Australian Securities and Investments Commission v LGSS Pty Ltdi is the most recent of several enforcement actions that ASIC has taken in the last few years against ASX-listed companies and financial product issuers for ‘greenwashing’, that is, over-stating or otherwise misrepresenting one’s environmental, social and governance (ESG) credentials.  

In this case, Justice O’Callaghan in the Federal Court found that registrable superannuation entity licensee LGSS Pty Ltd (LGSS), the trustee of the Active Super superannuation fund, made false and misleading representations that Active Super did not invest in companies involved in gambling, oil tar sands and coal mining and did not invest in Russia, following Russia’s invasion of Ukraine. These representations were declared to contravene prohibitions in sections 12DB and 12DF of the Australian and Securities and Investments Commission Act 2011 (Cth) (ASIC Act) against false and misleading conduct. However, His Honour held that LGSS, contrary to ASIC’s allegations, had not made false or misleading representations about not investing in tobacco companies. 

The judgment applied long-standing case law principles about misleading and deceptive conduct.ii, did not consider any completely new legal issues and, like all decisions about misleading and deceptive conduct, its conclusions depend heavily on the particular wording and visual appearance of the representations made and the context in which they were made. Nevertheless, as the number of  Australian ‘greenwashing’ cases is still relatively small there are some lessons that superannuation trustees and other businesses can take from the judgment when deciding how to promote their own ESG credentials. 

The case is also one of only 2 cases the author has found that consider whether the conduct of a ‘profit-to-member’ superannuation fund (such funds being sometimes referred to as ‘not-for-profit’ funds) was ‘in trade or commerce’, an essential element of the relevant ASIC Act provisions and similar provisions in the Australian Consumer Law.iii 

Overview of the facts and allegations

LGSS was the trustee of Active Super, also known as Local Government Super (the Fund). The Fund is a ‘profit-to-member’ fund that was established as the superannuation fund for NSW local government employees but by early 2021 the Fund was open to any member of the public. 

Between early 2021 and mid-2023, LGSS made representations on the Fund’s public website, on social media, in its Product Disclosure Statements and in an article in Investment Magazine about how ESG considerations affected the Fund’s investments.  Many of the representations used similar wording and, in summary, key representations were: 

1. The Fund would not invest in companies or organisations that derive more than 10% of their revenue from, amongst other things, ‘gambling’ or one-third or more of their revenue in ‘high carbon sensitive activities’.
2. There was ‘NO WAY’ the Fund would invest in ‘High ESG risk’ companies, ‘e.g. no tobacco, nuclear weapons, gambling etc.’ 
3. LGSS ‘eliminate investments that pose too great a risk to the environment and community, for example nuclear weapons, tobacco manufacturing, oil tar sands and gambling … .’ 
4. The Fund ‘will not make investments in companies that derive any revenues … [from] the manufacture and/or production of tobacco products.’ 
5. Following Russia’s invasion of Ukraine, the Fund would not ‘invest in Russia’. 

Despite these representations, the Fund had investment exposures to companies involved in gambling, oil tar sands and coal mining (restricted companies) and to Russian companies.  The company also had investment exposures to companies that made cigarette packaging. Some of the investments were direct shareholdings and other investments were as a unitholder in managed investment schemes, which in turn invested in restricted companies.  

ASIC alleged that these facts about the Fund’s investments meant that LGSS had  contravened: 

• the ASIC Act section 12DB(1)(a) prohibition that a  ‘person must not, in trade or commerce, in connection with the supply or possible supply of financial services, or in connection with the promotion by any means of the supply or use of financial services: (a) make a false or misleading representation that services are of a particular standard, quality, value or grade…’; and 
• the ASIC Act section 12DF(1) prohibition that  a  ‘person must not, in trade or commerce, engage in conduct that is liable to mislead the public as to the nature, the characteristics, the suitability for their purpose or the quantity of any financial services’. 

