SEC Spots New Target?

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    Stockholm (NordSIP) – The US Securities and Exchange Commission (SEC) is investigating Goldman Sachs Asset Management’s claims of ESG integration within its funds. Goldman Sachs Asset Management manages at least four funds that have “clean-energy” or “ESG” in their names, according to a report by the Wall Street Journal.

    Although no evidence of any such investigation has been presented and neither the SEC nor Goldman Sachs have confirmed or denied the report, such inquiries are aligned with ongoing supervisory and regulatory trends at the USA’s financial services authority (FSA).

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    SEC on the Hunt

    If confirmed this would be the second such investigation by the SEC, following the announcement it had fined BNY Mellon Investment Adviser US$1.5 million following a similar investigation at the end of May.

    On that occasion, the SEC noted that the asset manager had “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” despite the SEC finding that “numerous investments held by certain funds did not have an ESG quality review score as of the time of investment.

    Increased Regulatory Efforts

    IF true, the investigation would certainly be consistent with the SEC’s recent regulatory efforts. The news also follows a series of increasingly active steps by the SEC to regulate disclosures of businesses and asset managers regarding the role of ESG factors in their investments. On Monday, March 21st, the regulator proposed rule changes requiring regulated companies to include certain climate-related disclosures in their registration statements and periodic reports, including CO2 emissions.

    On May 25th, the SEC proposed reforms to ensure appropriate disclosures of ESG integration among fund and advice providers, which would require funds to be classified as “Integration Funds”, “ESG-Focused Funds” and “Impact Funds”. The proposed regulations appear to be somewhat inspired by the EU’s own Sustainable Finance Disclosures Regulation (SFDR).

    The Fear of Greenwashing

    The SEC’s efforts are not isolated. Across the pond, on 31 May, law enforcement officials in Frankfurt raided the offices of Deutsche Bank and its asset management company DWS. The raids were “triggered by reports in the international and national media that the asset manager DWS when marketing so-called ‘green financial products’ had sold these financial products as ‘greener’ or ‘more sustainable’ than they actually were,” according to the Frankfurt public prosecutor’s office.

    These prosecutorial concerns had already been flagged by media reports at the end of August 2021. The DWS investigation seems to have been sparked by greenwashing accusations from Desiree Fixler, who was fired six months into her job as the asset manager’s first Group Sustainability Officer. At the time, she gave an interview to the Wall Street Journal where she claimed that an internal assessment of DWS Groups’ ESG capabilities found that “only a small fraction of the investment platform applies ESG integration.”  The assessment was controversial because it contradicted the annual report published the subsequent month, which claimed that over half of its assets had run through an ESG integration process. Following the raid, DWS Group announced that Asoka Woehrmann had decided to resign from his role as CEO at the end of the Annual General Meeting that took place on 9 June.

    Nordic Commitments

    Nordic supervisors are also tuned to the dangers of greenwashing. In NordSIP’s 2022 EU Sustainable Finance Regulation Handbook, Finanstilsynet (Denmark’s FSA), Finansinspektionen (Sweden’s FSA) and Finanssivalvonta (Finland’s FSA) all expressed similar fears of inaccurate claims from asset managers.

    “In 2022 we will devote more resources to actually supervising compliance with the various pieces of sustainable finance legislation,” Theodor Joachim Christensen, then Deputy Director of Capital Market Regulations and Head of the Unit for Sustainable Finance at Denmark’s Finanstilsynet told NordSIP. “More specifically, we will increasingly focus on supervising the implementation of the EU Disclosure Regulation and initiate supervision of the EU Taxonomy Regulation,” Christensen continued.

    “Supervision is one of the most important tools that FI has for carrying out its assignment. To the greatest extent possible it will be risk-based. For 2022 we will focus on two risks: greenwashing and transition risk,” Johanna Fager Wettergren, Head of Sustainable Finance at Sweden’s Finansinspektionen explains in the handbook.

    “Sustainability risks have to be incorporated into the supervised entities’ business strategies and risk management,” Nina Männynmäki Senior Market Supervisor Finland’s Finanssivalvonta saidto NordSIP. “A wide choice of new products coming available in the market and growing investor demand might create room for misselling of ESG-labelled products. It is important to ensure that retail investors have access to adequate and understandable information on the greenness of investments while trying to prevent potential greenwashing,” Männynmäki added.

    Image courtesy of SEC Via Flikr
    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.
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