US SEC Includes “Greenwashing” in Its Examination Priorities for the First Time

In its 2022 Examination Priorities, issued on March 30, 2022, the Division of Examinations (“Division”) of the United States Securities and Exchange Commission (“SEC” or “Commission”) uses the term “greenwashing” for the first time, as it outlined ESG as an area of continued focus for the Division.

Specifically, the Division stated that it will continue to focus on ESG-related advisory services and investment products (e.g., mutual funds, exchange-traded funds and private fund offerings). The Division also explained that, in its exams, it will “typically” focus on whether RIAs and registered funds are:

“(1) accurately disclosing their ESG investing approaches and have adopted and implemented policies, procedures, and practices designed to prevent violations of the federal securities laws in connection with their ESG-related disclosures, including review of their portfolio management processes and practices;

(2) voting client securities in accordance with proxy voting policies and procedures and whether the votes align with their ESG-related disclosures and mandates; or 

(3) overstating or misrepresenting the ESG factors considered or incorporated into portfolio selection (e.g., greenwashing), such as in their performance advertising and marketing.”

Echoing past messaging from the Division and elsewhere in the Commission, the Division expressed concern there is a risk that disclosures regarding portfolio management practices could involve materially false and misleading statements or omissions, which could be compounded by: 

“(1) the lack of standardization in ESG investing terminology (e.g., strategies that are referred to as sustainable, socially responsible, impact investing, and environmental, social, and governance conscious, which incorporate ESG criteria); 

(2) the variety of approaches to ESG investing (e.g., a portfolio may be labeled as ESG because of consideration of ESG factors alongside traditional financial, industry-related, and macroeconomic indicators, among others; other portfolios may use ESG factors as the driving or main consideration in selecting investments; or some portfolios engage in impact investing seeking to achieve measurable ESG impact goals); and 

(3) the failure to effectively address legal and compliance issues with new lines of business and products.”

These and other ESG-related concerns were outlined by the Division in an April 9, 2021, Risk Alert.

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In the coming days, we expect to distribute a Legal Update that more fully describes all of the Division’s 2022 examination priorities for RIAs and funds.