SEC Starts Review on ESG Mislabeling

The Securities and Exchange Commission (SEC) has initiated a review into the use of green and socially conscious labels in an attempt to address greenwashing concerns.

In its second review of the sector in less than two years, the SEC has called for investment managers to explain the standards they use for classifying funds as focused on or aligned to environmental, social and governance (ESG) goals, according to Bloomberg.

The increase in popularity of ESG and socially responsible investing in the US has led total sustainable assets to grow from $8.7 trillion in 2016 to $17 trillion in 2020, according to data from the Global Sustainable Investment Alliance.

As asset managers have scrambled to launch products purporting to have a positive impact on environmental or social grounds, the SEC has become concerned about ‘greenwashing’ – the practice of exaggerating sustainability credentials in order to benefit from the boom in investor interest.

Bloomberg reports that the SEC asked investment advisers to describe their screening processes, their ESG compliance programs policies and procedures in place, and statements made by managers in their marketing materials or regulatory filings. If the SEC finds misconduct is an issue for ESG labelling this could lead to policy changes as well as further investigations or potential fines.

The SEC set up a Climate and ESG Task Force in March, consisting of enforcement staff who proactively identify ESG-related misconduct. Fund managers’ ESG disclosures is a key focus of the new unit.

The SEC is also working on a rule that would make it compulsory for public companies to disclose how a warming planet could impact their profits. The commission’s chair, Gary Gensler, said in August: “Today, investors increasingly want to understand the climate risks of the companies whose stock they own or might buy.

“Large and small investors, representing literally tens of trillions of dollars, are looking for this information to determine whether to invest, sell, or make a voting decision one way or another.

“Investors are looking for consistent, comparable, and decision-useful disclosures so they can put their money in companies that fit their needs.”