ESG investment sector under global regulatory oversight
The environmental, social and governance (ESG) oversight train continues to gain momentum with recent efforts to “greenwash” investment funds. Several actions reflect a confluence of global efforts to ensure that ESG-related actions, regardless of sector, are consistent, comparable and transparent. Entities participating in the ESG investment industry should stay tuned to these emerging regulatory and enforcement trends, both in the United States and elsewhere.
Developments in the United States
On May 25, 2022, the U.S. Securities Exchange Commission (SEC) proposed changes to rules and reporting forms to provide investors with information regarding the integration of ESG factors by funds and advisers. The proposed rules would require funds and advisers that consider ESG factors in their investment process to provide more detailed information in fund prospectuses, annual reports and adviser brochures about the ESG strategies they use. The SEC has proposed a “layered framework” for this additional disclosure, in which the level of detail required for the disclosure depends on how central ESG factors are to a fund’s strategy. The proposed rules would also require ESG-focused funds to disclose additional information regarding the greenhouse gas (GHG) emissions associated with their investment, such as the carbon footprint and weighted average carbon intensity of their portfolio. .
As part of its increased focus on ESG issues, the SEC’s Enforcement Division’s Climate and ESG Task Force recently accused BNY Mellon Investment Advisor, Inc. (BNY Mellon) “of misrepresentations and omissions regarding ESG considerations when making investment decisions for certain successful mutual funds. In its order, the SEC alleged that BNY Mellon said or implied that it had performed ESG quality reviews of its funds when it allegedly only performed this review of certain funds. The SEC found that many investment funds lacked an ESG quality assessment score. BNY Mellon settled the case with the SEC and agreed to pay a $1.5 million fine.
These SEC actions build on rulemaking and enforcement initiatives first launched in 2021, which we discussed here. Notably, the SEC sent letters to many publicly traded companies requesting additional information about their GHG risk reporting and proposed new rules to govern GHG risk reporting while creating new requirements for GHG risk disclosures. GHG and ESG, with comments on these rules expected by June 17. , 2022. The SEC’s broadening of its ESG focus to the financial sector is perhaps unsurprising, but represents a new area of focus for the SEC and a new source of risk for investment firms developing or market ESG funds.
Overseas entities also face heightened scrutiny of ESG claims related to investment funds. German law enforcement recently raided the offices of Deutsche Bank and its subsidiary, DWS, based on allegations of fraudulent advertising of sustainable investment funds. Prosecutors said they found evidence that DWS only applied ESG standards to a few investments, contrary to statements made in the company’s sales prospectus, and further enforcement by German authorities is expected.
Regulators around the world, particularly in the United States and Europe, will continue to focus more on the use and implementation of ESG factors as countries seek to enforce and regulate ESG-related claims . Entities that make ESG-related claims, whether related to their operations or investment platforms, should ensure that such claims are properly substantiated and comply with relevant laws to minimize enforcement or risk. “greenwashing” allegations. As part of this effort, it is important to assess ESG-related claims and strategies in all media as well as other public statements and regulatory filings to ensure consistency and accuracy.