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Companies must not mislead by omission on ESG, says SEC’s enforcement director

Regulator’s new enforcement division director says that there is ‘nothing new’ in the way it is tackling ESG-related misconduct, referring to 2008 case

Companies must ensure that they do not mislead by omitting material ESG information, the US Securities and Exchange Commission’s (SEC) Director, Division of Enforcement, Gurbir Grewal, has said. 

In a speech yesterday, Grewal, speaking in a personal capacity, said that companies must ensure that their statements on climate or ESG are not materially false or misleading – something that could happen “because they omit material information”.  

“If an issuer chooses to speak on climate or ESG – whether in an SEC filing or elsewhere – it must ensure that its statements are not materially false or misleading, or misleading because they omit material information – just as it would when disclosing information in its income statement, balance sheet, or cash flow statement,” he said. 

Grewal, who served as New Jersey’s Attorney General until taking up his new role at the SEC this summer, stressed in his Scott Friestad Memorial Keynote Address that the regulator's approach to ESG-related misconduct is longstanding, rebuffing what he said was a popular refrain that the SEC is regulating by enforcement. 

The formation of the SEC’s Climate and ESG Taskforce, which was announced earlier this year and sits within Grewal’s division, is to “sharpen our focus in this area”, he said; but “there is nothing ‘new’ about how the Taskforce – or the Enforcement Division as a whole – investigates possible climate and ESG-related misconduct”.    

On greenwashing in the asset management space, he said that the SEC would also apply the “long-standing principles regarding fiduciary duties and honest disclosure regarding how products will be managed”.  

If a manager is marketing an ESG fund or strategy, “it must do so in a way that’s not materially false or misleading while adhering to client mandates and restrictions – just as it would when marketing any fund or strategy,” Grewal said. 

To illustrate that efforts to tackle greenwashing or ESG-related misconduct are not new for the SEC, Grewal referenced a case the regulator settled with Pax World Management in 2008 over the fund’s investment in securities that breached its own socially responsible investing restrictions.  

“The SEC found that by failing to comply with the funds’ restrictions, Pax World breached its fiduciary duty to its clients and violated certain anti-fraud and false filing provisions of the federal securities laws,” Grewal said. 

Pax World Management was acquired by London-based sustainability specialist Impax Asset Management in 2018.  

This summer it was reported that the SEC had launched an investigation into asset manager DWS over accusations that it made misleading statements about its use of sustainability criteria – a case with potentially huge implications for the responsible investment industry. DWS has denied the accusations.  

Grewal concluded his speech by stating: “Although the focus of the Enforcement Division may change and evolve over time depending on issues facing and of importance to investors, companies and the economy as a whole, or in response to new and emerging technologies and investment products, we will continue to apply long-standing, well-known and understood regulations and standards that govern the securities industry when investigating possible misconduct.”