The SEC is Zeroing In on ESG

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ESG greenwashers better clean up their act.

The Financial Times reported Tuesday that the Securities and Exchange Commission has been in touch with a few fund managers, including some via subpoena, to find out more about their environmental, social and governance (ESG) disclosures. It signals the regulatory snare is just starting to tighten on ESG stocks.

Gotta Get That Green

ESG investment appeals to funds for a couple of reasons. First, it’s a good PR look and grants a veneer of ethics. Secondly, and perhaps most importantly, funds can charge higher fees for it. When it comes to standards, ESG has had a wild west quality.

“Until recently, investment houses have been able to determine what qualifies as an ESG fund according to their own terms,” Dr. Ciara Hurley, a fellow at the London School of Economics, told The Daily Upside. She added that while some funds are rigorous in their assessment, others simply “channel capital towards companies that meet certain conditions, which may not be too difficult to meet.” Shifting goalposts isn’t uncommon in the ESG world; even cigarette-maker Philip Morris has tried to position itself as an ESG stock.

According to asset management industry lawyers who spoke to the FT, the SEC appears to be focusing on a couple areas for enforcement:

  • Regulators are specifically looking at traditional funds that pivoted to primarily ESG funds, as well as entities which have a presence in both the US and Europe but disclose different amounts of information in each region.
  • The US isn’t the only government keeping an eagle eye on ESG. In June, the EU proposed new rules to let it peer over the shoulders of ESG rating agencies, to ensure they’re correctly auditing stocks for their worthiness.

A Less Verdant Amazon: While ESG is regulated on a largely voluntary basis at the moment, there are some entities keeping score of just how environmentally friendly companies are versus what they claim to be. The Science Based Targets initiative, which is UN-backed and parses companies’ claims about hitting net zero, removed Amazon from its nice list this week, a move which casts a dark cloud over Amazon’s status as an ESG stock.