It recently came to light that the SEC disbanded their ESG Enforcement Task Force. The move was met with much disappointment in ESG/sustainability circles who may not have fully appreciated SEC’s subtlety in saying that “the expertise developed by the task force now resides across the Division.” I’m confident that expertise will become more evident over time, rearing up in the form of existing regulations and enforcement initiatives. Case in point – the SEC’s latest Exam Priorities for investment advisors and companies, broker-dealers, and a few other “market participants”.
You won’t find any mention of ESG, climate, sustainability or DEI in the document’s 16 pages – but it’s there in at least one context: registered investment companies (RICs), which consists of mutual funds and exchange-traded funds.
“Examinations of RICs will generally review their compliance programs, disclosures, and governance practices. Particular examination focus areas may include review of specific topics or characteristics involving … portfolio management practices and disclosures, for consistency with claims about investment strategies or approaches and with fund filings and marketing materials…”
SEC announced such an enforcement action last month against Inspire Investing LLC, which Staff claimed made “misleading statements and … compliance failures related to the execution of its ‘biblically responsible investing’ strategy.” A similar action was published Monday against investment adviser WisdomTree Asset Management Inc.:
“According to the SEC’s order, from March 2020 until November 2022, WisdomTree represented in prospectuses for three ESG-marketed exchange-traded funds, and to the board of trustees overseeing the funds, that the funds would not invest in companies involved in certain products or activities, including fossil fuels and tobacco. However, the SEC’s order finds that the ESG-marketed funds invested in companies that were involved in fossil fuels and tobacco, including in coal mining and transportation, natural gas extraction and distribution, and retail sales of tobacco products.”
Wisdom Tree was assessed a $4 million civil penalty – substantially more than the $300,000 paid by Inspire.
I recommend reading the Order because of the role third-party data providers played in Wisdom Tree’s ESG screening process. There is an important lesson there (see paragraphs 23-36).
Depending on the breadth of SEC’s RIC examination initiative and resulting enforcement, we may see an acid-test for funds that claim ESG/sustainability strategies but in reality are veiled index funds or tech heavy strategies based on an assumption that tech companies inherently have little ESG/sustainability exposure. This may also put a spotlight on the need to understand details about ratings and benchmarking data on which investment professionals rely.
Members can learn more about ESG/sustainability enforcement here.
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