For all the greenwashers out there on Wall Street, the party may really be over.

There's now little doubt that the US Securities and Exchange Commission actually means business in its bid to crack down on misleading claims by managers of environmental, social and governance funds.

Last month, the regulator fined a Bank of New York Mellon Corp. investment unit on allegations it falsely implied some of the firm's mutual funds had undergone so-called ESG quality reviews. And now, the agency has taken on much bigger game, looking into whether some of Goldman Sachs Group Inc.'s mutual funds don't meet the environmental, social and governance metrics proclaimed by the Wall Street giant's marketing materials.

"These are the first ripples of a wave of regulatory interventions that we are likely to see in the coming months," said Sonali Siriwardena, partner and global head of ESG at law firm Simmons & Simmons.

Under Chair Gary Gensler, nominated by President Joe Biden to run the SEC in 2021, officials have been demanding that money managers explain the standards they supposedly use to classify ESG-labeled funds. When the examination division spots potential misconduct, it typically alerts the agency's enforcement unit for further investigation.

The BNY Mellon case may provide a road map for future cases. After a review, the SEC announced May 23 that BNY Mellon Investment Adviser Inc. used  "material misstatements and omissions" concerning the consideration of ESG principles in making investment decisions for some mutual funds overseen by the firm.

The agency concluded that BNYMIA had said portfolio holdings in its Overlay funds would be subject to "an ESG quality review." That turned out not to be the case, the SEC said.

As a result, the agency found the firm violated Section 34(b) of the Investment Company Act, which says it's unlawful to make any untrue statement of material fact in any registered document. BNYMIA agreed to pay a civil penalty of $1.5 million. While certainly not a lot relative to other recent securities violations uncovered by the SEC, it's likely just the beginning.

But one Wall Street lawyer sought to downplay the "wave of regulatory interventions" predicted by Siriwardena.

"We aren't talking about a Ponzi scheme or allegations of an industry-wide fraud like what we saw with the subprime mortgage meltdown," contends lawyer Marc Elovitz of Schulte Roth & Zabel, an adviser to private fund managers. "We aren't talking here about a vast conspiracy by asset managers."

Rather than a concerted Wall Street effort to make as much money as possible by slapping ESG labels on everything, Elovitz argues that the recent inundation of greenwashing is a function of the sector's novelty. ESG is a fairly recent innovation in investment management, Elovitz said. As the market matures, he predicts there will be greater clarity around the definition of ESG and that will ultimately result in better transparency.

Not everyone is so sanguine. "It feels almost inevitable that more names will come out as regulators dig in," said Fiona Huntriss, a partner at law firm Pallas, where she focuses on financial litigation and broader dispute strategies. And it's important to remember, she said, that this isn't just a U.S. or U.K. or Europe issue — it's a cross-border issue.

"We're really just at the beginning of the cycle because there hasn't been proper regulation between now and when asset managers started marketing ESG funds," Huntriss said. "Even as increased regulation is brought in, there is still uncertainty as to what the standards are, and that sort of uncertainty is fertile ground for litigation."

And globally, of course, there's still the unsettled investigation of DWS Group, which really kicked off all the focus on possible ESG misselling.

Tim Quinson reports for Bloomberg News.

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