Federal Court of Australia Australian Securities and Investments Commission v LGSS Pty Ltd (No 2) [2024] FCA 665 File number(s): NSD 847 of 2023 Judgment of: O'CALLAGHAN J Date of judgment: 20 June 2024 Catchwords: BANKING AND FINANCIAL INSTITUTIONS – "greenwashing" – where defendant contravened ss 12DB(1)(a) and 12DF(1) of the Australian Securities and Investments Commission Act 2001 (Cth) by making false or misleading representations, and engaging in conduct liable to mislead the public in relation to investments made by superannuation fund – form of declarations Legislation: Australian Securities and Investments Commission Act 2001 (Cth) ss 12DB(1)(a), 12DF(1) Cases cited: Australian Securities and Investments Commission v LGSS Pty Ltd [2024] FCA 587 Rural Press Ltd v Australian Competition and Consumer Commission (2003) 216 CLR 53 Division: General Division Registry: New South Wales National Practice Area: Commercial and Corporations Sub-area: Regulator and Consumer Protection Number of paragraphs: 6 Date of hearing: Determined on the papers Counsel for the Plaintiff: J Hewitt SC with J Buncle Solicitor for the Plaintiff Australian Securities and Investments Commission Counsel for the Defendant HK Insall SC with AE Smith Solicitor for the Defendant Allens ORDERS NSD 847 of 2023 BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION Plaintiff AND: LGSS PTY LTD ACN 078 003 497 AS TRUSTEE FOR LOCAL GOVERNMENT SUPER ABN 28 901 371 321 Defendant order made by: O'CALLAGHAN J DATE OF ORDER: 20 JUNE 2024 THE COURT DECLARES THAT: 1. During the Relevant Period, LGSS, in trade or commerce, made representations in connection with the supply of financial services, and the promotion of the supply of financial services, in contravention of s 12DB(1)(a) of the ASIC Act, in that: (a) LGSS made the representation at item 1 of Annexure A from 25 May 2021 to 28 February 2023, but contrary to that representation it in fact held the investments identified in Table 1 of Annexure B, each of which were investments in companies that derived more than 10% of their revenue from gambling; (b) LGSS made the representation at item 2 of Annexure A from 25 May 2021 to 1 March 2023, but contrary to that representation it in fact held the investments identified in Table 1 of Annexure B, each of which were investments in companies that derived more than 10% of their revenue from gambling; (c) LGSS made the representation at item 5 of Annexure A from 28 October 2021 to 1 March 2023, but contrary to that representation it in fact held the investments identified in Table 1 of Annexure B, each of which were investments in companies that derived more than 10% of their revenue from gambling; (d) LGSS made the representation at item 6 of Annexure A from 28 October 2021 to 1 March 2023, but contrary to that representation: (i) it in fact held the investments identified in Table 1 of Annexure B, each of which were investments in companies that derived more than 10% of their revenue from gambling; and (ii) it in fact held the investments identified in Table 4 of Annexure B, each of which were investments in companies that derived revenue from oil tar sands; (e) LGSS made the representation at item 11 of Annexure A from 19 January 2022 to 8 August 2023, but contrary to that representation it in fact held the investments identified in Table 1 of Annexure B, each of which were investments in companies that derived more than 10% of their revenue from gambling; and (f) LGSS made the representation at item 13 of Annexure A from October 2021 to May 2023, but contrary to that representation it in fact held the investments identified in Table 5 of Annexure B, each of which were investments in companies that derived one-third or more of their revenue from coal mining; (g) LGSS made the representation at item 15 of Annexure A from 20 December 2022 to March 2023, but contrary to that representation it in fact held the investments identified in Table 3 of Annexure B, each of which were investments in companies that derived revenue from Russia; (h) LGSS made the representation at item 16 of Annexure A from 20 December 2022 to March 2023, but contrary to that representation it in fact held the investments identified in Table 3 of Annexure B, each of which were investments in companies that derived revenue from Russia; (i) LGSS made the representation at item 17 of Annexure A from May 2022 to April 2023, but contrary to that representation it in fact held the investments identified in Table 3 of Annexure B, each of which were investments in companies that derived revenue from Russia; (j) LGSS made the representation at item 18 of Annexure A from 20 December 2022 to March 2023, but contrary to that representation: (i) it in fact held the investments identified in Table 1 of Annexure B, each of which were investments in companies that derived more than 10% of their revenue from gambling; and (ii) it in fact held the investments identified in Table 4 of Annexure B, each of which were investments in companies that derived revenue from oil tar sands. 