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.



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.

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.”

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