WEBVTT - ESG Funds Are Finding It's Not Easy Being Green 0:00:00.120 --> 0:00:02.800 If you don't know what greenwashing is, you will by 0:00:02.840 --> 0:00:05.240 the end of this episode. On today's Parts per Billion, 0:00:05.280 --> 0:00:09.000 we're talking about the SEC targeting allegedly environmentally friendly funds 0:00:09.000 --> 0:00:12.240 that are allegedly greenwashed, with the attorneys who are defending 0:00:12.240 --> 0:00:23.520 those funds. Hello, and welcome back once again to Parts 0:00:23.520 --> 0:00:26.760 per Billion Environmental podcast from Bloomberg Law. I'm your host, 0:00:26.920 --> 0:00:30.040 David Schultz. So today's another e s G episode. It's 0:00:30.040 --> 0:00:33.040 a topic we love talking about, and according to our analytics, 0:00:33.120 --> 0:00:35.600 you also love hearing about for those not in the know. 0:00:35.800 --> 0:00:39.040 E s G stands for Environmental, Social and governance. It's 0:00:39.040 --> 0:00:40.640 a tag that a lot of Wall Street funds have 0:00:40.680 --> 0:00:43.519 been adopting recently, touting that they only invest in companies 0:00:43.520 --> 0:00:46.519 that are good for the environment, have a positive social impact, 0:00:46.680 --> 0:00:50.440 and or have humane corporate government structures. But as we've 0:00:50.479 --> 0:00:53.800 talked about in the past, those are all pretty subjective metrics, 0:00:53.880 --> 0:00:56.200 and both investors and activists have started to worry that 0:00:56.600 --> 0:00:58.640 just because the mutual fund calls itself e s G 0:00:59.040 --> 0:01:02.240 doesn't mean it actually is. These worries have risen in 0:01:02.320 --> 0:01:04.600 tandem with the rise of e s G investing itself. 0:01:04.760 --> 0:01:07.040 Blomberg Intelligence estimates that by the end of this year, 0:01:07.280 --> 0:01:10.280 forty one trillion dollars will be managed by a fund 0:01:10.319 --> 0:01:13.600 that advertises itself as e s G. So clearly there 0:01:13.640 --> 0:01:15.080 are a lot of people who want to invest this 0:01:15.120 --> 0:01:17.440 way and they want to get what they're paying for. 0:01:17.920 --> 0:01:20.280 That's where the SEC steps in. In recent weeks, the 0:01:20.280 --> 0:01:23.080 agency has proposed regulations that would require e s G 0:01:23.160 --> 0:01:25.520 funds to report the carbon footprints of the companies they 0:01:25.560 --> 0:01:29.800 invest in. Also, possibly more significantly, the SEC settled an 0:01:29.880 --> 0:01:32.240 enforcement claim against B and Y Melonto the tune of 0:01:32.319 --> 0:01:35.480 one point five million dollars over allegations to the bank 0:01:35.520 --> 0:01:38.000 misled investors on some of its E s G products. 0:01:38.520 --> 0:01:40.800 It's a tricky time to be in the green investing business, 0:01:40.959 --> 0:01:44.479 and the tricky times lawyers become really important. We're gonna 0:01:44.480 --> 0:01:46.840 be hearing from two lawyers who represent the financial services 0:01:46.840 --> 0:01:49.520 folks trying to give investors what they want without running 0:01:49.520 --> 0:01:52.760 a foul of the SEC, George Rain and Robert Skinner 0:01:52.840 --> 0:01:54.680 with the firm Ropes and Gray, and they spoke with 0:01:54.680 --> 0:01:57.640 Bloomberg Laws Andrew Bonis about what this new aggressive stance 0:01:57.640 --> 0:02:00.640 from the SEC means for their clients. Or started off 0:02:00.680 --> 0:02:02.680 by talking about what he and his colleagues are telling 0:02:02.720 --> 0:02:06.840 nervous E SG fund managers right now. I think the 0:02:06.880 --> 0:02:09.880 main message we're giving to clients these days is that 0:02:10.480 --> 0:02:14.600 the fears and concerns they had previously based on SEC 0:02:14.840 --> 0:02:19.880 examinations and public statements are now all the more present 0:02:19.919 --> 0:02:23.440 and all the more important. That the expected actions that 0:02:23.480 --> 0:02:26.440 the SEC was going to make are now being made. 0:02:26.639 --> 0:02:30.240 So we've seen the first watershed enforcement case on an 0:02:30.240 --> 0:02:34.280 E s G disclosure matter, and we're seeing