The US SEC’s ESG task force strikes again with a US$4m settlement

The United States Securities and Exchange Commission’s (SEC) focus on ESG disclosure issues continues, evidenced  by its November 22, 2022, US$4m settlement with a large asset manager. The SEC charged the firm with failing to adhere to its policies and procedures involving two of the institution’s mutual funds and one separately managed account strategy marketed as ESG investments.

The SEC charges do not specifically allege greenwashing claims as we have seen in other ESG cases brought by the SEC, such as the settlement with BNY Melon Investment Advisory Inc. for charges that the firm falsely implied that some mutual funds had undergone an ESG quality review. Rather, here the SEC found that the institution had policy and procedure failures involving the ESG research that its investment team used to select and monitor securities. The material that the firm prepared about ESG investments, which it shared with investors and trustees, was therefore not based on proper policies and procedures. In addition, once it subsequently established policies and procedures, the SEC claimed that the institutions also failed to follow them. For example, the policies and procedures required the use of a proprietary ESG questionnaire and materiality matrix, which was pitched to trustees and investors as a means to “assign[ ] scores to companies based on their adherence to ESG principles.” These questionnaires were to be maintained in a shared database. In contravention of firm policy, the investment team chose to rely on previous ESG research, which differed from the policies and procedures and only completed the required questionnaire after securities were already selected for inclusion in the investment portfolios. In a couple of cases, the questionnaires were never completed. According to the SEC, a lack of training exacerbated the issue, with some members of the investment team under the misinformed belief that the questionnaires were optional. As a result, the selection of securities for the firm’s ESG investment portfolios was not in accordance with the policies and procedures or the promotional material conveyed to third parties.

This action comes from the efforts of the SEC’s Climate and ESG Task Force that it created in 2021 to identify potential material gaps or misstatements in issuers’ ESG disclosures.  In addressing this settlement, the Task Force’s deputy director emphasized that if asset managers brand and market their funds and strategies as ESG, they must “establish reasonable policies and procedures governing how the ESG factors will be evaluated as part of the investment process, and then follow those policies and procedures, to avoid providing investors with information about these products that differs from their practices.”

As discussed in this prior article, financial services firms can take several steps to manage and mitigate regulatory risk in connection with ESG investment strategies, including developing clear, reasonable and effective policies and procedures regarding how ESG considerations are deployed in the investment decision-making process. This most recent settlement underscores the importance not only of developing such policies and procedures but also ensuring a consistent implementation and strict adherence to them.