Gary Gensler, chairman of the U.S. Securities and Exchange Commission (SEC), speaks during a House Appropriation Subcommittee hearing in Washington, D.C., US, on Wednesday, May 18, 2022. The hearing is titled "Fiscal Year 2023 Budget Request for the Federal Trade Commission and the Securities and Exchange Commission."
Investment firms typically lend out shares to other financial firms to settle trades or to help short sellers wagering against a company. Asset managers have argued publicly that there are policies in place to prevent firms from borrowing securities solely for the purpose of voting on shareholder resolutions.
For ESG fund managers, the practice of short-selling can raise specific challenges. Short-term bets against companies could make it harder for an ESG fund manager to influence a portfolio company to become more sustainable over a longer period. It also creates the awkward appearance of aiding investors who are betting against the companies that the fund has deemed worthy investments.
Furthermore, supporters of the practice say, money managers can recall shares if they want to vote on shareholder resolutions to exercise their influence and power over an ESG-related issue facing a company.
“When the vote matters, mutual funds recall their shares,” said Josh Galper, managing principal at Finadium, a consultancy. “The funds most equipped to respond to shareholder concerns or the SEC are those that have internal ESG policies that make clear what they’re going to do when a vote comes up.”
The SEC enforcement division’s asset management unit, which polices fund disclosures, is leading the probe, according to one of the people familiar with the investigation.
While it’s unclear if the securities-lending probe will lead to the regulator suing firms or investment advisers, the agency has started bringing cases over ESG disclosures.
In May, a unit of Bank of New York Mellon Corp. without admitting or denying the SEC’s allegations paid $1.5 million to settle claims that it falsely implied some mutual funds had undergone an ESG quality review. In April, Vale SA, the Brazilian mining giant, was accused of making misleading claims in ESG disclosures about the safety of a dam that collapsed in 2019 and killing 270 people. The firm has denied those claims.
--With assistance from Saijel Kishan and Mariana Durao.
This article was provided by Bloomberg News.