Compliance Corner: SEC Cracks Down On "Greenwashing"

Editorial Staff May 27, 2022

Compliance Corner: SEC Cracks Down On

The latest compliance news: regulatory developments, punishments, guidance, permissions and new product and service offerings.

Securities and Exchange Commission
The Securities and Exchange Commission has proposed disclosure requirements to avoid wealth managers misleading investors.

Controversy is growing over how some financial firms are trying to appear more responsible on environmental, social and governance (ESG) investment than they really are. Such behavior has been dubbed as “greenwashing.”

The changes are designed to promote “consistent, comparable, and reliable information for investors concerning funds’ and advisors’ incorporation of environmental, social, and governance factors,” the SEC said in a statement this week.

The proposed changes would apply to certain registered investment advisors, advisors exempt from registration, registered investment companies, and business development companies, it said.

“ESG encompasses a wide variety of investments and strategies. I think investors should be able to drill down to see what’s under the hood of these strategies. This gets to the heart of the SEC’s mission to protect investors, allowing them to allocate their capital efficiently and meet their needs,” Gary Gensler, SEC chairman, said.

The SEC said that its proposed amendments seek to categorize certain types of ESG strategies broadly and require funds and advisors to provide more specific disclosures in fund prospectuses, annual reports, and advisor brochures based on the ESG strategies they pursue. 

Funds focused on the consideration of environmental factors generally would be required to disclose the greenhouse gas emissions associated with their portfolio investments. Funds claiming to achieve a specific ESG impact would be required to describe the specific impact(s) they seek to achieve and summarize their progress on achieving those impacts, the SEC continued.

The regulator said funds that use proxy voting or other engagement with issuers as a significant means of implementing their ESG strategy would be required to disclose information regarding their voting of proxies on ESG-related voting matters and information concerning their ESG engagement meetings.

A few days ago the SEC punished BNY Mellon Adviser for misstatements and omissions about ESG considerations in making investment decisions for certain mutual funds it ran. BNY Mellon Investment Adviser agreed to pay a $1.5 million penalty to settle the matter. 

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