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Client Alerts
V&E SEC Update | Published by Law360, November 19, 2024
By Jason Halper, Rebecca Fike, Sara Brauerman, Jon Solorzano, Josh Rutenberg, and Lucia Kang*
November 14, 2024 • 4-minute read
On November 8, 2024, the U.S. Securities and Exchange Commission (“SEC”) announced a settled enforcement action (the “SEC Order”) against Invesco Advisers, Inc. (“Invesco”), an investment advisory firm, for making misleading statements concerning the company-wide percentage of assets under management (“AUM”) that integrated environmental, social and governance (“ESG”) factors in investment decisions. The allegedly misleading statements were made from 2020 to 2022 (the “Relevant Period”) in various client communications and marketing materials and were determined to violate various provisions of the Investment Advisers Act of 1940 (the “Act”).
According to the SEC Order, beginning in late 2019, Invesco identified the use of ESG considerations across its global investment platform as a commercial imperative and accelerated its “ESG integration” efforts. In support of these efforts, the firm made claims to certain clients and potential clients about Invesco’s firmwide ESG integration of its investment strategies and the percentage of firmwide AUM that was ESG integrated. For example, in an April 2020 presentation to representatives of the U.S. registered funds it advised, Invesco described its “[c]ommitment to ESG” and noted that it had an “[e]volving and committed approach to ESG integration with over 94% of AUM currently integrating ESG at minimum levels with a scale of approaches depending on asset class.”
In addition to making representations regarding the percentage of firmwide ESG integrated AUM to specific and prospective clients, Invesco published similar representations in its publicly available 2020 and 2021 ESG Investment Stewardship Reports. The percentages claimed in client presentations and reports varied from 70 percent to 94 percent during the Relevant Period. The SEC found these percentages misleading, as the figures counted Invesco’s passive exchange traded funds (“ETFs”) that did not actually consider ESG factors in making investment decisions. The SEC pointed out that Invesco employees knew of the potential issue arising from counting all ETFs as ESG integrated, and some employees had proposed refining Invesco’s previously announced goal of having 100 percent of its AUM ESG integrated so that the goal would only pertain to actively managed strategies or ESG-specific ETFs. Invesco failed to implement this type of change.
Finally, the SEC’s investigation revealed that Invesco lacked a comprehensive set of written policies and procedures concerning how Invesco would determine the percentage of firmwide AUM that was ESG integrated. On a more fundamental level, the firm never adopted a written policy that defined “ESG integration” despite the fact that it frequently used the term in public documents.
Based on these factual findings, the SEC ordered Invesco to cease and desist from committing or causing any current or future violations of Sections 206(2) and 206(4) of the Act and Rules 206(4)-1(a)(5), 206(4)-7, and 206(4)-8 thereunder. The SEC also imposed on Invesco a civil monetary penalty in the amount of $17.5 million to settle the charges.
ESG-Focused Scrutiny is Alive and Well: The SEC’s enforcement action against Invesco for misleading ESG claims is part of a broader pattern of ESG-related regulatory scrutiny in the financial industry. Similar enforcement actions recently taken by the SEC against WisdomTree, Keurig Dr Pepper and others indicates that, despite disbanding of the ESG Taskforce in mid-2024, ESG-related disclosure continues to be an area of focus for the agency.
Greenwashing Remains an Area of Regulatory Focus Globally: The claims against Invesco further underscore the importance of ensuring that any public disclosures by issuers or investment advisors are accurate and not misleading, even if those statements are contained in a voluntary report such as Invesco’s Stewardship Report. The SEC, and various regulatory agencies outside the U.S. including the Financial Conduct Authority in the UK and the EU’s European Securities and Markets Authority, continue to be very focused on suspected greenwashing.
Internal Governance is Closely Related to Accurate ESG Disclosure: The SEC observed that Invesco lacked written policies and procedures for assessing the accuracy of its ESG integration claims. According to the SEC, the absence of such policies likely contributed to Invesco’s inconsistent disclosures. The SEC noted that Invesco lacked policies and procedures to ensure AUM was appropriately classified on an aggregated level as ESG integrated and to confirm that the basis for including AUM within the bucket of ESG-integrated assets, resulting in Invesco overstating the percentage of firmwide AUM that was ESG integrated to clients and prospective clients. The SEC’s Invesco action is just the latest case highlighting the role good governance plays in accurate disclosures of all kinds. With regard to ESG-related disclosures, a strong governance framework would help to ensure that the company is obtaining complete and accurate data from reliable sources, that responsibilities for preparing and reviewing disclosures are clearly established, that controls are implemented to manage risk, and that the board and relevant committees exercise appropriate oversight into the disclosure process. For example, certain financial institutions, such as HSBC, have expanded their boards of directors’ oversight of ESG disclosures, integrated climate-related issues into the mandates of board committees, formed committees dedicated to overseeing ESG disclosures, and incorporated climate-related considerations into their overall risk frameworks.
The Ability of Passive Investment Funds to Engage on ESG Issues Remains Subject to Challenge: Finally, the Invesco settlement serves as a reminder of the challenges faced by asset managers to participate in ESG-focused engagement and voting on behalf of passively invested assets or to make claims about the ESG characteristics of such assets. Some have questioned whether passive investing requires that passive managers not engage with portfolio companies on climate or other stewardship issues, and there is debate about where the line may be for investors promoting certain environmental, social or governance outcomes versus taking a fully hands-off approach with issuers. A 2022 report by the Minority Staff of the U.S. Senate Committee on Banking, Housing and Urban Affairs regarding the influence of the “Big Three” asset managers asserted that any commitment by asset management firms to engage with portfolio companies to reduce emissions was contrary to what it deemed appropriate for passive investment strategies. Historically, “passive” positioned ETFs and funds have taken the view that engagement on ESG topics and communicating voting preferences and guidelines to corporate issuers is distinct from having the ability to make buy and sell decisions over a company’s stock, and these nominally passive funds have largely been active in communicating their voting expectations. Companies and investors should remain mindful of this unsettled area, particularly in light of the new administration taking office in January 2025.
Please contact your Vinson & Elkins team to discuss these developments and their potential effects on your business.
*Lucia Kang is a law clerk in our New York office.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.
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