SEC and ESG
Over the past several years, investor interest has increased significantly for products and financial services that focus on environmental, social, and governance (“ESG”) factors. ESG includes terms and concepts such as “socially responsible investing,” “sustainable,” “green” and “ethical.” However, investment advisors sometimes don’t fully disclose the criteria they use in making their investment decisions. A related issue is when firms have established policies and procedures for ESG investments but fail to adhere to them.
Can You Trust “Socially Responsible” Investing?
The lack of consistency in the definitions and labels used for ESG investments can also hinder investors from making meaningful comparisons or objectively evaluating a fund’s investment goals. In some cases, the circumstances can cross the line and rise to the level of misrepresentations or omissions of material facts that could deceive investors when they make decisions regarding ESG investments.
During one of his YouTube channel presentations, SEC Chairman Gary Gensler stated that there are at least 800 registered investment companies with more than $3 trillion invested in assets that claim to meet some type of environmental, social or governance objective. He also added that the SEC has been evaluating measures to strengthen the rules and conventions regarding the naming of funds as well as disclosures by fund managers about the criteria and underlying data used in ESG investing.
The Division of Examinations Makes ESG Disclosures One of its Top Priorities
In its report of examination priorities for 2022, the Commission’s Division of Examinations listed ESG investing near the top of its list. The Division identified three circumstances that can increase the risk of an investment firm making a materially false and misleading statement or omission involving ESG investments:
- the lack of standards for ESG-related terminology (e.g., labels such as sustainable, socially responsible, and impact investing);
- the variety of approaches to ESG investing (e.g., two different portfolios carry the “ESG” label where one considers ESG factors along with other traditional, unrelated factors while the other makes ESG factors the primary consideration in choosing investments); and
- the failure to effectively address legal and compliance issues with new lines of business and products.
The Division also reiterated that it will continue to review ESG-related advisory services and investment products, including whether investment advisers and funds:
- accurately disclose their ESG investing approaches and have policies and procedures to prevent securities violations relating to those disclosures;
- cast proxy votes consistent with their ESG-related disclosures and mandates; and
- overstate or misrepresent the ESG factors incorporated into their portfolio selections, such as in performance advertising and marketing.
Noteworthy ESG Enforcement Actions in 2022
The SEC initiated a number of enforcement actions against companies and investment firms involving ESG-related issues and statements in 2022.
Vale Iron Ore Complaint
The Commission filed a complaint against Vale S.A., one of the largest iron ore producers in the world. The complaint alleges that the company intentionally concealed information that one of its older dams in Brazil was at risk of collapsing. In 2019, the dam collapsed killing 270 people and causing substantial environmental and social harm. The company lost more than $4 billion in market capitalization as a result of the disaster.
According to the SEC’s complaint, the dam was built to contain potentially toxic byproducts from mining operations but failed to meet required safety standards. The complaint also alleges that Vale obtained stability certifications for the dam by knowingly using unreliable laboratory data while representing to investors it adhered to the “strictest international practices” in assessing dam safety, and that 100 percent of the company’s dams were certified to be in stable condition. The case is still pending.
BNY Investment Settlement
In another case, BNY Mellon Investment Adviser consented to the entry of an order in which it agreed to pay a $1.5 million penalty to settle allegations that it made misstatements and omissions about ESG considerations for certain mutual funds that it managed.
The SEC alleged that the company either represented or implied that investments in certain mutual funds had undergone an ESG quality review when there was no ESG quality review score at the time of the investment. BNY Mellon Investment Adviser neither admitted nor denied the findings in the SEC’s order but agreed to a cease-and-desist order and a censure in addition to a $1.5 million penalty.
Goldman Sachs Settlement
Finally, Goldman Sachs Asset Management consented to the entry of an order to settle allegations that several of its procedures and policies for selecting and monitoring ESG related securities were deficient. The SEC alleged that for more than a year the company did not have any written policies or procedures for one of its ESG investment products, and that after those policies and procedures were established, they were not consistently adhered to.
The order identified a policy which required that an ESG questionnaire be completed for every company that would be included in the portfolio of ESG investment products. Although questionnaires were required to be completed prior to selecting a company for inclusion in a portfolio, the SEC found that many of the questionnaires were completed after the selection. Some selections were also allegedly made by relying on previous ESG research, which the SEC found was often performed in a manner inconsistent with the firm’s required policies and procedures.
Goldman Sachs Asset Management did not admit or deny the SEC’s findings but agreed to a cease-and-desist order, a censure and the payment of a $4 million penalty.
The Future of ESG Investing
The SEC has made it clear that it will continue to closely monitor investment firms to ensure that they implement, and adhere to, policies and procedures regarding their research and inclusion of ESG related investments in their portfolios.
As a further demonstration of its commitment, the SEC created a Climate and ESG Task Force within the Division of Enforcement. The Task Force has been charged with developing initiatives to identify ESG-related misconduct to protect investors who rely on the accuracy and truthfulness of company disclosures when making investment decisions.
If you have evidence involving misrepresentations or omissions of material facts in a company disclosure, contact Young Law Group for a confidential no-obligation consultation with one of our experienced SEC whistleblower attorneys by filling out a form or calling us at (800) 590-4116.