real rulemaking 0:02:34.400 --> 0:02:38.240 that's coming out that has teeth both as two names 0:02:38.240 --> 0:02:41.120 of funds as well as specific disclosures. And all the 0:02:41.160 --> 0:02:45.280 expectations are that this will be fast tracked and some 0:02:45.400 --> 0:02:48.120 variation on the rules will make their way into the 0:02:48.919 --> 0:02:52.440 position of being final rules over the coming months. But 0:02:52.480 --> 0:02:55.080 I've be interested rob your perspective on the You know, 0:02:55.080 --> 0:02:57.760 there are to two points there. One is there the 0:02:57.800 --> 0:03:01.360 immediate response to a worsement action, which is which is 0:03:02.400 --> 0:03:05.520 the flag that's up. Obviously, the rules are proposed and 0:03:05.680 --> 0:03:08.960 rule proposals required comment um, so that and we'll have 0:03:09.000 --> 0:03:11.880 a fair fair period of time for implementation before the 0:03:12.160 --> 0:03:14.760 compliance is required. So I think first and foremost were 0:03:14.760 --> 0:03:18.400 saying talk to people like Rob Skinner about why they 0:03:19.160 --> 0:03:21.880 should be could be concerned in the very present moment, 0:03:22.040 --> 0:03:25.919 but long before we have final rules. The timing of 0:03:25.960 --> 0:03:29.320 the enforcement action against a mutual fund advisor you can't 0:03:29.400 --> 0:03:32.960 have been coincidental, right. It preceded the issuance that they 0:03:33.000 --> 0:03:37.320 proposed rule in thement by two days um and strikes 0:03:37.520 --> 0:03:41.840 us as a pretty vivid prelude UM as to the 0:03:41.920 --> 0:03:46.520 enforcement agenda that's going to accompany the implementation of the rules, 0:03:46.640 --> 0:03:50.240 whatever those rules might be. UM and And frankly, it's 0:03:50.800 --> 0:03:54.920 the approach taken in that enforcement action UH causes us 0:03:54.920 --> 0:04:01.960 some real concern about UM how aggressive the staff intends 0:04:02.040 --> 0:04:07.560 to pursue UM what it deems to be greenwashing. I'll 0:04:07.600 --> 0:04:10.600 start with the premise that I feel like the claims 0:04:10.640 --> 0:04:13.360 of of widespread greenwashing that we see in a lot 0:04:13.360 --> 0:04:17.440 of the SEC's rhetoric recently UH to be pretty overblown. 0:04:17.960 --> 0:04:24.040 But if the SEC UM is prepared to UM enforce 0:04:24.200 --> 0:04:31.480 rules and read fund disclosures through a lens UH that 0:04:31.600 --> 0:04:35.040 is affected by their view of how E s G 0:04:35.320 --> 0:04:39.799 and sustainable and green funds ought to be run rather 0:04:39.880 --> 0:04:43.200 than through the traditional lens of let's see whether or 0:04:43.240 --> 0:04:47.839 not the disclosures fairly describe how they are being run. UM. 0:04:47.880 --> 0:04:50.560 It may open up a lot of uh, you know, 0:04:50.720 --> 0:04:56.360 enforcement exposure UM based upon you know, the staff's views 0:04:56.400 --> 0:04:59.279 regarding what funds should look like. You know what I 0:04:59.279 --> 0:05:00.840 what I went again too, is do you do you 0:05:00.880 --> 0:05:03.800 think the b N Y Melan case could have a 0:05:03.960 --> 0:05:07.880 chilling effect on funds that are thinking about employing E 0:05:08.080 --> 0:05:11.120 s G strategies. Well, let me say, I certainly hope not. 0:05:11.560 --> 0:05:15.080 At the end of the day. Uh, the law requires 0:05:15.480 --> 0:05:21.360 that a supposed misrepresentation or omission in fund disclosures be 0:05:21.800 --> 0:05:25.240 material in order to make out a violation of the 0:05:25.240 --> 0:05:28.280 securities laws. And that means that you know that there 0:05:28.320 --> 0:05:31.120 is a substantial likelihood that it would affect the decision 0:05:31.120 --> 0:05:34.159 of a reasonable investor um in light of all of 0:05:34.200 --> 0:05:37.560 the information available, the total mix of information. Frankly, the 0:05:38.800 --> 0:05:42.880 recent enforcement action strikes us as a reach. If the 0:05:42.920 --> 0:05:47.320 staff is prepared to pursue those kinds of theories consistently 0:05:47.640 --> 0:05:51.520 and aggressively, it