The SEC Is Cracking Down on ‘Potentially Misleading’ ESG Claims

In the wake of a sudden spike in interest for socially responsible investment strategies, the Securities and Exchange Commission provided a word of caution on "potentially misleading" claims and inadequate controls over investments that track environmental, social, and governance principles.

In a review of financial advisors and investment funds, the SEC warned of a number of approaches from funds or advisors that did not match true action, Reuters reports.

For example, issues included how firms handled proxy voting on behalf of investors, along with “unsubstantiated and potentially misleading claims” regarding socially responsible investment strategies.

The warning comes as regulators take further steps to incorporate climate risks and social and governance issues into their regulatory frameworks.

See also: ETF Database's ESG Investing

In a bid to step up regulatory scrutiny of a burgeoning new class of investment strategies, the SEC recently employed a team to police climate risk disclosures. The agency has also increased efforts on guidance for public companies for how they share information with investors on ESG issues like climate risk, and made the topic a priority for 2021.

The increased scrutiny has come after socially responsible funds ballooned in size in recent years as the strategies gain in popularity among investors. According to Morningstar data, a record $51 billion flowed into sustainable U.S. funds in 2020 alone.

Critics of the socially responsible asset category have warned that some money managers may have overstated their credentials in a bid to carve out a larger piece of the pie, or what some are calling "greenwashing".

The SEC’s exam staff have already found instances where firms claimed to have a formal review process, one they did not possess in actuality. In some cases, the SEC argued that advisors did not have ways to “reasonably track” or screen for investments in certain industries.

For more news, information, and strategy, visit the ESG Channel.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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