SEC lawyers subpoena fund managers over ESG disclosures

The US Securities and Exchange Commission enforcement division has sent document requests, including subpoenas, to several asset managers relating to their environmental, social and governance investment marketing this year, lawyers said, suggesting a potential crackdown looming for the sustainable fund world.

Among the SEC’s areas of inquiry are conventional investment funds that have repurposed themselves as ESG funds, the asset management industry lawyers said. Also in focus are cases where funds offered in the US and Europe may share strategies, holdings or portfolio managers but offer differing amounts of information on either side of the Atlantic.

The inquiries come after the SEC enforcement division in March 2021 formed a task force to hunt for misconduct in climate and ESG investment disclosures. While it settled ESG cases against companies and asset managers including Goldman Sachs and BNY Mellon in 2022, none have been filed so far this year.

That may change as new investigations proceed, lawyers said. Last month the German asset manager DWS disclosed it had set aside €21mn to settle an “ESG investigation” from the SEC and other regulators.

“I wouldn’t be surprised if more enforcement actions come out soon.” said Michael Piwowar, a former SEC commissioner who served as acting chair in 2017, now an executive vice-president at the Milken Institute.

Sustainable or ESG investing boomed in 2021 to reach $3tn in global assets under management, up from $1tn in 2019, according to Morningstar. More recently US investors have cooled on the strategy, withdrawing billions from sustainable and ESG funds, while conservative US politicians have attacked it.

The recent popularity of ESG investing, and the higher fees that frequently accompany it, are two criteria that could draw the enforcement division’s attention as it seeks to protect investors, Piwowar said.

Earlier this year the SEC examinations division — known as the agency’s “eyes and ears” and able to refer potential misconduct to enforcement staff — said it would scrutinise ESG investing.

“ESG remains a priority area for the SEC and I would expect to see some enforcement cases before the end of the agency’s fiscal year in September,” said Jina Choi, a former head of the SEC’s San Francisco office.

The names of asset managers who have received recent subpoenas could not be determined. The SEC declined to comment.

The €21mn that DWS has set aside, most of it earmarked for US authorities, would dwarf the $1.5mn and $4mn that BNY Mellon and Goldman Sachs, respectively, paid the SEC in last year’s settlements.

The SEC is not the only financial regulator looking into ESG disclosure. In late July the Australian Securities and Investments Commission charged US-based Vanguard with making ESG misstatements. The commission alleged Vanguard’s “ethically conscious” global bond fund said it excluded fossil fuel issuers but held debt from Chevron, pipeline businesses owned by the Abu Dhabi National Oil Company, and other oil companies.

“Vanguard self-identified and self-reported [the] breach to our regulator . . . There was never any intention to mislead, but Vanguard recognises it has not lived up to the high standards it holds itself accountable to and apologises for the concern this matter may cause for our clients,” the $8tn asset manager said in a statement.

Choi, now at law firm Morrison Foerster, said: “Registered investment advisers are already subject to examination and inspection, so their statements on green or socially conscious investing can be fertile ground for investigations and action by the SEC’s enforcement division.”

Additional reporting from Brooke Masters in New York and Stefania Palma in Washington

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