2. During the Relevant Period, LGSS, in trade or commerce, engaged in conduct that was liable to mislead the public as to the characteristics of the investments made by LGSS on behalf of Active Super in contravention of s 12DF(1) of the ASIC Act, in that: (a) LGSS engaged in the conduct referred to in sub-paragraphs (a) to (j) in Declaration 1 above; (b) LGSS made the representation at item 19 of Annexure A from 1 July 2022 to 1 May 2023, but contrary to that representation: (i) it in fact held the investments identified in Table 1 of Annexure B, each of which were investments in companies that derived more than 10% of their revenue from gambling; (ii) it in fact held the investments identified in Table 3 of Annexure B, each of which were investments in companies that derived revenue from Russia; (iii) it in fact held the investments identified in Table 4 of Annexure B, each of which were investments in companies that derived revenue from oil tar sands; (c) LGSS made the representation at item 20 of Annexure A from 25 May 2021 to 30 June 2022, but contrary to that representation it in fact held the investments identified in Table 5 of Annexure B, each of which were investments in companies that derived revenue one third or more of their revenue from coal mining. THE COURT NOTES THAT: A. In these declarations, the following terms have the following meanings: ASIC Act means the Australian Securities and Investments Commission Act 2001 (Cth); Active Super means the fund known as Local Government Super (ABN 28 901 371 321); LGSS means LGSS Pty Limited (ACN) as trustee for Local Government Super (ABN 28 901 371 321); Relevant Period means the period from 1 February 2021 to 30 June 2023. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. ANNEXURE A Representations No. Representation Location of Representation Period Representation Made 1. …we will not invest in organisations that derive more than 10% of their revenue from armaments, gambling, [emphasis added] old-growth logging and uranium mining. Active Super website Published: 25 May 2021 Removed: 28 February 2023 2. A visual representation headed 'Are we in? Or out?' indicating examples such as tobacco, nuclear weapons and gambling as 'High ESG Risk' and 'No Way' to whether Active Super decides to invest in those companies. Active Super website Published: 25 May 2021 Removed: 1 March 2023 3. [Not used] 4. [Not used] 5. A similar visual representation to the one on the Website, above, is included in the Impact Report with an additional statement below ' Negative screens eliminate our exposure to high ESG risk industries'. Page 12 of the Impact Report Published: 28 October 2021 Removed: 1 March 2023 6. We eliminate investments that pose too great a risk to the environment and the community, for example: tobacco, nuclear weapons, oil tar sands, gambling. Page 16 of the Impact Report Published: 28 October 2021 Removed: 1 March 2023 7. [Not used] 8. [Not used] 9. [Not used] 10. [Not used] 11. "Stockwell said Active Super sees its commitment to ethical and sustainable investment as being a critical part of its offering in a competitive superannuation market, particularly with last year's introduction of new laws which mean employees are automatically "stapled" to their super fund when they change jobs, unless they specifically opt to make a change to another fund. The fund was one of the first super funds in Australia to rule out investing in tobacco, a move it took 20 years ago. "It was not mainstream back then," he said. "It is important, in a stapling world, to have a good brand and a competitive proposition," he said. Investment Magazine URL: https://www.investmentmagazine.com.au/2022/01/mid-sized-funds-can-go-where-bigger-ones-cant-actives-stockwell/ Published: 19 January 2022 It now specifically excludes any investments in gambling, tobacco, weapons manufacturer and "certain investments which are carbon heavy."" Available as at 8 August 2023 [emphasis added] 12. [Not used] 13. "The