LGSS did not dispute the facts about what investments it had made or how it made them; nor did it dispute that it made the alleged representations (with one minor exception)iv. But LGSS did dispute that the impugned representations were false and misleading. LGSS advanced multiple arguments why none of the impugned representations was false or misleading, most of which were rejected by Justice O’Callaghan. 

No trustee conduct ‘in trade or commerce’?

As a threshold argument, LGSS submitted that none of LGSS’s conduct was ‘in trade or commerce’ because the Fund was a ‘profit-to-member’ fund and LGSS’s constitution prohibited it from paying a dividend or applying any of its capital or income to shareholders.v   Consequently, LGSS argued, it could not have contravened ASIC Act sections 12DB and 12DF.  LGSS relied on the 2007 judgment in Kowalskivi, in which Justice Finn in the Federal Court ruled that what was essentially a dispute about the alleged failure of a superannuation fund trustee to pay a member his full entitlements for total and permanent disablement did not involve any trustee conduct ‘in trade or commerce’, the conduct instead relating to the performance of the trustee’s obligations under the trust and the trustee-beneficiary relationship. Justice Finn said that the trustee-beneficiary relationship in that case ‘was not intrinsically a commercial relationship nor did the conduct complained of otherwise bear a trading or commercial character’. LGSS submitted that the relationship between it and its members and prospective members was not ‘intrinsically commercial’. 

Justice O’Callaghan, rejected this argument, referring to the facts that the Fund operated with a view to making profits, albeit for members rather than its shareholders; LGSS engaged in promotional activities for the purpose of supplying services to actual or potential customers; and the impugned ESG statements were directed towards encouraging existing members to remain and new members to join, to share in the Fund’s investment success. Justice O’Callaghan distinguished Kowalski on the facts but also noted that in Kowalski Justice Finn had cited the ‘making and management of the trust’s investments’ as an example of trustee conduct that might be ‘in trade or commerce’. 

The ‘no gambling’ representations: are lotteries ‘gambling’?

During the relevant period LGSS made or held direct investments in gambling companies as a shareholder and LGSS also made indirect investments in gambling companies through two managed investment schemes that held shares in these companies as part of the pool of scheme assets. 

One of LGSS’s direct share investments was in Jumbo Interactive Limited, a company that ran lotteries. LGSS argued that no reasonable person would understand an investment restriction against ‘gambling’ to extend to lotteries, on the basis that lotteries did not have the associated gambling-related social ills that pokie machines, casinos and online sports betting had. 

Justice O’Callaghan rejected this argument. He said that no evidence was adduced about the absence of ‘social ills’ associated with lotteries. In any event, the relevant question was whether a reasonable Fund member (or prospective Fund member) would consider gambling to include lotteries.   Lotteries were clearly within the ordinary meaning of ‘gambling’ and none of LGSS’s public disclosures had sought to distinguish different types of gambling based on their ‘social ills’ and qualify the references to ‘gambling’ in the way that LGSS argued for.vii  

Other qualifying material” the SRI Policy

LGSS argued that the gambling representations (and other representations) were not false or misleading because they should be understood in the context of qualifications and clarifications stated in the LGSS’s Sustainable and Responsible Investment Policy (SRI Policy). The SRI Policy was available on the Fund’s website and some of the impugned representations referred to the fact that the Fund had an SRI Policy.  

LGSS pointed to statements in the SRI Policy and other documents which, LGSS said: 

• further qualified the gambling exclusion;
• indicated that the decision whether to invest in any particular high ESG risk company would be made on a ‘case-by-case’ basis;
• explained that ‘where it is not possible to avoid indirect investment in restricted companies, [LGSS] will aim to eliminate exposure … by shorting the same number of securities via an overlay process’; and
• explained that LGSS relied on external fund managers and third party investment experts to research and vet investments to try to ensure that objectionable investments were excluded in accordance with the SRI Policy and LGSS’s ESG representations. 

