more – be sufficient to show that it is not operating in trade or commerce.

Gambling Representations

The Gambling Representations related to six statements. ASIC contended that they were misleading because, during different times in the Relevant Period, LGSS made or held investments

• indirectly in seven gambling companies through two funds, the CFS Fund and the ASX 200 Fund, that derived more than 10% of their revenue from gambling; and
• directly in two gambling companies, PointsBet Holdings Limited and Jumbo Interactive Limited, that derived more than 10% of their revenue from gambling.

LGSS argued that its holdings in Jumbo did not constitute making or holding investments in any companies that derived more than 10% of their revenue from gambling, on the basis that the ordinary and reasonable consumer would not conceive the restriction on ‘gambling’ to extend to companies selling lottery tickets. This was rejected by the Court.

LGSS otherwise contended that statements on which the Gambling Representations were based did not convey a representation that Active Super would not invest in investment funds which held shares in gambling companies. It indicated that the meaning contended were simply ‘guiding principles’. This was rejected by the Court, because the language used in the statements (such as ‘No way’ and ‘Not invest’) was cast in unequivocal terms. The Court also dismissed LGSS’s argument that the statements were qualified by the SRI Policy, on the basis that none of the statements were signposted as being subject to qualifications or limitations by reference to a policy (for instance, by footnotes or asterisks).

LGSS further submitted that its holding in PointsBet was not contrary to the gambling statements because LGSS maintained an Investment Restrictions List, reasonably relied on external data provided by a specialist ESG research provider, MSCI ESG Research (UK) Limited (MSCI), and followed ‘its proper processes within a reasonable time’ — in essence, that the terms of the SRI Policy implied that all LGSS represented was to use its best endeavours not to invest in gambling.  That argument was dismissed by the Court as ‘farfetched‘.

Tobacco Representations

The Tobacco Representations related to seven statements. ASIC contended that they were misleading because, during the Relevant Period, LGSS made or held direct investments in five tobacco companies.

LGSS submitted that its statements were not misleading because it did not invest in ‘tobacco’; rather, all it did was invest in companies which were involved in the manufacture or sale of packing, but which ‘derived no revenue from growing, manufacturing, or processing tobacco or tobacco products‘.

The Court accepted LGSS’s argument, having regard to the evidence that the companies in question derived between 1.5% and 11% of their revenue from supplying packaging to tobacco companies. The Court held that these companies would not be regarded as being a ‘tobacco company’ or ‘a company engaged in the manufacture of production of tobacco‘.

Russia Representations

The Russia Representations related to four statements. ASIC’s position was that the statements were false and misleading given that during the Relevant Period, LGSS held nine investments in Russia through the Macquarie Fund and the Wellington Fund.

LGSS disputed that the Russia Representations were misleading on the basis that:

• the Russia Representations were directed toward processes that had begun and commitments as to future investments decisions; and
• it did not hold investments in Russian entities, because they were held indirectly through a pooled fund.

The Court rejected the notion that holding in a pooled fund meant that LGSS did not ‘hold investments’ (a similar argument was made, and rejected, with respect to the Gambling Representations).

The Court did not accept LGSS’s submission that the representations were directed toward processes that had begun and commitments as to future investments decisions, ‘because that is not what LGSS said‘. The Court placed heavy emphasis on the definitive words – such as that Russia [investment] was ‘out’, and Russia on a list of countries in which the fund ‘will not invest‘ ‘now‘ – used by LGSS.

However, one of the Russia statements was found to not be false or misleading – the Court found that the statement that the ‘Trustee has determined that the Fund will not make investments in Russia‘ was to be read subject to the context of the SRI Policy, which acknowledged that indirect investment in ‘restricted companies‘ may not always be avoided.

Oil Tar Sands Representations

The Oil Tar Sands Representations related to four sets of representations. ASIC’s position was that the statements were false and misleading as, during the Relevant Period, LGSS held four direct investments in companies deriving revenue from oil tar sands, and one indirect investment (via the Wellington Fund) in a company deriving revenue from oil tar sands.

In summary, LGSS’s argument was that the relevant statements conveyed that, if a company was found to derive more than 33.3% of their revenue from oil tar sands projects, Active Super would consider whether to divest the holding, and, if it considered it appropriate to do so, would divest that holding within a reasonable period.

The Court rejected LGSS’ argument, again referring to the unequivocal language to support a finding that the statements were not qualified in the way that LGSS contended.

Coal Mining Representations

The Coal Mining Representations related to two representations. ASIC alleged that, contrary to these representations, LGSS held three indirect investments in companies deriving more than 33.3% of its revenue from coal mining, via the ASX 200 Fund. It also had a direct investment between 30 June and 31 December 2021.

LGSS’s argument was that the context in which these statements were made conveyed that:

• if Active Super became aware that it held an investment in a company that derived one-third or more of its revenue from coal mining, it would divest and no longer hold investments in the company;
• it was not always possible to avoid a pooled fund investing in restricted companies; and
• if Active Super did have indirect exposure to a restricted coal mining company, it would aim to offset that exposure.

The submissions were described by the Court as ‘threadbare‘ and not accepted.

Other relevant findings

The Court also concluded that the ordinary reasonable consumer would not draw a distinction between LGSS’s direct investments (in terms of its shareholdings) and its indirect investments (in terms of exposures through pooled funds) in terms of the question of whether or not the representations were misleading.

The Court rejected arguments made by LGSS that its overlay process/policy negated its investments in gambling and tobacco companies (and, even if it had, otherwise expressed doubt as to whether the ordinary and reasonable consumer would have understood this process).

LGSS also advanced an argument that the representations were as to future matters. Ultimately, the Court did not give much consideration to this question in the decision, given that section 12BB(2) of the ASIC Act requires a party to positively adduce evidence to show how they had reasonable grounds for making the representation. No such evidence was adduced by LGSS.