The SEC Has Taken Big Actions on ESG. And We’re Not Talking About the Climate Disclosure Rules.
On March 3, 2021, the SEC’s Division of Examination announced its 2021 examination priorities, including an enhanced focus on climate-related risk. One day later, the SEC’s Division of Enforcement announced the creation of the Climate and ESG Task Force, to work closely with other SEC divisions and offices (an “all agency approach” to ESG), including the Division of Examination. As stated in the release, the purpose of the Task Force is to identify ESG-related misconduct by reviewing “any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules” and identify any compliance issues relating to investment advisers’ and funds’ ESG strategies. In addition to looking at issuer disclosures and the marketing of ESG funds, the Task Force, in alliance with the Division of Examination, will review proxy votes to ensure that institutional votes are consistent with both fiduciary duties and advertised ESG mandates.
In our opinion, the SEC was playing a little bit of catchup here. As the demand for ESG funds skyrocketed in 2021 and ESG became a hot topic, the SEC is now sifting through both corporate and fund disclosures to identify instances of greenwashing. It has always been part of the SEC’s mandate to protect investors and ensure they have access to reliable and accurate data – and we think the exponential acceleration of interest in ESG investing may have allowed some asset managers seeking returns to stretch the definitions of ESG factors.
One year later…
While the proposed and highly anticipated rules on climate disclosures have made most of the headlines, the Climate and ESG Task Force is starting to take over, and the group is grabbing the media’s attention by going after big players.
At the issuer level:
On April 28, 2022, the SEC announced it was fining Vale over how the mining company disclosed its mining safety procedures before one of its dams collapsed in 2019 and killed 270 people. For the first time, the Task Force relied heavily on the issuer’s sustainability reports to substantiate its allegations that the company made false and misleading claims in its ESG disclosures, which investors rely upon to make informed investment decisions.
Activist investors are also leveraging the potential benefits of the Task Force. In April 2022, The Humane Society wrote to the SEC’s Division of Enforcement asking them to review McDonald’s statements, claims, and disclosures regarding the use of gestation crate.
At the asset manager level:
The SEC has been investigating DWS, the investment arm of Deutsche Bank, for almost a year as reported by the WSJ back in August 2021, after the former head of sustainability came out and spoke on the bank’s misrepresentation of its ESG capabilities and related investments. On May 31, 2022, the Deutsch Bank AG offices were raided by German authorities – the jury is still out on the SEC’S investigation results.
In another investigation, the SEC’s Division of Enforcement found Bank of New York Mellon Investment Adviser did not always perform the ESG quality review that it disclosed it was using within certain investments. In 2022, the SEC fined BNY Mellon $1.5 million, which the accused settled without admission or denial of the allegations.
The SEC is also investigating Goldman Sachs Group Inc.’s asset management arm over its ESG funds and whether the publicly articulated ESG criteria and methodology used for these funds are accurate and truthful.
What this means for you.
It’s clear that the SEC is making moves, and fast. The last thing you want is to be on the agency’s radar for misrepresenting ESG-related claims. First and foremost, take an extra close eye to your corporate disclosures and future commitments. Make sure any numbers provided are auditable, and there are controls in place to measure and report the data on an annual basis. Follow the lead of SEC comment letters by ensuring material disclosures and metrics that are not in the 10-k filing are not also provided in your sustainability report. Remember the SEC can only look at past, already public disclosures. Thus, go back to your public documents and ensure the processes described in these documents indeed reflect your current activities and initiatives in place.
It looks like the SEC’s findings related to ESG funds are perhaps accelerating the potential for sustainable investing regulations. In May 2022, the SEC released a proposal that would establish disclosure requirements for ESG funds and advisors. As the proposed rules for ESG funds evolve, keep tabs on how institutions are increasing transparency within their disclosures. Down the line, this may impact your disclosures, your ESG communications to investors, and your inclusion in ESG funds.
In the meantime, it’s critical to stay on top of the SEC’s moves when it comes to ESG. The landscape is rapidly changing for both companies and investors alike. If you’re looking for a better way to keep up to date, subscribe to The Infinite Minute newsletter. The weekly email compiles the biggest ESG news of the week impacting corporate issuers.