Featured in Net Zero Investor:
News that the US Securities and Exchange Commission (SEC) has launched an investigation into several asset managers, relating to their green marketing claims, is putting managers and investors on edge, as the probe may lead to a critical review of how a range of investment vehicles are packaged and presented, insiders have told Net Zero Investor.
On Tuesday, this publication reported that the US Securities and Exchange Commission’s enforcement division has sent a number of document requests, including subpoenas, to several asset managers across the U.S. relating to their environmental, social and governance investment marketing practices.
Among the SEC’s areas of inquiry are conventional investment funds that have repurposed themselves as ESG funds.
The names of the impacted asset managers could not be determined but Hester Peirce, a commissioner at the SEC, stressed that “concerns about greenwashing are genuine because advisers can profit by labelling their products and services as ‘green’ without undertaking anything exceptional to substantiate that designation.”
Experts within the green investment community have said a wider crackdown on such practices within the sustainable fund market should not be ruled out as the SEC’s regulatory action firmly puts the spotlight on how investment vehicles are packaged, presented and marketed.
It also raises questions about the credibility of managers’ claims and statements.
“Don’t be surprised if more enforcement actions come out soon,” said Michael Piwowar, a former SEC commissioner who served as acting chair in 2017, these days executive vice-president at the Milken Institute think tank in Washington, D.C.
Commenting on the SEC’s regulatory action, Jina Choi, a former head of SEC’s team in San Francisco, also thinks investors and fund managers should brace themselves for more regulatory scrutiny of investment vehicles and firms.
“ESG remains a priority area for the SEC and I would expect to see some enforcement cases before the end of the agency’s fiscal year in September,” she said.
Choi, these days a lawyer at Morrison Foerster in California, pointed out that “registered investment advisers are already subject to examination and inspection, so their statements on green or socially conscious investing can be fertile ground for investigations and action by the SEC’s enforcement division.”
Strategy before launch
Emilie Rowe, ESG lead and head of financial services at Aspectus Group, said “the SEC investigation reaffirms the necessity for an ESG communications strategy to be grounded in real business strategy.”
London-based Rowe stressed that “if these funds can truly evidence ESG credentials, then fund managers need a very clear, considered communications strategy in place before launching marketing efforts.”
With the regulator’s focus now firmly on what Rowe called “this burgeoning area of the market, firms need to ensure that their communications and distribution efforts are reflective of the investment strategies employed by such funds.”
While no US asset managers have incurred fines related to greenwashing so far this year, in 2022, Goldman Sachs and BNY Mellon were fined $4 million and $1.5 million, respectively.
This year, the German asset management firm DWS has set aside $21 million in anticipation of the fine it will face due to previous extensive greenwashing activities.
In Australia, asset manager Vanguard has incurred fines following a series of upheld allegations of greenwashing, most recently related to misleading investors regarding the implementation of ESG exclusionary screens in certain ETFs.
“A key focus of this latest investigation is into funds that have been converted from conventional investment funds into ESG funds,” observed Yann Bloch, vice president for the Americas at NeoXam.
“When making such a significant shift in the direction that a fund takes, the operational requirements behind the scenes change dramatically.”
“You are dealing with totally different types of funds, and data often sourced from a greater number of providers and in varying formats,” Bloch explained.
“To run those funds, firms have to employ ESG specialists, investment teams, and reporting teams.”
In April of this year, the SEC launched the Climate and ESG Task Force to uncover ESG-related misconduct and it has outlined rules for corporate climate risk disclosure.
However, publication has experienced repeated delays, moving from December 2022 to April of this year, and now set to be released in the autumn.