Speaker 1: If you don't know what greenwashing is, you will by
Speaker 1: the end of this episode. On today's Parts per Billion,
Speaker 1: we're talking about the SEC targeting allegedly environmentally friendly funds
Speaker 1: that are allegedly greenwashed, with the attorneys who are defending
Speaker 1: those funds. Hello, and welcome back once again to Parts
Speaker 1: per Billion Environmental podcast from Bloomberg Law. I'm your host,
Speaker 1: David Schultz. So today's another e s G episode. It's
Speaker 1: a topic we love talking about, and according to our analytics,
Speaker 1: you also love hearing about for those not in the know.
Speaker 1: E s G stands for Environmental, Social and governance. It's
Speaker 1: a tag that a lot of Wall Street funds have
Speaker 1: been adopting recently, touting that they only invest in companies
Speaker 1: that are good for the environment, have a positive social impact,
Speaker 1: and or have humane corporate government structures. But as we've
Speaker 1: talked about in the past, those are all pretty subjective metrics,
Speaker 1: and both investors and activists have started to worry that
Speaker 1: just because the mutual fund calls itself e s G
Speaker 1: doesn't mean it actually is. These worries have risen in
Speaker 1: tandem with the rise of e s G investing itself.
Speaker 1: Blomberg Intelligence estimates that by the end of this year,
Speaker 1: forty one trillion dollars will be managed by a fund
Speaker 1: that advertises itself as e s G. So clearly there
Speaker 1: are a lot of people who want to invest this
Speaker 1: way and they want to get what they're paying for.
Speaker 1: That's where the SEC steps in. In recent weeks, the
Speaker 1: agency has proposed regulations that would require e s G
Speaker 1: funds to report the carbon footprints of the companies they
Speaker 1: invest in. Also, possibly more significantly, the SEC settled an
Speaker 1: enforcement claim against B and Y Melonto the tune of
Speaker 1: one point five million dollars over allegations to the bank
Speaker 1: misled investors on some of its E s G products.
Speaker 1: It's a tricky time to be in the green investing business,
Speaker 1: and the tricky times lawyers become really important. We're gonna
Speaker 1: be hearing from two lawyers who represent the financial services
Speaker 1: folks trying to give investors what they want without running
Speaker 1: a foul of the SEC, George Rain and Robert Skinner
Speaker 1: with the firm Ropes and Gray, and they spoke with
Speaker 1: Bloomberg Laws Andrew Bonis about what this new aggressive stance
Speaker 1: from the SEC means for their clients. Or started off
Speaker 1: by talking about what he and his colleagues are telling
Speaker 1: nervous E SG fund managers right now. I think the
Speaker 1: main message we're giving to clients these days is that
Speaker 1: the fears and concerns they had previously based on SEC
Speaker 1: examinations and public statements are now all the more present
Speaker 1: and all the more important. That the expected actions that
Speaker 1: the SEC was going to make are now being made.
Speaker 1: So we've seen the first watershed enforcement case on an
Speaker 1: E s G disclosure matter, and we're seeing real rulemaking
Speaker 1: that's coming out that has teeth both as two names
Speaker 1: of funds as well as specific disclosures. And all the
Speaker 1: expectations are that this will be fast tracked and some
Speaker 1: variation on the rules will make their way into the
Speaker 1: position of being final rules over the coming months. But
Speaker 1: I've be interested rob your perspective on the You know,
Speaker 1: there are to two points there. One is there the
Speaker 1: immediate response to a worsement action, which is which is
Speaker 1: the flag that's up. Obviously, the rules are proposed and
Speaker 1: rule proposals required comment um, so that and we'll have
Speaker 1: a fair fair period of time for implementation before the
Speaker 1: compliance is required. So I think first and foremost were
Speaker 1: saying talk to people like Rob Skinner about why they
Speaker 1: should be could be concerned in the very present moment,
Speaker 1: but long before we have final rules. The timing of
Speaker 1: the enforcement action against a mutual fund advisor you can't
Speaker 1: have been coincidental, right. It preceded the issuance that they
Speaker 1: proposed rule in thement by two days um and strikes
Speaker 1: us as a pretty vivid prelude UM as to the
Speaker 1: enforcement agenda that's going to accompany the implementation of the rules,
Speaker 1: whatever those rules might be. UM and And frankly, it's
Speaker 1: the approach taken in that enforcement action UH causes us
Speaker 1: some real concern about UM how aggressive the staff intends
Speaker 1: to pursue UM what it deems to be greenwashing. I'll
Speaker 1: start with the premise that I feel like the claims
Speaker 1: of of widespread greenwashing that we see in a lot
Speaker 1: of the SEC's rhetoric recently UH to be pretty overblown.
Speaker 1: But if the SEC UM is prepared to UM enforce
Speaker 1: rules and read fund disclosures through a lens UH that
Speaker 1: is affected by their view of how E s G
Speaker 1: and sustainable and green funds ought to be run rather
Speaker 1: than through the traditional lens of let's see whether or
Speaker 1: not the disclosures fairly describe how they are being run. UM.
