Alleged ESG exaggerations cost Invesco $17.5M

Fears that hundreds of billions in AUM would walk out the door drove Invesco to greatly overstate its commitment to ESG investing, regulators say.

Now those alleged exaggerations have landed the investment management giant's advisory arm in a $17.5 million settlement with the Securities and Exchange Commission. In an announcement Friday, the SEC accused Invesco Advisers of being misleading about how assets it managed were being invested in accordance with so-called ESG principles. ESG — short for environmental, social and governance — derives from the idea that investors should be able to be beyond chasing returns by using their money to promote certain favorite causes.

According to the SEC, Invesco started making its disingenuous statements after an internal investigation warned that it could lose $370 billion in AUM to rival firms if it neglected "ESG integration." Invesco Advisers, a registered investment advisor, listed $746 billion in assets under management in documents submitted to the SEC on April 24.

"As stated in the order, Invesco saw commercial value in claiming that a high percentage of company-wide assets were ESG integrated. But saying it doesn't make it so," Sanjay Wadhwa, the acting director of the SEC's Division of Enforcement, said in a statement. "Companies should be straightforward with their clients and investors rather than seeking to capitalize on investing trends and buzzwords."

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A spokesperson for Invesco, which neither admitted to nor denied the SEC's charges, noted that  the firm cooperated with the SEC investigation.

"The SEC Order makes no allegations or findings related to disclosures about specific funds or investment strategies," Andrea Raphael, Invesco chief communications officer, said in a statement.

She added that "Invesco has not issued public reports of firmwide ESG integration levels since late 2022" and that the firm "will continue to take a client-led approach of offering investment strategies tailored to the specific investment objectives of its clients."

The case comes as enthusiasm for ESG investing — once a hot trend — has diminished significantly. Amid a conservative-led backlash against "woke capitalism," many former champions of ESG like the investment giant BlackRock have backed away, if not from their commitment to environmental and social causes, at least from invoking the three letters.

In the U.S., the nearly $70 billion inflow that ESG funds saw in 2021 had turned into a $13.2 billion outflow by 2023, according to the investment research firm Morningstar. That latter year was the worst in ESG's history.

But while ESG investing remained popular, regulators were particularly concerned about a type of abuse they called "greenwashing." This meant claiming environmental, or "green," benefits for an investing strategy that were really absent.

Joseph Wojciechowski, an investment fraud lawyer at Chicago-based Stoltmann Law and vice president of the Public Investors Advocate Bar Association, said the SEC's allegations paint a picture of a firm that didn't live up to its basic responsibility to do what it promised clients. Although that duty will always remain in place, Wojciechowski said he questions if the SEC will maintain its zeal for enforcing "greenwashing" and similar cases when former President Donald Trump returns to the White House next year.

Trump has said he will fire SEC Chair Gary Gensler "on day one" and has otherwise expressed support for rolling back Gensler's extensive regulatory agenda.

"It's too bad for Invesco that they had to pay the money out now," Wojciechowski said. "if they had waited three months or so, they may have got off the hook, because this is not something the Trump SEC will be focusing much energy on."

According to the SEC, Invesco at various times between 2020 and 2022 told clients and said in marketing materials that anywhere from 70% to 94% of the assets it had under management were "ESG integrated," suggesting they were being used in some way to further environmental, social and governance goals. The firm's 2020 ESG Investment Stewardship Report, for instance, claimed: "Currently we are at 75%. Invesco aspires to 100% ESG integration across all investment capabilities by 2023."

In reality, though, most of the assets were in passive exchange-traded funds that automatically track certain indexes or market sectors without taking other investing goals into account, the SEC said. Regulators noted that Invesco's biggest ETF — traded under the symbol QQQ — simply tracks the largest 100 non-financial firms on the Nasdaq stock exchange. The QQQ fund had roughly $180 billion in AUM in the period in question, according to the SEC.

"While Invesco publicly stated ESG integration meant 'ESG considerations as an influence in investment decision making,' Invesco counted all of its ETFs — including passive ETFs that followed a non-ESG index — as ESG integrated," according to the SEC. 

The SEC also alleged that Invesco at one point changed its method for determining how much of the assets it was managing were "ESG integrated." As a result, the figure for ESG integration fell from 90% to between 75% and 80%.

The SEC said some Invesco employees recognized the firm wasn't living up to its commitments and raised their concerns. But no changes were made in response, the regulator said.

The SEC accused Invesco of violating various provisions of the Investment Advisers Act of 1940, including one banning business activity that "operates as a fraud or deceit upon any client or prospective client." It also alleged that Invesco breached a section of the act barring misleading advertising. 

The SEC noted that the advertising provision was replaced by a new marketing rule in May 2021. But since that stricter rule didn't take effect until more than a year later, it didn't apply to Invesco's alleged misrepresentations.