Trustee has determined that the Fund will not make investments in companies that derive 33.3% (one-third) or more of their revenues in high carbon sensitive activities. SRI Policy versions: Published: October 2021 Removed: May 2023 Companies assessed as being the most vulnerable from the sectors that are evaluated as being highly sensitive to the multiple investment risks associated with climate change. This list will include companies which derive their revenue or assets from coal mining, oil tar sands and coal fired electricity utilities. Active Super will reference external research to determine which companies are high carbon sensitive" (emphasis added) 8 dated October 2021 10 dated October 2022 11 dated March 2023 14. [Not used] 15. RUSSIA OUT Page 6 of the Responsible Investment Report 2021/22 under heading This Year's Highlights Published: 20 December 2022 Removed: March 2023 Now a country exclusion FOLLOWING EVENTS IN UKRAINE 16. Russian Investments out Page 31 of the Responsible Investment Report 2021/22 under heading Divesting to Make a Difference Published: 20 December 2022 Removed: March 2023 Until recently, Active Super had a very small amount of exposure to Russian stocks, via investments in two Emerging Market funds which equated to approximately 0.1 percent of our total funds under management. Following Russia's invasion of Ukraine, however, both these funds moved quickly to begin divesting of all Russian securities. Furthermore, Active Super has now added Russia to its list of restricted countries in which it will not invest 17. Russia investments out in the cold Emailed to members Published: May 2022 Removed: April 2023 Following Russia's invasion of Ukraine, which runs counter to our responsible investment principles, Active Super has now added Russia to its list of restricted countries in which the fund will not invest. Active Super website Furthermore, while Active Super did have a small amount of exposure to Russian investments via two Emerging Markets funds (which equated to 0.1% of our total funds under management), soon after the conflict began, these funds began divesting of any Russian stocks. 18. We eliminate investments that pose too great a risk to the environment and the community, for example nuclear weapons, tobacco manufacturers, oil tar sands and gambling. Page 10 of the Responsible Investment Report 2021- 2022 Published: 20 December 2022 Removed: March 2023 19. Negative Screens 'How we invest your money' PDS Fact Sheet Published: 1 July 2022 Removed: 1 May 2023 We eliminate investments that pose too great a risk to the environment and the community, for example nuclear weapons, tobacco manufacturing, oil tar sands and gambling. We also recently added Russia to our list of excluded countries, following the invasion of Ukraine. (Accumulation dated 1 July 2022) (Defined Benefit dated 1 July 2022) (Pension Product dated 1 July 2022) (Retirement dated 1 July 2022) (Defined Benefit dated 4 November 2022) 20. Active Super will not actively invest in companies that derive 33.3% or more of their revenue from: 'How we invest your money' PDS Fact Sheet Published: 25 May 2021 Removed: 30 June 2022 • High carbon sensitive activities: including coal mining, oil tar sands and coal fired electricity generation. (Accumulation dated 25 May 2021) Active Super will not actively invest in companies that are identified as: (Defined Benefit Scheme dated 25 May 2021) • High ESG risk: Including poor governance and management of ESG risks. (Pension Product dated 25 May 2021) (Retirement dated 25 May 2021) Annexure B Active Super's investments contrary to representations 1. Gambling investments Table 1: Gambling Investments No. a. Company a. Type of holding b. First date held c. Disposal date/Last date held Skycity Entertainment Group Limited Indirect (via the Colonial First State Wholesale Small Companies Fund) 1 February 2021 Held as at 31 May 2023 Indirect (via SPDR S&P/ASX 200 ETF) 30 November 2016 21 March 2022 PointsBet Holdings Limited Indirect (via SPDR S&P/ASX 200 ETF) 4 February 2021 19 September 2022 Direct 30 November 2016 23 December 2021 Jumbo Interactive Limited Direct 3 April 2019 6 June 2023 Aristocrat Leisure Limited Indirect (via SPDR S&P/ASX200 ETF) 30 November 2016 Held as at 23 May 2023 The Lottery Corporation Limited Indirect (via SPDR S&P/ASX200 ETF) Added to the ASX200 24 May 2022 Held as at 23 May 2023 Tabcorp Holdings Limited Indirect (via SPDR S&P/ASX200 ETF) 30 Nov 2016 Held as at 23 May 2023 Crown Resorts Ltd Indirect (via SPDR