As Greenwashing Grows Commonplace, The SEC Looks to Set Its House in Order

Stakeholders should expect increasingly frequent crackdowns on greenwashing at Wall Street’s biggest institutions. 

You’d be forgiven for noting the irony in the Securities and Exchange Commission’s (SEC) recently-announced probe into two of Goldman Sachs’ asset management group’s ESG-aligned mutual funds. After all, ESG—even before it became a household term that routinely shows up on legislative dockets and in investment research—is an endeavour anchored in good intentions. The allegations of greenwashing the SEC has levelled at several of Wall Street’s most prominent financial institutions, then, come as something of a shock, resulting in a much darker narrative which frames ESG-aligned investments at banks as vessels for achieving reputational and commercial success.  

Despite the apparent suddenness of the SEC’s crackdown on greenwashing, its probe into Goldman’s asset management division is a move that’s far from unprecedented. Recent months have seen the SEC take decisive strides towards broader regulatory oversight of ESG investment, in an effort to combat misinformation and misrepresentation. Last year, the SEC made concrete its commitment to sustainability and corporate responsibility by forming a “Climate and ESG Task Force”; earlier this year, in May, this nascent task force fined BNY Mellon $1.5 million for misconstruing the extent to which ESG considerations played a role in the bank’s “investment selection process”—a penalty analysts describe as being one of the first of its kind.  Though a cynic might see this as definitive proof that no good deed goes unpunished, the SEC’s decision to tighten ESG investment regulations is rooted firmly in the financial services industry’s protracted love affair with greenwashing.  

It’s worth taking a moment to note the burgeoning significance of ESG alignment. ESG-aligned assets are, for instance, projected to represent nearly 44% of global assets under management within the decade—and some argue that even that’s a conservative estimate. With an increased focus on responsible investing comes a rat race for reputational capital; as banks scramble to distinguish themselves as leaders in the ESG investing space by making headline-stealing acquisitions and ambitious commitments, it only stands to reason that marketing the appearance of corporate responsibility, without committing to it completely, might prove appealing. The prevalence of greenwashing within the financial services industry indicates that ESG-aligned investments—while commendable—are far from immune to unsavoury practices; one Natixis brief describes the very concept of ESG / CSR as a “market fad,” suggesting that greenwashing—alongside anti-greenwashing regulatory mechanisms—will continue to dominate ESG discourse for the foreseeable future.

In spite of this, the future of ESG is a promising one. Within his first two years as the Chairman of the SEC, Chair Gary Gensler has established a focus on disclosures and transparency, has made groundbreaking progress towards maintaining industry-wide accountability, and has demonstrated a willingness to engage with the threat of greenwashing on a comprehensive and granular level. Investors and analysts alike should expect further probes and penalties to follow the SEC’s investigation into Goldman Sachs. 

Source: KnowESG

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