U.S. regulators are cracking down on socially responsible investments that track factors like environmental, social, and governance principles for sustainable investing strategies that only appear sustainable in name only.
Securities and Exchange Commission regulators demanded money managers to explain the standards for classifying funds as ESG-focused, Bloomberg reports. This latest round of scrutiny is the SEC’s second into possible ESG mislabeling since last year.
“It is a real area of scrutiny, particularly as it relates to disclosures,” Morgan Miller, a partner at law firm Paul Hastings in Washington and a former SEC enforcement attorney, told Bloomberg.
With $35 trillion in so-called sustainable investment assets, the SEC is trying to define an investment segment more clearly as governments, pension plans, and corporations are seeking to lower carbon footprints and be global citizens. The sudden rush into socially responsible investments has caused more observers to warn of potential marketing schemes or so-called greenwashing that try to pass off traditional investment strategies as sustainable.
In the latest crackdown, German and U.S. authorities have launched investigations into Deutsche Bank AG’s asset-management arm DWS Group, following a former senior executive’s allegations that the financial institute exaggerated its ESG credentials on some products. DWS has rejected those claims.
The scrutiny has done its job as some European firms are checking to see if they have to reclassify assets or place internal teams to review their ESG selection process.
The SEC has sent out letters earlier this year, asking the financial industry to describe in detail the screening processes they use to ensure assets can fall under ESG designations. The SEC also wants to know how firms are dealing with varying jurisdictions’ requirements – Europe has specific standards to make sure assets are green or sustainable, but U.S. standards are less systematic.
The SEC is also seeking information on ESG compliance programs, policies, and procedures, along with any statements made by managers in marketing materials or regulatory filings.
The SEC could begin forcing fund managers to disclose criteria and data they utilize to market strategies as environmentally and socially conscious. The agency is also working on a rule that would require disclosures on how a warming planet could impact profits.
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