In August, it was reported that the SEC and European regulators were investigating German investment manager DWS (80% owned by Deutche Bank) for misleading clients about the nature of its sustainable investment offerings. This appears to be the first significant act against a large asset manager, but it follows a number of signals that the SEC is cracking down on “greenwashing”.
In remarks before the Principles for Responsible Investment “Climate and Global Financial Markets” on July 28, 2021, SEC Chair Gary Gensler provided insights into what fund managers might expect from enhanced SEC disclosure rules. Gensler commented that a growing number of funds market themselves as "green," "sustainable," and "low-carbon" and indicated that SEC staff are considering more robust disclosures from fund managers regarding the criteria and the underlying data used in the investment process.
This is particularly interesting because many managers, especially large managers, claim that they integrate ESG across all their products. It appears the SEC is trying to ensure asset managers claiming to use ESG data in security selection are actually using that data and can explain it clearly to consumers. The SEC is also looking at the Names Rule with respect to ESG funds. The Names Rule prohibits materially deceptive or misleading fund names. These initiatives on their own will make it much more difficult for managers to make simple claims of ESG integration, and will put all ESG claims by managers under scrutiny, alongside performance claims. We look forward to the SEC addressing consumer and institutional concerns when it comes to unsubstantiated claims of ESG and impact.
Another interesting thing occurring at the regulatory level is the SEC is taking real steps towards public company equity and inclusion disclosure. Some of you will remember one of our previous monthly letters discussed the new Nasdaq diversity requirements. We are pleased to report that the SEC has approved them - which means that issuers listed on Nasdaq will have to comply with enhanced disclosure rules and will need to have at least two diverse board members.
There is no doubt that all managers making ESG claims feel the heat of potential litigation. Those that are exaggerating their actual commitment to ESG and impact will have to either up their game by doing what they say they are doing - or answer to the regulators.
[Image below is a field of grass covered in morning dew]
