SEC Charges Investment Adviser for Making Misleading ESG-Related Statements

Who may be interested: Registered Investment Companies; Investment Advisers; Compliance Staff

Quick Take: The SEC recently settled charges against a registered investment adviser (the Adviser) for making misleading statements about the amount of company-wide assets under management (AUM) that integrated environmental, social, and governance (ESG) factors into investment decisions.

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According to the SEC’s order (Order), between April 2020 and July 2022, the Adviser made misleading claims regarding company-wide, ESG-integrated investments in presentations to the boards of directors of funds it advised, in marketing materials, and in proposals to prospective clients. The Order indicated that the amount of AUM the Adviser claimed to be ESG-integrated ranged between 70 percent and 94 percent of firmwide AUM, even though a significant amount of those assets were held in the Adviser’s passive exchange-traded funds that did not follow ESG strategies.

The Order noted that the Adviser believed that identifying the use of ESG considerations on a company-wide basis was a commercial imperative and that an internal analysis had indicated that 30% of company-wide AUM was at risk due to clients’ increased interest in ESG integration. The Order also found that the Adviser failed to adopt and implement written policies and procedures defining “ESG integration” or explaining how the firmwide percentage of ESG-integrated AUM would be determined.

The Order found that the Adviser violated sections of the Advisers Act and rules thereunder, including those governing advertising and compliance policies and procedures. Without admitting or denying the findings, the Adviser agreed to a cease-and-desist order, to be censured, and to pay a $17.5 million civil penalty.

The Order announcing the settled charges can be found here.