With the news broke within the last few weeks that months earlier the SEC had quietly disbanded its Climate and ESG task force, the agency took pains to emphasize that the winding up of the Task Force did not mean that the agency was no longer policing ESG-related issues. At least one recent development underscores the fact that the agency is continuing to monitor ESG concerns, particularly “greenwashing”-type concerns. Earlier this week, the agency initiated entered an agreed cease-and-desist order against investment adviser WisdomTree Asset Management, based on alleged misstatements and compliance failures relating to the firm’s execution of its ESG investment strategy. Among other things, the agency alleged that the firm’s funds invested in the investment classes it had said it would avoid.

A copy of the SEC’s October 21, 2024, press release regarding the action can be found here. A copy of the date cease-and-desist order itself can be found here.

The SEC alleges that from March 2020 through November 2022, WisdomTree represented in prospectuses for three of its funds that the fund would not invest in companies involved in, among other things, fossil fuels and tobacco. However, the SEC alleged, the three funds had in fact 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. Apparently, WisdomTree relied on data from third-party vendors that did not screen out all companies in fossil fuels and tobacco-related activities. The SEC alleged that the firm did not have policies and procedures over the screening process to exclude such companies.

WisdomTree consented to the entry of the SEC order, in which the agency found that the firm had violated the antifraud provisions of the Investment Advisers Act of 1940 and the Investment Company Act of 1940. Without admitting or denying the SEC’s findings, Wisdom Tree agreed to a cease-and-desist order and censure and to pay a $5 million civil penalty.

Discussion

The role of ESG-related issues in both the financial markets and in the regulatory arena has changed and evolved over the last few years. There was concern that the agency’s quiet disbanding of its ESG task force represented another bit of evidence of the changing role of ESG. There was even some concern that the dismantling of the task force was a tacit concession to the political forces that were pushing back against ESG-related initiatives. The SEC was emphatic that the disbanding of the task force did not mean that the agency was taking its eyes off of ESG-related issues.

At a minimum, this recent action against WisdomTree shows that the agency will continue to pursue misconduct even when related to ESG issues. A statement by an SEC spokesperson in the agency’s press release about the enforcement action says that the federal securities laws represent a “straightforward proposition” in that “investment advisers must do what they say and say what they do.” When investment firms say the “will follow particular investment criteria” the firms “have to adhere to that criteria and appropriately disclose any limitations or exceptions.” The funds at issue in this action, by contrast, “made precisely the types of investments that investors would not have expected them to based on WisdomTree’s disclosures.”

Seen in light of these comments, it could be argued that the action against Wisdom tree was not noteworthy so much for its ESG overlay as it is for its more fundamental concern, which is that investment funds have to follow and apply their declared investment approach.

It is noteworthy that that the size of the penalty the company paid is not insubstantial. Based on the comments in the press release, it may be surmised that the size of the penalty is more of a reflection of the fact that the funds’ actual investments apparently deviated from those proposed from the prospectus.

It is probably also important to consider the reason that the funds’ actual investments deviated from the stated criteria – that is, the investment firm relied on data from a third-party firm without sufficient oversight or scrutiny. As the Anderson law firm put it in its October 22, 2024, memo about the SEC’s enforcement action (here) the SEC’s cease-and-desist order “highlighted a critical compliance failure.” The investment firm “did not have adequate policies and procedures in place to ensure that the ESG criteria were properly implemented.”

The critical compliance failure “underscored the importance of robust internal controls and due diligence, particularly for firms marketing ESG products. In an environment where regulatory scrutiny of ESG claims is increasing, firms must ensure that their marketing materials align with their actual investment practices.” It is also “essential to have comprehensive oversight procedures for third-party vendors, especially when those vendors are responsible for critical functions such as screens investments for ESG criteria.”