Enforcement of Sustainable Investment Policies

Although U.S. sustainable funds have experienced significant outflows in the last period, green investments are showing no signs of historical decline. As of December 2023, statistics revealed that a whopping $3 trillion in worldwide assets under management are based on Environmental, Social, and Governance (“ESG”) factors, and over 7,000 funds are devoted to sustainability, the majority of which are located in Europe. 

This surge in ESG-related investments has led hundreds of firms to adopt self-prepared green policies. While there is no clear guide as to how firms should draft their prospectuses, ESG-forward NGOs have identified certain principles for potential investors in sustainable investing. One of those pillars is the instatement of a reporting, monitoring and review system to ensure that asset managers are structurally involved in complying with their portfolios’ guidelines.

This formal standard aligns with the Securities and Exchange Commission’s (“SEC”) purported role of oversight over the marketing of ESG-linked funds, enforced by its newly inaugurated ESG Task Force. As this piece will argue, it appears that the SEC is becoming interested not just in the accuracy of sustainable investments’ advertising, but also in how the procedures necessary to carry out ESG assessments are being monitored internally.

In this context, after a two-year investigation took place, the SEC issued a $19 million fine on asset manager DWS Investment Management Americas, Inc. (“DWS”), a Delaware-incorporated investment adviser that is indirectly owned by Deutsche Bank AG. The civil money penalty, imposed on September 25, 2023, was part of a settlement offer made by DWS after the SEC found violations of several sections of the Investment Adviser Act over how the asset manager marketed its investment products under ESG labels. Subsequently, DWS denied there being any “intent to defraud,” despite the strong language used in the SEC’s order, which found “willful” violations of the sections that ban fraud, deceit and misstatements. These violations resulted from inaccuracies in DWS’ ESG representations and a lack of adequate monitoring of ESG compliance. The monetary sanction is the highest in the SEC’s record for incurring the misstatement of the use of ESG criteria in investment portfolios, a practice known as “greenwashing.” 

Notwithstanding this impasse, DWS continued to grow as an important green investment firm: their ESG mutual funds and account strategies registered inflows of almost $5 billion in 2023, adding up to a total of $93 billion in net ESG assets and positioning the company as the fourth largest sustainable asset manager in the world.

What the SEC is trying to achieve with such an exemplary punishment may be better understood by taking notice of previous cases with similar misconduct. In 2022, the financial regulator examined activities that concerned the investment advice branches of BNY Mellon and Goldman Sachs, where both companies were fined millions of dollars. In these investigations, the SEC exercised more acute scrutiny on monitoring systems than on marketing ESG labels. As such, the former investigation found an absence of ESG quality checks before investments were put out to the public, whereas the latter pointed out delayed compliance with ESG questionnaires that personnel were due to file before selecting securities for investment portfolios.

These “procedural cases” hint at which aspect of ESG practices are becoming insufficient in the eyes of the agency, namely monitoring protocols. Instead of simply focusing on whether ESG-related risks and strategies are accurately disclosed to the public, these investigations also look at how those factors are being incorporated into the investment advice process. This phenomenon may be due in part to the SEC’s experience in identifying breaches of internal control and communication protocols. Additionally, this may be in part due to the inherent limitations of the government’s role in protecting investors, by which some of the risks must rest on the investors themselves. The SEC has emphasized its commitment to enable a free investment market where investors are responsible for their own decisions, so long as firms keep their side of the bargain by implementing procedures that facilitate complete, accurate and seamless disclosure.

However, this has not kept the SEC from proposing more substantial disclosure requirements for ESG investment advisers. Under an amendment to investment advice rules, adopted on March 6, 2024, certain firms would be required to disclose the greenhouse gas emission indexes of some of the businesses that are part of their portfolios, as well as justify their projected environment impact goals. As supplemented by the investigations of the SEC’s ESG Task Force, this new rule would force advisers to not only maintain proper procedures but to also offer precise information to investors.

In light of these precedents, disclosure from firms that claim to go green should aim not just at showing that their portfolio assessments are sound, but also that their procedures are being strictly followed in order to certify efforts being done to enhance the quality of the advice. Read together, the enhanced ESG disclosure regulation and its enforcement by the SEC demonstrate that investment advisers are responsible for appropriate disclosure to investors, as well as monitoring internal protocols.

Ronny Vaisman is an LL.M. Candidate in Corporation Law at NYU School of Law and serves as a Graduate Editor for the NYU Journal of Law & Business. Before coming to New York, Ronny worked as a Corporate Associate at Cuatrecasas' Santiago office, where he focused his practice in M&A and finance transactions, advising international clients in the natural resources, financial, technology and payment card industries. He is a board member of the NYU Law & Business Association and member of the NYU Jewish Law Students Association.