SEC ready to clamp down on ESG investment claims

ESG, or environmental, social, and governance concerns, occupy a growing amount of headspace in many industries, commercial real estate being one of them. Most CRE investors see the topic as crucial as a matter of risk management.

But there’s another aspect of risk: the SEC plans to clamp down on overinflated ESG investment claims, according to the Financial Times. That could mean CRE investment funds, REITs, and the like will have to increase compliance vetting on their marketing and communications.

In a mid-March article about the new SEC climate disclosure rules, Hunton Andrews Kurth counsel Samuel Kardon noted that some companies “tend to focus on their achievements and aspirations without addressing matters they are less eager to highlight,” known as greenwashing. He then went on, “even though an ESG report that is not filed with the SEC is subject to the same potential liability under the general anti-fraud provisions of the federal securities laws as any other public statement by a public company, the level of rigor applied to the preparation and review of ESG disclosures by companies, their auditors and investors is often substantially less stringent than that applied to disclosures in SEC filings.”

That may no longer be the case. Evidence outside of the report is available for the SEC itself, which “charged BNY Mellon Investment Adviser, Inc. for misstatements and omissions about Environmental, Social, and Governance (ESG) considerations in making investment decisions for certain mutual funds that it managed” on Monday, May 23rd. The agency said that between July 2018 and September 2021, the firm “represented or implied in various statements that all investments in the funds had undergone an ESG quality review, even though that was not always the case.” The SEC levied a $1.5 million fine.

“The challenge for CRE, as with many industries, will be in compliance and measurement,” Michael Moran, chief markets officer at Microshare, a provider of smart building data systems, tells GlobeSt.com. “Already, market pressures are forcing landlords to take greater notice of ESG matters, particularly carbon footprint. Now, regulators will demand empirical data to back these—often greenwashed—claims.”

Also, avoiding terms that directly invoke environmental responsibility or actions might not provide any cover.

“The SEC’s crackdown could potentially affect access to capital as funds begin more rigorous vetting of companies in their ‘impact portfolios’ in an effort to avoid greenwashing allegations,” Kimberly Jaimez, a partner at Pillsbury and former white collar federal prosecutor, tells GlobeSt.com. “Impact investments are typically marketed as ones that create social and environmental benefits. Thus, real estate companies that market development projects as ‘transformative development,’ ‘urban renewal,’ ‘redevelopment,’ or ‘sustainable’ real estate should be ready to provide evidence for such statements. They should be ready to explain the social and/or environmental benefits generated by their development projects if they want to ensure their inclusion in such impact portfolios going forward.”