S&P/ASX200 ETF) 30 Nov 2016 20 June 2022 The Star Entertainment Group Ltd Indirect (via SPDR S&P/ASX200 ETF) 30 Nov 2016 Held as at 23 May 2023 Indirect (via the Colonial First State Wholesale Small Companies Fund) 31 March 2023 Held as at 31 May 2023 2. [Not used] 3. Russian investments Table 3: Russian Investments No. a. Company b. Type of holding c. First date held d. Disposal date/Last date held Rosneft Oil Co Indirect (Macquarie Emerging Markets Fund) 31 January 2021 Held as at 30 June 2023 Etalon Group Indirect (Macquarie Emerging Markets Fund) 31 January 2021 Held as at 30 June 2023 Mail.ru Indirect (Macquarie Emerging Markets Fund) 31 January 2021 Held as at 30 June 2023 Transneft PJSC Indirect (Macquarie Emerging Markets Fund) 31 January 2021 Held as at 30 June 2023 Yandex NV Indirect (Macquarie Emerging Markets Fund) 31 January 2021 Held as at 30 June 2023 Sberbank of Russia Indirect (Macquarie Emerging Markets Fund) 31 January 2021 Held as at 30 June 2023 Gazprom PJSC Indirect (Macquarie Emerging Markets Fund) 31 January 2021 Held as at 30 June 2023 Gazprom PJSC Indirect (Wellington Emerging Markets Fund) 30 June 2021 30 September 2022 Gazprom PJSC Indirect (Wellington Emerging Markets Fund) 31 October 2022 Held as at 30 June 2023 4. Oil Tar Sands investments Table 4: Oil Tar Sands Investments No. a. Company b. Type of holding c. First date held d. Disposal date/Last date held ConocoPhillips Direct 30 Nov 2016 10 December 2021 CK Hutchison Holdings Ltd Direct 4 March 2021 Held as at 26 July 2023 Shell Plc Direct 30 Nov 2016 Held as at 26 July 2023 TotalEnergies SE Direct 30 Nov 2016 Held as at 26 July 2023 PTT Exploration & Production Public Company Limited Indirect (via Wellington Emerging Markets) 30 Nov 2016 Held as at 30 June 2023 5. Coal mining investments Table 5: Coal Mining Investments No. a. Company b. Type of holding c. First date held d. Disposal date/Last date held Coronado Global Resources Inc. Indirect (SPDR S&P/ASX200 ETF) Added to the ASX200 20 June 2022 Held as at 23 May 2023 Direct 30 June 2021 31 December 2021 New Hope Corporation Limited Indirect (SPDR S&P/ASX200 ETF) Added to the ASX200 20 June 2022 Held as at 23 May 2023 Whitehaven Coal Limited Indirect (via SPDR S&P/ASX200 ETF) 30 Nov 2016 Held as at 23 May 2023 REASONS FOR JUDGMENT O'CALLAGHAN J 1 On 5 June 2024, I found that the plaintiff, ASIC, was entitled to declarations as to contraventions by the defendant, LGSS Pty Ltd, of s 12DB(1)(a) and s 12DF(1) of the Australian Securities and Investments Commission Act 2001 (Cth) by making certain false or misleading representations, and engaging in conduct liable to mislead the public in relation to investments made by the superannuation fund, of which LGSS is the trustee, now known as Active Super, during 1 February 2021 to 30 June 2023. See Australian Securities and Investments Commission v LGSS Pty Ltd [2024] FCA 587 (Reasons). 2 As explained in the Reasons, I found that LGSS had engaged in what is colloquially called "greenwashing" by making false or misleading representations to members and potential members of the fund about their "green" or "ESG" credentials. 3 I ordered that the matter be listed for further hearing, and said that I would hear the parties at that hearing on the appropriate form of declaratory relief in light of the Reasons. See Reasons at [238]. 4 Following publication of my Reasons, and prior to the further hearing being listed, the parties agreed upon a form of declaratory orders and provided those proposed orders to my chambers on 19 June 2024. 5 In this case, I consider it is appropriate to make the declarations sought by the parties, as there is utility in setting out the basis of the liability found and, in turn, the basis of any penalties and consequential relief to be imposed. See Rural Press Ltd v Australian Competition and Consumer Commission (2003) 216 CLR 53 at 92 [95] (Gummow, Hayne and Heydon JJ). In addition, the declarations are appropriate because they serve the public interest in defining and publicising the type of conduct that constitutes a contravention of the ASIC Act. 6 Pursuant to my order of 5 June 2024, the proceeding will be listed for a further directions hearing, at which I will hear the parties on the appropriate timetable for the hearing and determination of ASIC's claims for pecuniary penalties, adverse publicity orders and injunctive relief. I certify that the preceding six (6) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice O'Callaghan. Associate: Dated: 20 June 2024