ASIC hits Fiducian IM over ESG claims

The Australian Securities and Investments Commission (ASIC) has taken action against Fiducian Investment Management  alleging it engaged in misleading and deceptive conduct over its environmental social and governance (ESG) fund.

The regulator said it had initiated civil penalty proceedings in the Supreme Court of NSW alleging FIMSL failed to act with care and diligence as the responsible entity of the Diversified Social Aspirations Fund (the Fund) and engaged in misleading and deceptive conduct relating to its description of how the Fund works in the Fund’s Product Disclosure Statement (PDS).

Fiducian has issued a statement acknowledging the ASIC action and stating that it is reviewing its position while noting that the fund ceased to operate in May, last year, due to lack of scale.

ASIC said the Fund was established to meet client demand for a ‘socially responsible’ or ‘ethical’ investment option and was available for investment between 2015 and 2024. The Fund selected investments by using underlying fund managers or underlying investment funds, (Underlying Funds) which had their own bespoke ESG methodologies and tolerance thresholds for choosing investments. ASIC alleges these processes did not align with the approach outlined in the Fund’s PDS.

The PDS of the Fund stated that: ‘The share portfolios comprise investments in companies that aim to be positive for society and for the environment and aim to avoid investments in harmful activities’. It also specified a number of industries or activities that the Fund would avoid investing in.

ASIC also alleges the PDS of the Fund contained false and misleading statements that it would monitor the portfolio exposure and investment styles of the Underlying Funds in circumstances where FIMSL did not have the requisite information to conduct that monitoring.

ASIC alleges FIMSL failed to act with care and diligence when it failed to:

• review the underlying investments of the Fund to ensure their consistency with the PDS of the Fund
• ensure its compliance documents identified any ESG related risks and included commensurate controls
• comply with its own risk management framework including the procedure for reviewing PDSs, and
• engage or employ an ESG expert to review or monitor the Fund.

ASIC further alleges that FIMSL failed to comply with its compliance plan when it failed to record and lodge investor complaints in accordance with the compliance plan and when it failed to address investor concerns that the Fund held investments contrary to the representations made in the PDS such as investments in BHP Billiton Limited, Rio Tinto Limited, Woodside Petroleum Limited, Newcrest Mining Limited and Orica Limited. This was despite FIMSL having policies and procedures that applied to logging, investigating, managing and responding to investor concerns, and to the preparation and sending of external communications including PDSs.

Commenting on the move, ASIC Deputy Chair Sarah Court said responsible entities are responsible for the governance of investor funds and, as such, must have proper processes, procedures and policies in place to ensure the investment strategy, and statements made about the investment strategy, reflect the representations made. This is particularly important when the investment strategy is ESG-focused.

“We believe FIMSL’s governance of the Fund provides a clear example of how not to run an ESG fund.

“We will allege FIMSL took a perfunctory approach to its oversight of the Fund, attracting investors with claims it made no effort to validate, and in failing to independently monitor investments in the Underlying Funds to ensure they were consistent with the representations in the PDS.

“Even when alerted that the Fund held investments that were contrary to its PDS, FIMSL continued to re-issue the PDS without making any changes for over nine years.

“We consider it to be unacceptable for entities to capitalise on investors’ interest in ESG investments without ensuring sustainability-related representations are well-founded, transparent and consistent. The bar for governance standards that underpin ESG representations for investment products is high and ASIC will ensure that entities which we believe may have failed to meet those standards, are held to account,” Court said.

The Fiducian statement said the firm is closely reviewing the court documents and the allegations made by ASIC. As the matter is now before the Court, FIMS or the Company won’t make any other comment at this time.

“FIMS has fully cooperated with ASIC’s investigations to date,” it said.

“The Fund ceased to operate in May 2024 due to a lack of scale. The Fund invested client monies in two underlying funds and upon closure, investors with two-thirds of funds invested elected to be transferred to these underlying funds, where FIMS bore the costs of the buy/sell differential. At the time of closure, the Fund had $15.57 million Funds Under Management and 158 underlying investors and delivered an annualised return of 7.62% p.a. over the 9 years and 86.61% total return since inception.”

“The Company will keep the market informed in accordance with its disclosure requirements.”