Enforcement News: Investment Advisor Settles “Greenwashing” Charges Concerning The percentage of Assets Under Management that Integrated ESG factors in Investment Decisions

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Posted on: Nov 11 2024

On November 8, 2024, the Securities and Exchange Commission (“SEC” or “Commission”) announced (here) that it settled charges against Invesco Advisers, Inc., which operates Invesco mutual funds and has approximately $746 billion in assets under management, for making misleading statements about the percentage of company-wide assets under management (“AUM”) that integrated environmental, social, and governance (“ESG”) factors in investment decisions. According to the SEC, the Atlanta-based registered investment adviser agreed to pay a $17.5 million civil penalty to settle the charges.

According to the SEC’s order (here), from 2020 to 2022, Invesco told clients and represented in marketing materials that between 70 and 94 percent of its parent company’s assets under management were “ESG integrated.” However, said the SEC, those figures included a substantial amount of assets that were held in passive ETFs (including the Invesco QQQ Trust, the firm’s largest ETF that tracked Nasdaq’s 100 largest non-financial companies and Invesco S&P 500 Equal Weight ETF) that did not consider ESG factors in investment decisions.

The SEC also found that Invesco failed to adopt and implement written policies and procedures reasonably designed to prevent violations of the Investment Advisers Act of 1940 and the rules promulgated thereunder. Specifically, said the SEC, notwithstanding Invesco making representations to clients and prospective clients regarding the percentage of firmwide AUM that was ESG integrated, Invesco never adopted a written policy that defined “ESG integration,” even though that was a term it used in public-facing documents. “As such,” explained the SEC, “Invesco lacked policies and procedures to ensure AUM was appropriately classified on an aggregated level as ESG integrated and to confirm that the basis for including AUM within the bucket of ESG integrated assets, including the AUM held in passive ETFs, was correct.” As a result, concluded the SEC, “Invesco overstated the percentage of firmwide AUM that was ESG integrated to clients and prospective clients.”

Commenting on the charges and settlement, Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement, stated: “As stated in the order, Invesco saw commercial value in claiming that a high percentage of company-wide assets were ESG integrated. But saying it doesn’t make it so. Companies should be straightforward with their clients and investors rather than seeking to capitalize on investing trends and buzzwords.”

The order charged Invesco with willfully violating the Investment Advisers Act of 1940. Without admitting or denying the SEC’s findings, Invesco agreed to cease and desist from violations of the charged provisions, be censured, and pay the aforementioned $17.5 million civil penalty.

Last month, the SEC settled another enforcement action involving charges of greenwashing. On October 21, 2024, the SEC announced (here) that it settled charges against WisdomTree Asset Management for failing to follow its own investment criteria for three now-defunct ETFs that were marketed under the banner of ESG.

According to the SEC’s order (here), from March 2020 until November 2022, WisdomTree represented in prospectuses for three ESG-marketed exchange-traded funds, and to the board of trustees overseeing the funds, that the funds would not invest in companies involved in certain products or activities, including fossil fuels and tobacco. However, according to the SEC, the ESG-marketed funds invested in companies that were involved in fossil fuels and tobacco, including coal mining and transportation, natural gas extraction and distribution, and retail sales of tobacco products. According to the SEC, WisdomTree used data from third-party vendors that did not screen out all companies involved in fossil fuel and tobacco-related activities. The SEC further found that WisdomTree did not have any policies and procedures regarding the screening process to exclude such companies.

WisdomTree consented to the entry of the SEC’s order finding that it violated the antifraud provisions of the Investment Advisers Act of 1940 and the Investment Company Act of 1940, and the compliance rule in the Investment Advisers Act. Without admitting or denying the SEC’s findings, WisdomTree agreed to a cease-and-desist order and censure and to pay a $4 million civil penalty.

Takeaway

The SEC has increased its scrutiny of “greenwashing” claims.[1] These claims – i.e., statements about the company’s sustainability practices and commitments to the environment – are aimed at consumers who are interested in climate change and environmental protection. The enforcement actions discussed above show that the SEC will not tolerate vague, unverified, and unsubstantiated representations about a company’s or advisor’s sustainability practices and commitments to the environment.

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Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP. This article is for informational purposes and is not intended to be and should not be taken as legal advice.

[1] The SEC defines greenwashing as “the act of exaggerating the extent to which products or services take into account environmental and sustainability factors.” See Investor.gov, Greenwashing (here). According to the SEC Alert, “[f]unds and advisers that engage in greenwashing may exaggerate or overstate the environmental and sustainability practices or factors considered in their investment products or services, while labeling and marketing themselves in a manner that makes it difficult for investors to distinguish them from funds and advisers that are truly using environmental and sustainability strategies.” Id.

As noted by the SEC, “[o]ther entities or industry professionals may also engage in greenwashing. For example, companies may exaggerate or overstate the environmental and sustainability aspects of their products or services or make unsupported claims about taking environmental or sustainability actions.” Id.