is certainly a possibility this this will 0:05:51.520 --> 0:05:55.000 be chilling. Building on that the b N Y Melan 0:05:55.360 --> 0:05:59.159 case was certainly selected not just for timing but also 0:05:59.320 --> 0:06:03.240 for content, the fact that it was hitting only the 0:06:03.279 --> 0:06:06.919 primary advisor to a fund, and they didn't hit the 0:06:06.920 --> 0:06:09.479 subadvisor and only hit the advisor as they were organizing 0:06:09.520 --> 0:06:13.160 their complex um the fact that it was really about 0:06:13.839 --> 0:06:18.640 ambiguous language rather than actively misleading language. It was more 0:06:18.800 --> 0:06:22.320 sort of sloppiness as to the to the delineation of 0:06:22.360 --> 0:06:24.880 which funded with what aspect of of E s G 0:06:25.360 --> 0:06:28.800 incorporation into the process, that that was the focus here 0:06:29.200 --> 0:06:32.320 than it was any notion that there was active greenwashing 0:06:32.400 --> 0:06:37.760 or someone uh intentionally misrepresenting. But but that's sort of 0:06:37.800 --> 0:06:42.440 the point of this shot across the bow. Ultimately, the 0:06:42.600 --> 0:06:48.440 content of this enforcement action is consistent with what we've 0:06:48.440 --> 0:06:51.560 been seeing, and we've an advising clients in the day 0:06:51.560 --> 0:06:55.960 to day examination process with the SEC Division of Examinations, 0:06:56.520 --> 0:06:59.480 where the questions they're getting on the E s G 0:06:59.680 --> 0:07:03.760 fund are very much focused on do you have a 0:07:03.800 --> 0:07:06.200 process in place to make sure you've ticked and tied 0:07:06.279 --> 0:07:10.840 every single statement with an E s G activity that's 0:07:10.840 --> 0:07:15.120 being overseen and documented. Every time you're saying you you 0:07:15.200 --> 0:07:18.720 have any kind of involvement of E s G, how 0:07:18.720 --> 0:07:20.680 do you know that you're actually doing it? It's this 0:07:20.760 --> 0:07:22.840 sort of be very clear of say what you do, 0:07:22.840 --> 0:07:25.320 do what you say, but really tying it in almost 0:07:25.320 --> 0:07:28.200 with compliance policies and procedures, and so it's it's very 0:07:28.280 --> 0:07:32.560 much what the examination staff has been pushing for quite 0:07:32.600 --> 0:07:34.960 some time and which frankly a lot of our clients 0:07:35.000 --> 0:07:38.000 are spending a lot of time trying to be responsive to. 0:07:38.440 --> 0:07:42.360 So before before you saw, before this case came out, 0:07:43.240 --> 0:07:48.000 you saw your clients for seeing an uptick of interest 0:07:48.080 --> 0:07:52.200 from examinations and and E s G. So this was 0:07:52.280 --> 0:07:55.560 sort of you saw you saw something like this could 0:07:55.640 --> 0:08:00.680 be coming U. How aggressive has those like hamination has 0:08:00.720 --> 0:08:03.440 been and what can you talk a little bit about 0:08:03.440 --> 0:08:07.640 that The examinations have been ongoing for several years and 0:08:07.640 --> 0:08:11.880 we've been tracking kind of tweaks to the standard request list. 0:08:12.880 --> 0:08:16.320 Uh that that the that the exam staff has been 0:08:16.320 --> 0:08:20.840 out with UM it's been a very technical, rigorous process. 0:08:20.920 --> 0:08:26.000 Anytime they see anything that's E s G related that 0:08:26.080 --> 0:08:29.200 you'll get a set of specific questions. Uh. And and 0:08:29.240 --> 0:08:34.160 there's a focus on really getting to a compliance oversight 0:08:34.559 --> 0:08:40.880 role with respect to what previously and frankly reasonably was 0:08:41.000 --> 0:08:44.280 or could be seen as a a part of the 0:08:44.320 --> 0:08:49.960 investment process. You don't have compliance officers going through with 0:08:50.040 --> 0:08:53.520 a compliance policy to tell whether someone is thinks that 0:08:53.640 --> 0:08:57.080 something will grow quickly or slowly, or has a value 0:08:57.080 --> 0:08:59.280 tilt or some sort of you know, these aspects of 0:08:59.320 --> 0:09:02.040 the process s they can't get inside the heads of 0:09:02.080 --> 0:09:05.040 the portfolio managers. With