The US Securities and Exchange Commission fined ETF provider and asset manager WisdomTree $4 million as a result of an investigation into compliance failures and misstatements about the company’s Environmental, Social, and Governance practices. The SEC said that even though the company touted itself as an ESG-aware investor, it was putting money in fossil fuel and tobacco-related companies in certain funds marketed as ESG-focused. As indicated in their filing and the filing done by the SEC, there were three ETFs held by WisdomTree which they claim adhered to the ESG principles from prospectus statements by eliminating funds associated with fossil fuel, tobacco, and all companies engaged in coal mining or transporting, natural gas extractions or distribution, or retailing tobacco products during March 2020 till November 2021; yet the SEC noted a fact that the entities participated in the activities stated earlier.
In this regard, the investigation carried out by the SEC had pointed out that the processes of screening and compliance carried out at WisdomTree suffered serious failures. As a result, WisdomTree failed to have an appropriate in-house policy system that was put in place to block companies from proscribed industries. In this regard, WisdomTree only solicited data from third-party service providers who, at some level, excluded none of their companies operating in the fossil fuel and tobacco industries. This reliance on subpar data screening practices assured that WisdomTree’s ESG funds did not live up to the standards of investors to whom the advertising was directed.
As part of the settlement of the claims, WisdomTree agreed to the SEC’s order to cease and desist, along with a $4 million civil penalty. Although WisdomTree neither admitted nor denied the allegations, it agreed to the entry of the SEC’s order. Sanjay Wadhwa, Acting Director of the SEC’s Division of Enforcement, said that compliance with disclosed investment criteria, particularly for funds marketed as ESG, is critical. He added that the breaches are particularly egregious in that the ESG investor relies on these promises to avoid specific industries.
This case helps further drive scrutiny of the SEC about ESG funds’ practices, as ESG investments gain popularity. The sanction sets a clear message from the SEC to fund providers: commitments to avoid some industries must be verifiable and transparent with robust policies regarding compliance in place. This action against WisdomTree at the hands of the SEC portrays that the agency stands firmly by its decision-making towards asset managers, putting an emphasis on the obligation that asset managers must honor when making ESG-related claims so that investors trust their values are truly reflected within portfolios.