Justice O’Callaghan rejected the argument that the impugned representations should be read in the context of the SRI Policy because he did not agree that the ordinary reasonable consumer would seek out and read the Policy. Given the apparently emphatic and unequivocal nature of the statements about excluding gambling and other investments, there was simply no reason why an ordinary reasonable consumer would look for any qualifying terms and conditions or assume that there were any.  His Honour referred to the lack of any ‘footnotes or asterisks … containing the sort of language that all consumers are familiar with, such as that the claims are subject to specific limitations contained in terms and conditions’.viii 

In respect of one direct investment in a gambling company, LGSS also argued that the impugned ‘no gambling’ representations were not false and misleading because LGSS had followed proper processes for divesting itself of the stock and had relied on an external ESG research provider. His Honour rejected this on the basis that the representations made by LGSS were not merely to use its best endeavours not to invest in gambling.ix 

Indirect investments

LGSS also argued that an ordinary and reasonable consumer would draw a distinction between investments that LGSS could control and those that it could not control. LGSS argued that the consumer would not understand the representations about not investing in restricted companies as applying to ‘indirect exposures arising through a pooled fund’, that is, to the Fund’s investments in managed investment schemes which, in turn, owned shares in restricted companies. LGSS relied on the fact that, as a unitholder in these schemes, it had no control over what companies the schemes invested in and LGSS had no rights to any particular scheme assets. 

Justice O’Callaghan rejected this argument on the simple basis that he disagreed that an ordinary and reasonable consumer would draw such a distinction. But he also noted that neither the impugned representations nor LGSS’s website made any distinction between direct and indirect investments and suggested that the Fund might indirectly invest in restricted companies.x    

Offsetting transactions and the ‘overlay process’

LGSS had indirect exposures to some restricted companies through its unitholdings in the ASX 200 Fund. As alluded to in the SRI Policy and referred to above, in respect of these exposures LGSS engaged in direct short-selling transactions in the stocks of the restricted companies held by the ASX 200 Fund, to the same value as LGSS’s indirect exposures to these companies through the ASX 200 Fund.  LGSS said that the effect of these transactions was that LGSS did not have a ‘net exposure’ to these restricted companies and therefore, in respect of its indirect exposures through the ASX 200 Fund, its representations about not investing in restricted companies were true and not misleading. However, LGSS admitted that it still received the full benefit of income and growth from the ASX 200 Fund, which would include income and capital growth attributable to the managed fund’s shareholding of the restricted companies. 

His Honour’s reasons for rejecting LGSS’s argument seem, with respect, highly summarised but appear, in effect, to be that (1) engaging in off-setting transactions to negate the financial effect of an investment that you have made does not mean that you have not in fact made that investment; and (2) in this case, LGSS had not fully negated the financial effect of its indirect investment in the restricted companies because it still received the full benefit of any income and capital growth on its ASX 200 Fund units.xi  

Tobacco representations

LGSS had direct shareholdings in several companies which derived between 1.5% and 11% of their revenue from supplying packaging to tobacco companies as part of the supplier’s business of supplying packaging and other products to many other customers across different industries. 

ASIC and LGSS made various competing submissions as to whether these investments were contrary to LGSS’s representations that it would not invest in ‘tobacco’ or in companies that ‘derive revenue … from the manufacture and/or production of tobacco products’. The arguments including reliance on how MSCI, LGSS’s third party research provider, had defined these terms.  

Justice O’Callaghan said that how MSCI defined these terms was irrelevant as MSCI’s definitions were not referred to in the representations.  The question was simply what an ordinary reasonable consumer would understand the representations to mean. His Honour was of the opinion that the consumer would understand the relevant companies to be packaging companies and not ‘tobacco companies’ and not deriving revenue from the manufacture or production of tobacco products. He therefore found that these representations were not false or misleading.xii  

Russia

Shortly after Russia’s invasion of Ukraine, LGSS began making various representations about not investing ‘in Russia’.  LGSS did not dispute that at the time of some of these representations the Fund had indirect investments in Russian companies through its managed fund unitholdings. However, LGSS argued that, in context, the representations should be understood as representations that LGSS was in the process of withdrawing from Russian investments and representations about what LGSS was going to do in future. 