E s G. It's in a 0:09:05.080 --> 0:09:10.800 different category almost. Um. It's the The expectation on exam 0:09:10.960 --> 0:09:14.520 has been that you have to have a process that 0:09:14.559 --> 0:09:18.080 links any statement about E s G to what's actually 0:09:18.120 --> 0:09:20.880 happening on the ground and have some kind of oversight 0:09:20.960 --> 0:09:25.080 over it. It hasn't helped from the regulatory side of 0:09:25.120 --> 0:09:28.760 things that a number of managers have taken existing funds 0:09:28.800 --> 0:09:32.839 and rebranded them with an E s G tilt, which 0:09:33.040 --> 0:09:37.560 immediately gets to the word of the day, which is greenwashing. Um. 0:09:37.679 --> 0:09:41.080 And I will also note that in the SEC proposing 0:09:41.120 --> 0:09:45.920 release for the new advisor and fund disclosures where greenwashing 0:09:45.920 --> 0:09:48.160 comes up in the second paragraph, So it's there right 0:09:48.160 --> 0:09:51.360 at the front. And I take it this is not 0:09:51.440 --> 0:09:54.320 going to be a one off case for the SEC. 0:09:54.559 --> 0:09:56.960 This d N Y mel and one that they're they're 0:09:57.160 --> 0:10:00.640 just likely more more to come. But what what do 0:10:00.640 --> 0:10:05.160 you expect future litigation to look like in this area? Well, 0:10:05.200 --> 0:10:09.200 I mean, one thing that is remarkable about the settlement 0:10:09.320 --> 0:10:14.000 order is the staff ultimately concludes that investors could have 0:10:14.200 --> 0:10:21.679 been misled by what the fund disclosures implied or suggested. 0:10:22.120 --> 0:10:28.400 Two extrapolate from that conclusion to something being materially misleading. Um, 0:10:28.480 --> 0:10:32.120 it's pretty extraordinary and we think not in keeping with 0:10:32.120 --> 0:10:36.120 with um, you know, the traditional legal standards of materiality 0:10:36.160 --> 0:10:41.959 when when enforcing the securities laws. So if you overlay 0:10:42.040 --> 0:10:46.240 that approach, UM, if the staff is going to be 0:10:46.720 --> 0:10:51.720 you know, using a screen about about what somebody could 0:10:51.720 --> 0:10:56.120 have found misleading in isolation, rather than looking at the 0:10:56.200 --> 0:10:59.560 entirements of information available to the to the to the investor, 0:11:00.440 --> 0:11:03.800 and and apply that screen to all of the new 0:11:03.880 --> 0:11:06.720 rules that are about to issue. There are a lot 0:11:06.840 --> 0:11:10.760 of judgment calls that are going to be required under 0:11:10.800 --> 0:11:13.680 those rules. And if the staff is prepared to second 0:11:13.800 --> 0:11:17.679 guess them this aggressively based on what somebody quote could 0:11:17.679 --> 0:11:21.360 have been misled by from what a prospectives might suggest 0:11:21.960 --> 0:11:24.960 or imply, it could be very fertile ground if that's 0:11:25.000 --> 0:11:28.000 where the staff wants to go. And of course, um, 0:11:28.040 --> 0:11:31.920 as we know from history, the plaintiffs bar happily lines 0:11:32.000 --> 0:11:35.079 up behind the staff and comes in with securities class actions. 0:11:35.440 --> 0:11:38.800 It's kind of a recipe for a big fat open 0:11:38.880 --> 0:11:41.840 door for the plaintiff's bar to follow in behind the 0:11:41.840 --> 0:11:44.400 staff and and wreak a lot of havoc and frankly, 0:11:44.840 --> 0:11:50.880 um bring a lot of expensive and distracting litigation. UM 0:11:50.920 --> 0:11:55.480 that is going to ultimately, I'm afraid, you know, undermine 0:11:55.520 --> 0:11:57.960 that the ultimate purpose of the of the of the 0:11:58.000 --> 0:12:00.560 E s G movement, which is to put you know, 0:12:00.679 --> 0:12:22.199 values into action in their investments. All right, let's get 0:12:22.200 --> 0:12:25.560 back to our discussion of SEC enforcement of E s 0:12:25.600 --> 0:12:29.800 G funds. Here is Andrew Ramonis. Now I want to 0:12:29.840 --> 0:12:33.720 get a little bit into the uh the E s 0:12:33.800 --> 0:12:37.600 G fund proposals that that also came out with. With 0:12:37.720 --> 0:12:42.400 these proposals, the SEC has been receiving significant