Speaker 1: It may open up a lot of uh, you know,
Speaker 1: enforcement exposure UM based upon you know, the staff's views
Speaker 1: regarding what funds should look like. You know what I
Speaker 1: what I went again too, is do you do you
Speaker 1: think the b N Y Melan case could have a
Speaker 1: chilling effect on funds that are thinking about employing E
Speaker 1: s G strategies. Well, let me say, I certainly hope not.
Speaker 1: At the end of the day. Uh, the law requires
Speaker 1: that a supposed misrepresentation or omission in fund disclosures be
Speaker 1: material in order to make out a violation of the
Speaker 1: securities laws. And that means that you know that there
Speaker 1: is a substantial likelihood that it would affect the decision
Speaker 1: of a reasonable investor um in light of all of
Speaker 1: the information available, the total mix of information. Frankly, the
Speaker 1: recent enforcement action strikes us as a reach. If the
Speaker 1: staff is prepared to pursue those kinds of theories consistently
Speaker 1: and aggressively, it is certainly a possibility this this will
Speaker 1: be chilling. Building on that the b N Y Melan
Speaker 1: case was certainly selected not just for timing but also
Speaker 1: for content, the fact that it was hitting only the
Speaker 1: primary advisor to a fund, and they didn't hit the
Speaker 1: subadvisor and only hit the advisor as they were organizing
Speaker 1: their complex um the fact that it was really about
Speaker 1: ambiguous language rather than actively misleading language. It was more
Speaker 1: sort of sloppiness as to the to the delineation of
Speaker 1: which funded with what aspect of of E s G
Speaker 1: incorporation into the process, that that was the focus here
Speaker 1: than it was any notion that there was active greenwashing
Speaker 1: or someone uh intentionally misrepresenting. But but that's sort of
Speaker 1: the point of this shot across the bow. Ultimately, the
Speaker 1: content of this enforcement action is consistent with what we've
Speaker 1: been seeing, and we've an advising clients in the day
Speaker 1: to day examination process with the SEC Division of Examinations,
Speaker 1: where the questions they're getting on the E s G
Speaker 1: fund are very much focused on do you have a
Speaker 1: process in place to make sure you've ticked and tied
Speaker 1: every single statement with an E s G activity that's
Speaker 1: being overseen and documented. Every time you're saying you you
Speaker 1: have any kind of involvement of E s G, how
Speaker 1: do you know that you're actually doing it? It's this
Speaker 1: sort of be very clear of say what you do,
Speaker 1: do what you say, but really tying it in almost
Speaker 1: with compliance policies and procedures, and so it's it's very
Speaker 1: much what the examination staff has been pushing for quite
Speaker 1: some time and which frankly a lot of our clients
Speaker 1: are spending a lot of time trying to be responsive to.
Speaker 1: So before before you saw, before this case came out,
Speaker 1: you saw your clients for seeing an uptick of interest
Speaker 1: from examinations and and E s G. So this was
Speaker 1: sort of you saw you saw something like this could
Speaker 1: be coming U. How aggressive has those like hamination has
Speaker 1: been and what can you talk a little bit about
Speaker 1: that The examinations have been ongoing for several years and
Speaker 1: we've been tracking kind of tweaks to the standard request list.
Speaker 1: Uh that that the that the exam staff has been
Speaker 1: out with UM it's been a very technical, rigorous process.
Speaker 1: Anytime they see anything that's E s G related that
Speaker 1: you'll get a set of specific questions. Uh. And and
Speaker 1: there's a focus on really getting to a compliance oversight
Speaker 1: role with respect to what previously and frankly reasonably was
Speaker 1: or could be seen as a a part of the
Speaker 1: investment process. You don't have compliance officers going through with
Speaker 1: a compliance policy to tell whether someone is thinks that
Speaker 1: something will grow quickly or slowly, or has a value
Speaker 1: tilt or some sort of you know, these aspects of
Speaker 1: the process s they can't get inside the heads of
Speaker 1: the portfolio managers. With E s G. It's in a
Speaker 1: different category almost. Um. It's the The expectation on exam
Speaker 1: has been that you have to have a process that
Speaker 1: links any statement about E s G to what's actually
Speaker 1: happening on the ground and have some kind of oversight
Speaker 1: over it. It hasn't helped from the regulatory side of
Speaker 1: things that a number of managers have taken existing funds
Speaker 1: and rebranded them with an E s G tilt, which
Speaker 1: immediately gets to the word of the day, which is greenwashing. Um.
Speaker 1: And I will also note that in the SEC proposing
Speaker 1: release for the new advisor and fund disclosures where greenwashing
Speaker 1: comes up in the second paragraph, So it's there right
Speaker 1: at the front. And I take it this is not
Speaker 1: going to be a one off case for the SEC.
Speaker 1: This d N Y mel and one that they're they're
Speaker 1: just likely more more to come. But what what do
Speaker 1: you expect future litigation to look like in this area? Well,
Speaker 1: I mean, one thing that is remarkable about the settlement
Speaker 1: order is the staff ultimately concludes that investors could have
Speaker 1: been misled by what the fund disclosures implied or suggested.
