The U.S. Securities and Exchange Commission recently issued financial services firm WisdomTree a $4 million fine for greenwashing. Per an ESG Dive report, the firm was penalized for falsely representing its execution of three of its funds' ESG — or environmental, social, and governance — investment strategies.
What's happening?
The U.S. Securities and Exchange Commission recently fined WisdomTree Asset Management $4 million for greenwashing, finding the company failed to comply with an ESG investment strategy the financial services firm advertised.
According to the cease-and-desist filing, the New York-based firm made misstatements about the investment strategy of three exchange-traded funds — the WisdomTree International ESG Fund, the WisdomTree Emerging Markets ESG Fund, and the WisdomTree U.S. ESG Fund.
From March 2020 to November 2022, WisdomTree advertised that these three funds would not invest in companies that were "involved in certain controversial products or activities," specifically mentioning "fossil fuels" and "tobacco" as excluded from the portfolios. But, according to the filing, the SEC found the funds did, in fact, invest in companies in those sectors.
The filing says WisdomTree relied on insufficient data from a third-party ratings and research firm when screening companies for the ESG-marketed funds. Even further, the SEC found WisdomTree was aware its screening process was flawed, likely finding the discrepancy when preparing ESG characteristics reports for the funds.
The filing also states WisdomTree misrepresented the funds' investment strategies to its board of trustees and investors, violating various SEC laws and antifraud provisions.
Why is WidsomTree's ESG fund misrepresentation important?
Being intentional with your dollars is a major way consumers can intertwine climate justice into their daily lives. While it's important to research where your money is going, sometimes that research can lead to greenwashed claims.
When companies make statements about their environmental impact, it's essential that those claims are factual and properly represented. If a company's ESG statements are exaggerated or entirely false, it's likely greenwashing. When a company greenwashes its products or services, its customers are misguided about what their money is truly funding. And that is troubling when trying to use your spending power for good.
The SEC said in a release that the enforcement action against WisdomTree was made because the three funds "made precisely the types of investments that investors would not have expected … based on WisdomTree's disclosures."
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What's being done to keep other companies from misrepresenting their ESG activities?
Unfortunately, the SEC recently disbanded its Climate and ESG Task Force, saying the task force had created adequate groundwork for the broader agency to address greenwashing if and when needed — as a Harvard Law School forum post indicated. While that is still the intention of the SEC, it does indicate a step back in confronting climate and ESG concerns with considered dedication.
The Natural Resources Defense Council says the best short-term means of tackling greenwashing is to build awareness through activism and education. But the organization says that the government has to take the lead to "reduce the burden [of addressing greenwashing] on consumers" through laws and penalties.
According to the NRDC, the Federal Trade Commission — which protects consumer interests, while the SEC protects investor interests — has prosecuted greenwashing violators fewer than 100 times since the early 1990s.
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