As investors, advisers, corporations and other stakeholders become increasingly focused on environmental, social and governance (ESG) investments and disclosures, regulators are becoming increasingly concerned with potential “greenwashing,” which Kelly Gibson, Chair of the Securities and Exchange Commission’s (SEC) ESG Task Force, defined as “exaggerating” a “commitment to, or achievement of climate . . . related goals.”
During a discussion with the Environmental Law Institute, Gibson shared that the ESG Task Force will be concentrated on detecting and bringing enforcement actions for greenwashing in the upcoming year. Gibson explained that due to the “dramatic surge in popularity for ESG focused investment funds” without an equally paced development in U.S.-law and ESG criteria, there is a significant risk that investors may be misled by greenwashing.
Gibson indicated that the ESG Task Force will be looking closely at the following:
- Disclosures that issuers make within their public filings “and elsewhere.”
- Statements versus actions of investment advisers with respect to their stated investment strategies.
- The way investments are labeled.
Soon after Gibson outlined the ESG Task Force’s priorities, SEC’s Director of the Division of Enforcement, Gurbir Grewal, noted that while the task force was created to “sharpen [the SEC’s] focus” on ESG-matters, there is “nothing ‘new’ about how the Task Force – or the Enforcement Division as a whole – investigates possible climate and ESG-related misconduct.”
The concern about greenwashing by funds was also underscored in a survey shared with the SEC earlier this year by As You Sow, a shareholder advocacy group. As You Sow led a study of 94 ESG funds and concluded that in the majority of funds reviewed, “one can’t tell the difference between a prospectus for true ESG offerings vs. greenwashing mutual funds and ETFs,” claimed the advocacy group.
The researchers used data-analytic tools and found that language in many funds’ prospectuses lacked clarity when disclosing why they held stakes in companies involved in areas typically not considered ESG-friendly, such as fossil fuels, deforestation, firearms and weapons, prisons and tobacco.
“We see funds with ESG in their names getting F’s on our screening tools because they hold dozens of fossil-fuel extraction companies and coal-fired utilities,” As You Sow CEO Andrew Behar said.
Representatives from As You Sow met with the SEC last month to share their analysis and make recommendations. While companies are encouraged (and often pressured) to prioritize ESG matters and provide helpful related disclosure, companies must approach these actions with a great level of thought and vetting before sharing such information with investors.