Speaker 1: Two extrapolate from that conclusion to something being materially misleading. Um,
Speaker 1: it's pretty extraordinary and we think not in keeping with
Speaker 1: with um, you know, the traditional legal standards of materiality
Speaker 1: when when enforcing the securities laws. So if you overlay
Speaker 1: that approach, UM, if the staff is going to be
Speaker 1: you know, using a screen about about what somebody could
Speaker 1: have found misleading in isolation, rather than looking at the
Speaker 1: entirements of information available to the to the to the investor,
Speaker 1: and and apply that screen to all of the new
Speaker 1: rules that are about to issue. There are a lot
Speaker 1: of judgment calls that are going to be required under
Speaker 1: those rules. And if the staff is prepared to second
Speaker 1: guess them this aggressively based on what somebody quote could
Speaker 1: have been misled by from what a prospectives might suggest
Speaker 1: or imply, it could be very fertile ground if that's
Speaker 1: where the staff wants to go. And of course, um,
Speaker 1: as we know from history, the plaintiffs bar happily lines
Speaker 1: up behind the staff and comes in with securities class actions.
Speaker 1: It's kind of a recipe for a big fat open
Speaker 1: door for the plaintiff's bar to follow in behind the
Speaker 1: staff and and wreak a lot of havoc and frankly,
Speaker 1: um bring a lot of expensive and distracting litigation. UM
Speaker 1: that is going to ultimately, I'm afraid, you know, undermine
Speaker 1: that the ultimate purpose of the of the of the
Speaker 1: E s G movement, which is to put you know,
Speaker 1: values into action in their investments. All right, let's get
Speaker 1: back to our discussion of SEC enforcement of E s
Speaker 1: G funds. Here is Andrew Ramonis. Now I want to
Speaker 1: get a little bit into the uh the E s
Speaker 1: G fund proposals that that also came out with. With
Speaker 1: these proposals, the SEC has been receiving significant pushback from
Speaker 1: some quarters of the finance industry, with the leader of
Speaker 1: a funds trade group saying the proposal on emissions reporting
Speaker 1: is unworkable because some emissions information from companies is not
Speaker 1: accessible to funds. Do you agree on the miss sans
Speaker 1: reporting piece. I see that as being on the shopping
Speaker 1: block when the industry comes in. This has happened time
Speaker 1: and time again that the SEC comes out with a
Speaker 1: set of standards and then some specific may potentially cherry
Speaker 1: picked requirement that everyone just can't get over. It happened
Speaker 1: the first time they tried swing pricing. It was to
Speaker 1: be mandatory, just became optional and then no one adopted it,
Speaker 1: So it may be a first swing it is. It
Speaker 1: is absolutely a blunt instrument because it it picks up
Speaker 1: one attribute on greenhouse gas emissions with some kind of
Speaker 1: fuzzy trigger as to whether you need to put this
Speaker 1: in your in your disclosures, and does not give any
Speaker 1: real away for you to to to distinguish between which
Speaker 1: whether it's E or s ORG that you're doing. Yet
Speaker 1: you have to be putting in a whole bunch of
Speaker 1: disclosure about one particular subset of the poor of the E,
Speaker 1: S and G. It's it's unworkable, there's arbitrary and no.
Speaker 1: This was also pillaried by Commissioner Purse in her in
Speaker 1: her comments when the when the proposal was coming out.
Speaker 1: I don't I don't see that one surviving. But the
Speaker 1: the other parts of the rule, I think aspects of
Speaker 1: those are gonna are absolutely going to be there, and
Speaker 1: they're going to be wooden, and they're going to be
Speaker 1: difficult to deal with, and they're going to have I think,
Speaker 1: the effect in the case of the disclosures, of pushing
Speaker 1: the industry to fit their funds into particular boxes because
Speaker 1: they're being driven by a category that is designed today
Speaker 1: by the SEC based on current practices and isn't really
Speaker 1: designed or built to expand and develop over time as
Speaker 1: the concept of E s G investing develops, and that
Speaker 1: different today's episode of Parts Bervillion. If you want more
Speaker 1: environmental news, check us out on Twitter. These are pretty
Speaker 1: easy to remember handle. It's at Environment, just that at Environment.
Speaker 1: Today's EPP. The Parts of the Billing is produced by myself,
Speaker 1: David Schult's Parts of Him was graded by Jessica Combs
Speaker 1: and Rachel Dagle and is edited by Zach Sherwood and
Speaker 1: Chuck McCutcheon, and our executive producer is Josh Block. Thanks
Speaker 1: everyone for listening. Those nine Justices in Washington can be
Speaker 1: hard to keep track of. That's where we commit on
Speaker 1: our podcast cases and controversies. We give you a week
Speaker 1: by week accounting of the Supreme Court, the filings, the arguments,
Speaker 1: the opinions, and much much more. Check in on Fridays
Speaker 1: with Bloomberg Law's cases and controversies to find out what's
Speaker 1: coming up on the horizon of the Supreme Court. Download
Speaker 1: and subscribe wherever you get your podcasts.