The Bottom Line: Actions that investors and advisors should consider if a relevant enforcement action is brought by the SEC against an ESG fund adviser.
Latest SEC action against a fund manager making misleading ESG-related statements in various client communications and marketing materials
On November 8, 2024, the U.S. Securities and Exchange Commission (SEC) announced that it had charged Invesco Advisers, Inc. for making misleading statements about the percentage of company-wide assets under management that integrated environmental, social, and governance (ESG) factors in investment decisions. The Atlanta-based registered investment adviser agreed to cease and desist from committing or causing any current or future violations and to pay a $17.5 million civil penalty to settle the SEC’s charges—the second largest penalty levied by the SEC in connection with ESG-related matters. While this is not a material sum, for instance relative to the firm’s total quarterly revenues in the amount of $1.5 billion in the third quarter of this year, it does put a blemish on the firm’s reputation. According to the SEC’s order, from 2020 to 2022, Invesco told clients and stated in marketing materials that between 70% and 94% of its parent company’s assets under management were “ESG integrated.” According to the SEC, however, these percentages included a substantial amount of assets that were held in passive ETFs that did not consider ESG factors in investment decisions. Furthermore, the SEC’s order found that Invesco lacked any written policy defining ESG integration. This is the second ESG-related SEC settlement announced this year and the fifth since the earliest one involving BNY Mellon for misstatements and omissions about ESG factors in making investment decisions, back in May 2022.
Enforcement actions against five firms between 2022 and the present still does not represent a significant number of greenwashing cases, considering that roughly during the same period between 2022 and the present there were an average number of about 152 fund firms offering focused sustainable mutual funds and ETFs. On this basis, the five firms represent about 3% of firms¹, a number that’s likely overstated as it does not consider the number of advisers managing client assets pursuant to sustainability mandates in separate accounts or other non-fund products.
That said, additional ESG-related violations could arise in the future. According to Proskauer Rose, ESG-related questions have become a normal part of an SEC exam. While there is less of a hyperfocus on ESG compared to previous years, ESG enforcement is still on the SEC’s radar. The SEC staff is actively confirming whether fund managers are acting consistently with the fund’s ESG disclosures and following through on ESG initiatives versus greenwashing. This, even after the disbanding of the SEC’s ESG Taskforce in mid-2024.
How should investors and financial advisers consider an SEC enforcement action²?
How should investors and financial advisers consider the Invesco case, and the four others described in the table below? If an investment adviser of your mutual fund or ETF is involved in an SEC enforcement action, investors or their advisers should pursue the questions and action steps set forth below to properly assess the potential impact on their investments. Depending on the severity of the charges or the enforcement action, no further action may be necessary. Otherwise, a manager and its fund may be subject to further monitoring, they might be placed on a Watch List and any further purchases may be suspended until the Watch Listing is rescinded or shares in the implicated fund(s) might be redeemed in their entirety. That said, the developments described with regard to Invesco, once it’s been confirmed that these have been remedied, do did seem to call for more severe actions.
Questions and actions to be taken
1. Understand the nature of the enforcement action.
Questions:
(a) What is the specific reason for the SEC enforcement action? (e.g., misrepresentation, fraud, compliance failure, such as failing to adhere to investment criteria or practices, or improper disclosures)
(b) Is the action related to the management of the specific mutual fund or ETF you are invested in, or is it limited to other areas of the firm’s operations?
Action steps:
(a) Reading public filings, press releases, or SEC documents to gain clarity on the issue.
(b) Determining whether the allegations suggest systemic issues within the firm that could affect other funds or portfolios, such as separate accounts.
2. Evaluate the financial and reputational impact.
Questions:
(a) How significant are the penalties or settlements associated with the enforcement action?
(b) Could this enforcement action impair the firm’s ability to operate, raise capital, or manage funds effectively?
(c) Are there reputational risks that might lead to a loss of investor confidence or fund outflows?
Action steps:
(a) Monitoring news and industry analysis to assess potential impacts on the firm’s stability.
(b) Looking at fund performance and recent flows to see if other investors are withdrawing capital.
3. Assess the fund’s governance and compliance practices.
Questions:
(a) While funds are subject to independent oversight by a board of trustees that ensures its operations are separate from broader issues at the firm, is this also the case for other investment products that may be impacted?
(b) Have there been previous compliance or governance concerns related to this management company? (c) Is the fund in compliance with its investment policies and disclosures?
Action steps:
(a) Review fund documentation, such as the stewardship reports, prospectuses, or annual reports, to understand governance structures and compliance measures.
4. Analyze the fund’s performance and fees.
Questions:
(a) Has the mutual fund or ETF been consistently meeting its performance objectives?
(b) Are fees or expense ratios reasonable, and have they been stable, or is there a risk they might increase due to penalties or operational issues?
Action steps:
(a) Compare the fund’s recent performance with its benchmark and peer funds.
(b) Evaluate whether the fund still aligns with your sustainable preferences, investment goals and risk tolerance.
5. Consider portfolio diversification.
Questions:
(a) How significant is this mutual fund or ETF within your overall portfolio?
(b) Are you overly exposed to this management company?
(c) Are there alternative funds or ETFs that could meet your sustainability preferences and investment objectives with less risk?
Action steps:
(a) Diversify your investments to reduce reliance on a single management company, particularly if enforcement actions suggest systemic issues.
(b) Exploring options to switch to funds with better governance and performance records, if necessary.
6. Monitor regulatory and legal developments.
Questions:
(a) What steps has the firm agreed to take/has taken to address the issues raised?
(b) Are there ongoing investigations or litigation that could exacerbate the situation?
(c) Might the firm be exposed to other legal actions that may be taken by shareholders or other stakeholders?
Action steps:
(a) Follow updates from the SEC and the firm’s public communications.
(b) Consider consulting with a financial advisor or attorney if the issues appear severe or could materially impact your investment.
7. Evaluate your exit strategy.
Questions:
(a) What are the costs or implications to the exiting fund? (e.g., redemption fees, tax consequences).
(b) Are there alternative funds with similar strategies that are unaffected by this enforcement action?
Actions steps:
(a) Weighing the potential risks of staying invested against the costs of exiting.
(b) Watch Listing the fund and not making any additional purchases.
(c) If selling, identify and transition to funds that align with your sustainability preferences and investment goals while avoiding similar risks.
By proactively seeking information and evaluating the situation, investors can make informed decisions to protect their investment portfolio while responding to the potential risks associated with the enforcement action.ac
Notes of Explanation: Actions listed in order of size of civil penalties paid. Sources: SEC Press Releases, Sustainable Research and Analysis LLC.
¹ Based on an average number of management firms offering focused sustainable mutual funds and ETFs between year-end 2022 and October 2024.
² Questions and action steps are equally relevant for SEC enforcement actions involving conventional investment funds within the same family of funds that can have spillover effects or strictly conventional fund firms.
