Environmental, social, and governance (ESG) investment could be on the chopping block—as the federal government begins snooping into misconduct.
Key Details
- Lawyers working for multiple asset managers tell The Financial Times that the US Securities and Exchange Commission (SEC) is sending them document requests and subpoenas.
- These requests all relate to ESG investment, leading lawyers to believe these funds could face a potential crackdown.
- Conventional investment funds that have been repurposed as ESG funds and funds with US and European share strategies and holdings are facing notable scrutiny.
Why It’s News
ESG has become one of the most prominent business buzzwords and contentious topics of the past two years. These investments and funds have become a political hot potato, with leading presidential candidates like Ron DeSantis and Vivek Ramaswamy making their representative careers through targeted campaigns against “anti-wokeness” and crusaders against ESG investing. President Joe Biden used his first veto in office against a bipartisan anti-ESG bill in March.
As we previously reported, ESG is a financial shorthand for a company’s approach to environmental impact, social issues, and transparency and describes how companies approach investment strategies. It has become a popular investing strategy, with $3 trillion in global assets being managed by these indexes as of 2021. However, poor performance in 2022 resulted in many investors backing away from them, while promoters have backed away from the verbiage due to its political baggage.
The SEC enforcement division’s inquiries into ESG are unlikely to be tied to partisan squabbles. The SEC formed a task force in March 2021 to focus on misconduct in ESG disclosures and has already filed cases against large corporations like Goldman Sachs and BNY Mellon. German asset manager DWS reportedly paid €21 million last month to settle an ESG investigation.
“I wouldn’t be surprised if more enforcement actions come out soon,” says former SEC commissioner Michael Piwowar, who tells The Financial Times that the popularity and high fees of ESG investing could be what is drawing law enforcement’s attention.
“ESG remains a priority area for the SEC, and I would expect to see some enforcement cases before the end of the agency’s fiscal year in September,” says former SEC head Jina Choi. “Registered investment advisers are already subject to examination and inspection, so their statements on green or socially conscious investing can be fertile ground for investigations and action by the SEC’s enforcement division.”
