(Bloomberg) -- A looming landmark court case in Australia is sending a strong message to some of the country’s biggest investors about backing up climate claims: get your house in order.

The Australian Securities and Investments Commission is suing pension fund Mercer Superannuation in the corporate watchdog’s first legal action against greenwashing. Supporting court documents filed by ASIC reveal the lengths to which it’s scrutinizing the A$3.4 trillion ($2.3 trillion) pensions industry — known as superannuation — that’s among key backers of the country’s biggest polluters. 

The papers provide detailed figures alleging that six of Mercer’s sustainable investment products held shares in BHP Group Ltd. and other fossil fuel companies, and ramped up its holdings in the mining giant from A$4.2 million to A$7.1 million in less than a year. That’s despite Mercer stating the products excluded firms involved in the extraction or sale of carbon-intensive fossil fuels, ASIC claims.

ASIC also alleges the A$29.3 billion fund had a small exposure to gambling and alcohol company stock in its sustainable products, despite stating those sectors were barred. The court hearing date is yet to be scheduled.

Mercer is cooperating with ASIC and “takes their concerns very seriously,” a Mercer spokesperson said in an emailed statement. “As this matter is before the courts, it would be inappropriate for us to comment further at this time.”

As regulators crack down on dubious green claims across the globe, Australia’s watchdog is only getting started. In the past six months it’s slapped fines worth A$140,000 on firms including US behemoth Vanguard Group Inc. for misrepresenting their climate credentials, even if unintentionally. That its most serious allegation yet targets a superannuation fund sends a warning about what lies ahead, said Sarah Yu, a partner with King & Wood Mallesons in Sydney.

“ASIC’s action represents a clear shift in regulatory approach from education to enforcement,” said Yu. “That sends a major signal to the superannuation sector that ASIC is serious about its stated intention to prioritize prosecuting alleged greenwashing,” she said, adding that the case is “being watched very closely by the sector.”

Pensions will most immediately be focusing on any takeaways from the case around due diligence, as well as the use of technology to make green reporting less prone to error, said Yu. Other closely-watched areas will be risk management and the emerging issue of how trustees are using their voting power, she said. 

Global Pressure

The Mercer action follows a wave of global pressure on climate disclosures. The UK pensions regulator has warned funds they must improve reporting of environmental, social and governance data, while Europe is poised for a new green bond standard that puts the onus on issuers to meet their promises. In the US, a number of large firms including Goldman Sachs Group Inc. have also been fined. 

ASIC said there’s more enforcement action to come in Australia. 

“We have got superannuation funds that we are continuing to look at,” ASIC Commissioner Danielle Press said in an interview last month. “When we are getting breaches reported to us, we are taking those very seriously.”

Australian pension funds UniSuper and Active Super removed dozens of pages of ESG risk disclosures from their websites to review the accuracy and reliability of their data, Bloomberg reported this month, highlighting the increasing pressure that local funds are under to stand up their claims. 

While disclosures of climate-related risk are currently voluntary, the government is consulting on shifting the requirement to mandatory reporting. ASIC has already said it supports the change. 

Investors seem to be getting the message. Ashurst partner and superannuation specialist Scott Charaneka said his office was seeing an uptick in inquiries from pension funds for advice and briefings on issues related to greenwashing. 

“This topic has been a focus of many board papers for some time and many entities are increasing their focus in this area,” he said in an interview. “It’s safe to say that this will not be the only case.”

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