A series of recent enforcement actions targeting alleged greenwashing by asset managers has fund firms increasingly wary of the added regulatory risk associated with ESG funds, says Fitch Ratings.
In a report, the rating agency highlighted the growing attention from regulators to ESG asset management.
“A spate of high-profile regulatory findings against how asset managers operate ESG funds and present them to clients highlights the regulatory risk associated with such funds,” the report said.
In particular, Fitch noted that, last week, the U.S. Securities and Exchange Commission (SEC) settled with the asset management division of Goldman Sachs for failures in its ESG investment policies and procedures.
And, earlier this year, the SEC settled allegations against BNY Mellon Investment Adviser “for misstatements and omissions about ESG considerations in making investment decisions for certain funds.”
“Such charges can lead to reputational damage that can weaken franchises, particularly if they occur repeatedly. We expect regulators to continue their efforts to step up their scrutiny of ESG funds to crack down on ‘greenwashing’,” Fitch said.
This enhanced regulatory attention is, in turn, leading asset managers to “be more conservative in how they present their ESG credentials,” Fitch said, noting that fund managers in Europe are becoming increasingly careful in how they classify funds.
“Many managers are even reversing existing classifications, to soften the claims they are making about their ESG credentials given the increased regulatory scrutiny,” the report said.
Fitch noted that, while investors are increasingly expected to seek funds that meet more stringent ESG standards, asset managers are becoming more mindful of the extra regulatory risk that comes with stricter criteria, and are being cautious “to ensure that their processes and investment strategies are sufficiently compliant before proceeding.”