Australia's securities watchdog said the US$8.9 million penalty was the "highest yet for greenwashing conduct" in the country.
Vanguard Investments Australia claimed that stocks and bonds in an "ethically conscious" index were chosen to exclude industries such as fossil fuels, the Australian Securities and Investments Commission said.
But the country's federal court found that almost three quarters of an almost US$700 million fund had not been properly screened.
This included fossil fuel companies that "derived revenue from the transportation or exploration of thermal coal", the court found.
"This is an important decision and the penalty imposed is the highest yet for greenwashing conduct," said the Australian Securities and Investments Commission.
"Vanguard admitted it misled investors that these funds would be screened to exclude bond issuers with significant business activities in certain industries, including fossil fuels, when this was not always the case."
Vanguard Investments Australia said it accepted the court ruling and apologised for the "unintentional" errors.
The Vanguard group is one of the largest investment management companies in the world.
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