U.S. ESG Regulatory Update: Q4 2023

Brian Helmes, William Wu

Q4 2023 continued to demonstrate significant momentum globally on environmental, social and governance matters.  Whilst more than 50,000 European companies prepare Corporate Reporting based on the new EU standards, the SEC and the State of California have taken bold actions in Q4 to push for accurate ESG disclosure and penalize “greenwashing.” While these announcements continue to draw attention in the media, they clearly signal that progressive ESG policies and federal enforcement have not been sidelined.

Greenwashing Concerns

Global Regulators, including the SEC, also continue to signal concerns over greenwashing. In late September, the SEC issued its highest-ever fine for ESG matters on DWS, a subsidiary of Deutsche Bank, charging it with making “materially misleading statements” regarding its controls for incorporating ESG factors into its products. This included exaggerating the size of its ESG assets in the 2020 annual report. The SEC also found that some of DWS’ portfolio managers failed to follow the firm’s ESG investment processes marketed externally, leading to significant reputational damage and the resignation of the previous CEO. The German manager agreed to pay $19 million to settle the charge.

Naming Rules

Simultaneously, the SEC adopted amendments to Rule 35d-1 under the Investment Company Act to tackle fund names that are likely to mislead investors about a fund’s investments. A fund’s name is the first place of information that investors look at to assess its investment scope. The “Names Rule” mandates registered investment firms whose funds have a thematic focus in their names (e.g., “growth”, “value” or one of the three ESG factors) to invest at least 80% of assets in that type of investment. The amendment also includes enhanced disclosure requirements for new fund prospectuses and mandates a 90-day timeframe to get back into compliance with the 80% rule for existing funds. This rule change will have a significant impact on the industry, as SEC officials estimate that 75% of all public funds will be affected in some manner.

Climate Risk Reporting

At the State-level, California passed the Corporate Climate Corporate Data Accountability Act (SB 253) and Climate-Related Financial Risk Act (SB 261) in October, becoming the first U.S. State to require large companies to disclose greenhouse gas emissions across scopes 1, 2, and 3 starting in 2026. Asset managers operating in California with revenue of more than $500 million will need to report on climate-related financial risks and disclose measures to mitigate such risks in accordance with the TCFD framework. Those with revenue of more than $1 billion will need to evaluate, inventory, and report scopes 1 and 2 emissions starting in 2026 and scope 3 emissions starting in 2027. The Acts also impose a $500,000 fine every year for non-compliance.

Consistent with the Greenhouse Gas Protocol (the “GHG Protocol”), the California legislature defines scopes 1-3 emissions as follows:

  • Scope 1: All direct greenhouse gas emissions that stem from sources that a reporting entity owns or directly controls, regardless of location, including, but not limited to, fuel combustion activities
  • Scope 2: Indirect greenhouse gas emissions from consumed electricity, steam, heating or cooling purchased or acquired by a reporting entity, regardless of location
  • Scope 3: Indirect upstream and downstream greenhouse gas emissions, other than Scope 2 emissions, from sources that the reporting entity does not own or directly control and may include, but are not limited to, purchased goods and services, business travel, employee commutes and processing and use of sold products

What Asset Managers Should Be Doing Now

The DWS fine and changes to the Names Rule demonstrate the SEC’s heightened scrutiny and willingness to take enforcement actions. For asset managers concerned about their own exposure to the above legislation, preparation is as ever essential and we see firms taking various actions:

  • Asset managers are actively reviewing their external marketing materials to assess the risk of improper marketing to their clients. Specifically, asset managers should be conducting a close review of the external marketing of investment products against the 80% rule as well as whether internal processes adhere to what is marketed externally
  • Asset managers are actively increasing their climate capabilities, building in-house teams, procuring and ingesting climate and other ESG related metrics as well as reviewing their reporting capabilities
  • Ingestion of new data sources are requiring firms to review their data architecture and sources of ESG data ingestion, as data sets on physical and transition risks of underlying investee companies continues to grow
  • Asset managers are increasing their engagement activities as corporate ESG expectations begin to evolve and investors expect corporates to adopt the new legislation

For asset management firms that have yet to start any of the above, the complexity and costs associated with readiness and assurance should not be underestimated and the penalties can be substantial, as evidenced by the recent fines levied.


If you would like to discuss practical ways to prepare your firm for emerging ESG legislation and global investor expectations, please contact us.

About the Authors

Brian Helmes - Senior Manager at Alpha FMC
Brian Helmes
Senior Manager

Brian is a Boston-based Senior Manager in Alpha FMC North America with over 15 years of diverse experience in financial services and consulting built over numerous years in industry and subsequent consulting engagements at leading global asset managers and government institutions. Brian also leads ESG research and advisory efforts for North America.

William Wu - Analyst at Alpha FMC
William Wu

Will is a New York-based Analyst in Alpha FMC North America. Will supports ESG research and advisory efforts for Alpha NA, and has experience supporting investment managers within the Operations, Investments and Benchmarking practice areas. He is a graduate of Georgetown University where he obtained a BA in Political Economy with a thesis titled “A Cautious Step Forward: Carbon Emissions Trading in China.”