The party may be over for all of the greenwashers on Wall Street.
There is now little doubt that the U.S. Securities and Exchange Commission is serious about cracking down on misleading claims made by ESG fund managers.
Last month, the Securities and Exchange Commission fined a Bank of New York Mellon Corp. investment unit for falsely claiming that some of the firm’s mutual funds had undergone so-called ESG quality reviews. And now, the agency is investigating whether some of Goldman Sachs Group Inc.’s mutual funds fail to meet the environmental, social, and governance metrics proclaimed by the Wall Street behemoth’s marketing materials.
“We are likely to see a wave of regulatory interventions in the coming months,” said Sonali Siriwardena, partner and global head of ESG at law firm Simmons & Simmons.
Officials have demanded that money managers explain the standards they allegedly use to classify ESG-labeled funds under Chair Gary Gensler, who was nominated by President Joe Biden to lead the SEC in 2021. When the examination division detects potential misconduct, it usually notifies the agency’s enforcement unit, which then conducts an investigation.
The BNY Mellon case may serve as a model for future cases. Following an investigation, the SEC announced on May 23 that BNY Mellon Investment Adviser Inc. used “material misstatements and omissions” in making investment decisions for some mutual funds managed by the firm.
According to the agency, BNYMIA stated that portfolio holdings in its Overlay funds would be subject to “an ESG quality review.” The SEC stated that this was not the case.
As a result, the agency determined that the firm violated Section 34(b) of the Investment Company Act, which states that making any untrue statement of material fact in any registered document is illegal. BNYMIA agreed to pay a $1.5 million civil penalty. While it’s not much in comparison to other recent SEC securities violations, it’s likely just the beginning.
However, one Wall Street lawyer attempted to downplay Siriwardena’s predicted “wave of regulatory interventions.”
“We’re not talking about a Ponzi scheme or allegations of industry-wide fraud like we saw with the subprime mortgage meltdown,” says Schulte Roth & Zabel lawyer Marc Elovitz, an adviser to private fund managers. “We’re not talking about a massive asset management conspiracy here.”
Elovitz contends that the recent inundation of greenwashing is a result of the sector’s novelty, rather than a concerted Wall Street effort to make as much money as possible by slapping ESG labels on everything. ESG is a relatively new innovation in investment management, according to Elovitz. He predicts that as the market matures, there will be more clarity around the definition of ESG, which will lead to greater transparency.
Not everyone is as upbeat. “It almost feels inevitable that more names will emerge as regulators dig in,” said Fiona Huntriss, a partner at law firm Pallas who focuses on financial litigation and broader dispute strategies. It’s also important to remember, she says, that this isn’t just a US, UK, or European issue — it’s a global one.
“We’re really just getting started because there hasn’t been proper regulation between now and when asset managers started marketing ESG funds,” Huntriss said. “Even with increased regulation, there is still uncertainty about what the standards are, and that type of uncertainty is fertile ground for litigation.”
And, of course, there is still the unresolved investigation of DWS Group, which sparked all the attention on possible ESG misselling.