The Markets November 30, 2022

Fitch: SEC “Crack Down” on ESG Greenwashing to Continue

Retirement plan advisers should be aware both of SEC charges against those offering ESG funds, as well as the new DOL rule paving the way for ESG use in retirement plans, a consultant advises.

Reported by



Recent regulatory actions focused on how asset managers are managing and presenting environment, social and governance investment funds will likely continue into 2023, according to analysts at Fitch Ratings.

Last week, Goldman Sachs Asset Management paid the Securities and Exchange Commission $4 million to settle charges of failing to correctly incorporate ESG research into investment procedures and branding. That followed a May 23, $1.5 million penalty BNY Mellon Investment Adviser paid for misstatements and omissions about ESG representation in mutual funds.

Never miss a story — sign up for PLANADVISER newsletters to keep up on the latest retirement plan adviser news.

These types of charges are likely to continue as the SEC looks to “crack down on ‘greenwashing,’” Fitch said Tuesday in a press release. The rating agency also noted that these types of charges can “lead to reputational damage that can weaken franchises, particularly if they occur repeatedly.”

The regulatory moves by the SEC come even as the Department of Labor on November 22 finalized a rule paving the way for ESG investment consideration in retirement plans. While the SECs action should not deter plan fiduciaries from considering ESG in fund menus, they should be aware of the actions and who is being charged, according to Bonnie Triechel, co-founder and Chief Solutions Officer at Endeavor Retirement, a consultancy working with plan advisers.

“This shows that retirement plan advisers need to keep in mind both the DOL framework, and the SEC actions,” Triechel says. “It is a fiduciary’s job to understand questions around greenwashing…or find a prudent expert who does.”

Earlier this year, the SEC proposed updates to fund naming rules as well as new mandatory disclosures related to ESG investment practices. Fitch, which provides ESG ratings for investors, said the SEC actions are leading to asset managers being more conservative in touting their ESG credentials.

In the Goldman case, the SEC noted branding and marketing funds as ESG-compliant as an issue.

“In response to investor demand, advisers like Goldman Sachs Asset Management are increasingly branding and marketing their funds and strategies as ‘ESG,’” Sanjay Wadhwa, deputy director of the SEC’s division of enforcement and head of its climate and ESG task force, said in a release. “When they do, 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.”

The BNY Mellon penalty came from similar charges; the SEC said the investment advisory “represented or implied in various statements that all investments in the funds had undergone an ESG quality review, even though that was not always the case.”

ESG, while a frequent topic of discussion in the retirement plan space, has not seen quick uptake in defined contribution plans, and may in fact have lost traction among institutional investors over the past year, according to a survey released by Callan on Tuesday. The consulting firm found that fewer institutional investors incorporate ESG into their plans as compared to a similar survey conducted last year. The survey of 109 institutional investors conducted in May and June found that 35% of respondents incorporate ESG factors into investment decision-making, down from 49% in 2021.

“While there are a number of asset owners incorporating ESG at increasingly complex levels, there is federal regulatory uncertainty and differing ESG policies across states and their pension systems — which have led to confusion and inaction in some cases,” Tom Shingler, senior vice president and ESG practice leader at Callan, said in a press release. “Additionally, there is backlash against ESG from some stakeholders who question its contribution to investment outcomes, while other stakeholders demand increasing levels of ESG incorporation.”

Compliance November 29, 2022

What Do the Mid-Terms Mean for ESG and SECURE 2.0?

ESG-minded investors have cause for concern, as Republicans prepare to take control of the House.

Reported by


This year’s midterm elections resulted in Democrats keeping their narrow lead in the Senate but losing control of the House to Republicans.

Republicans are expected to have a nine-seat majority in the House, and Democrats will either have a one-seat majority or the tiebreaking vote in an evenly split Senate, pending the result of the Georgia runoff election on December 6.

Want the latest retirement plan adviser news and insights? Sign up for PLANADVISER newsletters.

With the House changing hands, some key committee gavels will switch from Democrat to Republican control. What does that mean for the retirement, tax and investment issues that PLANADVISER has been covering?

ESG Issues

First, Republicans taking control of the House means Rep. Virginia Foxx, R-North Carolina, who has frequently expressed opposition to government initiatives to encourage environmental, social and governance-informed investing, will likely become the next chair of the House Committee on Education and Labor, which has jurisdiction over the Department of Labor.

Foxx has described the recent DOL rule to permit retirement plan fiduciaries to use ESG strategies as an attempt to “satisfy the woke mob” and has said it will put Americans’ retirement at risk in order to prioritize left-wing political goals. Foxx is currently the ranking member of the committee, and a spokesperson for the committee confirmed she intends to seek the position.

The House Committee on Financial Services is currently led by Rep. Maxine Waters, D-California, who will likely be replaced by Rep. Patrick McHenry, R-North Carolina, the current ranking member. A spokesperson for McHenry’s office confirmed that he intends to seek the position.

Like Foxx, McHenry is also known for his opposition to ESG and to the Securities and Exchange Commission’s proposed climate-related disclosure regulations. McHenry was critical of the SEC’s proposal from March to require issuers to disclose their climate-related risks to investors. He argued that climate policy should be set in Congress, not from the executive bureaucracy. The SEC proposal has not yet been finalized.

Republican control of the House could lead the administration of President Joe Biden to pursue executive-branch regulation more aggressively, since legislative reform would be harder to achieve with divided government.

This observation applies not only to ESG, of course, but other regulations put forward by the DOL and SEC, such as those concerning swing-pricing and qualified professional asset manager reform.

In reaction to such an effort, Republicans could hold hearings and summon the heads of executive branch departments or business executives to hearings that carry headline risk. They could also use the federal budget and appropriations process for leverage in a wide range of negotiations. Concern over such action might be informing recent statements from Democrats on the need to increase the federal debt ceiling before the next Congress.

There has also been legislation proposed in the Senate that seeks to reign in ESG. The Maximize Americans’ Retirement Security Act, proposed by Senator Mike Braun, R-Indiana, is a bill that would essentially codify the Trump-era DOL guidance on ESG investing, which required fiduciaries to only consider financial factors and was understood as a challenge to ESG strategy. Braun’s bill would also require that a fiduciary distinguish between two investments on a pecuniary basis alone before considering other factors, but they must disclose to investors why pecuniary factors were insufficient.

Senator John Boozman, R-Arkansas, introduced legislation in October that would prevent the SEC from requiring corporate disclosure related to climate and emissions, and it was referred to the Senate Committee on Banking, Housing and Urban Affairs yesterday.

These bills are not expected to pass this year, but both indicate that Republican skepticism of ESG also exists in the Senate.

Retirement

The consequences of the election for the retirement reform package dubbed SECURE 2.0, which is still expected to pass during the current Congress, is less dramatic.

The changing composition in both chambers is unlikely to alter the trajectory of SECURE 2.0. The package has little opposition from either party, and the only challenge would be reconciling its conflicting terms before the next Congress.

If it fails to pass during this Congress, it can be re-proposed in the next Congress, but the new bills would have been informed by months of negotiating and could therefore move faster through the legislative process. SECURE 2.0 would likely receive the same widespread support it enjoyed during this Congress.

SECURE 2.0 is expected by insiders to be attached to a must-pass bill this December and to be signed into law by President Biden.

«