Based on the particular words used and their context, His Honour agreed with LGSS in relation to one impugned representation but not in relation to others. 

Oil tar sands

The Fund had direct and indirect investments in companies that had oil tar sands projects, despite LGSS’s representations that it would ‘eliminate investments’ in ‘oil tar sands’.   

LGSS said the representations were not misleading because they should be interpreted as not applying to indirect investments and should be interpreted subject to (1) statements in the SRI Policy that the oil tar sands exclusion only applied to companies that derived at least one-third of their revenue from oil tar sands, and not merely ‘any revenue’; and (2) the references in the SRI Policy to LGSS’s reliance on third party research about restricted companies. 

Justice O’Callaghan rejected these arguments for the same reasons he had already given in relation to other representations, namely that an ordinary reasonable consumer would not distinguish between direct and indirect investments and, given the apparently unequivocal statements about ‘eliminating’ investments in oil tar sand, the consumer would also have no reason to search for qualifying statements in the SRI Policy.xiii  

Coal mining

For the same reasons as given earlier in the judgment, His Honour rejected LGSS’s arguments that representations that the Fund would not invest in coal mining companies (1) should not be understood as referring to indirect investments; (2) should be read subject to qualifying statements in the SRI Policy and to LGSS’s reliance on third party research; and (3) were true because of offsetting direct trades per the ‘overlay process’.xiv  

Representations as to future matters?

ASIC Act section 12BB provides in effect that a representation with respect to any ‘future matter’ is taken to be misleading unless ‘evidence is adduced’ that the maker of the representation had ‘reasonable grounds’ for making it. According to the judgment, LGSS had submitted that all of the impugned representations were as to future matters because the representations said that LGSS ‘would’ not invest, presumably as opposed to saying that LGSS ‘does’ not invest. (From the judgment one can see that in fact sometimes the words are ‘will not’ –  the word ‘will’ arguably also indicating only an intent about future conduct– but some of the impugned representations clearly use the present tense.) 

LGSS gave evidence about its process of relying on third party managers and research providers to exclude investments in restricted companies. It submitted that this process meant that LGSS had reasonable grounds to believe that its (supposedly) future-looking representations about future investments would be true. 

Justice O’Callaghan gave this argument short shrift.   It is clear that he thought that most of the impugned representations were about a present state of fact rather than future matters. With respect, such a view would be undoubtedly true in this case; having regard to the overall impression likely to be created by the representations in the minds of the likely audience for them, it is too technical or academic to focus on the difference between ‘would not invest/will not invest’ and ‘does not invest’. 

In any event, His Honour said he did not have to decide whether the representations were as to future matters.  LGSS’s argument failed because, applying the words of section 12BB(2), no ‘evidence was adduced’ by LGSS about its grounds for making any of the impugned representations; that is, no witness or other evidence from LGSS said why any representations were made and consequently the ‘reasonable grounds defence’ in  section 12BB(2) was not established. LGSS either failed or chose not to ‘connect the dots’ to show any causal link between its ESG due diligence process and the making of the ESG representations. 

 Investment Magazine article

The Investment Magazine article was not published by LGSS but LGSS did not deny that the Fund’s CEO made the statements attributed to him in the article. Consequently, His Honour found that LGSS had made the ‘no tobacco’ and ‘no gambling’ representations in the article and they were misleading. 

Orders

Justice O’Callaghan held that ASIC was entitled to declarations as to ASIC Act contraventions in respect of most of the impugned representations.  The actual declarations themselves were detailed by His Honour in a separate judgment a couple of weeks later.xv  There will be a further hearing in future to deal with ASIC’s claims for pecuniary penalties, adverse publicity orders and injunctive relief. 

This article was first published in the August 2024 edition of the Australian Superannuation Law Bulletin (2024, Vol 35 No 1&2).