pushback from 0:12:42.440 --> 0:12:45.200 some quarters of the finance industry, with the leader of 0:12:45.240 --> 0:12:49.160 a funds trade group saying the proposal on emissions reporting 0:12:50.679 --> 0:12:55.640 is unworkable because some emissions information from companies is not 0:12:55.760 --> 0:13:00.360 accessible to funds. Do you agree on the miss sans 0:13:00.559 --> 0:13:05.720 reporting piece. I see that as being on the shopping 0:13:05.800 --> 0:13:09.080 block when the industry comes in. This has happened time 0:13:09.080 --> 0:13:13.120 and time again that the SEC comes out with a 0:13:13.160 --> 0:13:17.400 set of standards and then some specific may potentially cherry 0:13:17.440 --> 0:13:21.480 picked requirement that everyone just can't get over. It happened 0:13:21.520 --> 0:13:24.400 the first time they tried swing pricing. It was to 0:13:24.440 --> 0:13:26.800 be mandatory, just became optional and then no one adopted it, 0:13:26.920 --> 0:13:29.360 So it may be a first swing it is. It 0:13:29.480 --> 0:13:34.480 is absolutely a blunt instrument because it it picks up 0:13:34.640 --> 0:13:39.040 one attribute on greenhouse gas emissions with some kind of 0:13:39.280 --> 0:13:41.360 fuzzy trigger as to whether you need to put this 0:13:41.440 --> 0:13:47.320 in your in your disclosures, and does not give any 0:13:48.200 --> 0:13:51.960 real away for you to to to distinguish between which 0:13:51.960 --> 0:13:54.079 whether it's E or s ORG that you're doing. Yet 0:13:54.080 --> 0:13:55.960 you have to be putting in a whole bunch of 0:13:55.960 --> 0:14:00.520 disclosure about one particular subset of the poor of the E, 0:14:00.679 --> 0:14:04.439 S and G. It's it's unworkable, there's arbitrary and no. 0:14:04.640 --> 0:14:08.080 This was also pillaried by Commissioner Purse in her in 0:14:08.160 --> 0:14:10.880 her comments when the when the proposal was coming out. 0:14:11.440 --> 0:14:15.280 I don't I don't see that one surviving. But the 0:14:15.280 --> 0:14:18.160 the other parts of the rule, I think aspects of 0:14:18.200 --> 0:14:20.120 those are gonna are absolutely going to be there, and 0:14:20.160 --> 0:14:21.640 they're going to be wooden, and they're going to be 0:14:21.680 --> 0:14:25.200 difficult to deal with, and they're going to have I think, 0:14:25.240 --> 0:14:29.480 the effect in the case of the disclosures, of pushing 0:14:29.480 --> 0:14:33.840 the industry to fit their funds into particular boxes because 0:14:33.840 --> 0:14:37.720 they're being driven by a category that is designed today 0:14:38.320 --> 0:14:41.440 by the SEC based on current practices and isn't really 0:14:41.480 --> 0:14:45.040 designed or built to expand and develop over time as 0:14:45.160 --> 0:14:50.320 the concept of E s G investing develops, and that 0:14:50.320 --> 0:14:52.600 different today's episode of Parts Bervillion. If you want more 0:14:52.680 --> 0:14:55.200 environmental news, check us out on Twitter. These are pretty 0:14:55.200 --> 0:14:58.920 easy to remember handle. It's at Environment, just that at Environment. 0:14:59.400 --> 0:15:01.600 Today's EPP. The Parts of the Billing is produced by myself, 0:15:01.680 --> 0:15:04.080 David Schult's Parts of Him was graded by Jessica Combs 0:15:04.080 --> 0:15:06.720 and Rachel Dagle and is edited by Zach Sherwood and 0:15:06.800 --> 0:15:10.560 Chuck McCutcheon, and our executive producer is Josh Block. Thanks 0:15:10.560 --> 0:15:17.160 everyone for listening. Those nine Justices in Washington can be 0:15:17.240 --> 0:15:20.560 hard to keep track of. That's where we commit on 0:15:20.640 --> 0:15:24.080 our podcast cases and controversies. We give you a week 0:15:24.120 --> 0:15:28.160 by week accounting of the Supreme Court, the filings, the arguments, 0:15:28.280 --> 0:15:32.080 the opinions, and much much more. Check in on Fridays 0:15:32.080 --> 0:15:34.840 with Bloomberg Law's cases and controversies to find out what's 0:15:34.840 --> 0:15:37.720 coming up on the horizon of the Supreme Court. Download 0:15:37.760 --> 0:15:39.800 and subscribe wherever you get your podcasts.