SEC Charges WisdomTree with Failing to Adhere to Its Own Criteria For ESG-Marketed Funds

The SEC’s recent enforcement action against WisdomTree Asset Management highlights the critical importance of adherence to Environmental, Social, and Governance (ESG) criteria. From March 2020 to November 2022, WisdomTree marketed three exchange-traded funds (ETFs) as ESG-compliant, assuring investors these funds excluded companies involved in fossil fuels and tobacco. However, SEC findings revealed that the funds invested in companies engaged in coal mining, natural gas, and tobacco sales—industries that directly contradicted ESG claims.

This enforcement underscores the need for robust oversight in ESG fund management and serves as a cautionary reminder for firms that promote ESG standards.

What ESG Funds Represent and Why Compliance Matters

ESG funds combine ethical values with investment strategy. These funds avoid harmful industries like fossil fuels and tobacco while investing in companies committed to sustainability and positive social impact. These “values-based” portfolios are more than ethical investments; for many, they represent a forward-thinking strategy that positions investors to succeed in the future, increasingly focused on sustainable practices. Research indicates companies with solid ESG practices are better equipped to manage risks and achieve long-term growth, potentially boosting performance.

The WisdomTree Case: Key Findings

The SEC’s investigation found that WisdomTree relied on third-party vendors whose screening failed to exclude companies involved in coal mining, natural gas, and tobacco. Without internal policies to oversee this process, WisdomTree’s funds included investments that contradicted their ESG marketing claims.

In the fast-paced world of investment management, relying on third-party data to enforce ESG criteria is standard practice. However, WisdomTree’s case highlights the risks of depending solely on external providers without verifying their accuracy. Despite promising to exclude companies that would violate the ESG funds’ investment mandate, the data provider’s screening was inadequate and lacked internal checks.

Without robust internal checks to verify this data, the funds inadvertently included companies that investors expected to be excluded. The SEC’s enforcement action underscores a critical point: relying on outside data doesn’t eliminate the need for internal oversight. Regulators expect asset managers to build in regular data audits and compliance checks to ensure that ESG claims hold up to scrutiny. WisdomTree’s $4 million civil penalty is a costly reminder that in today’s market, with rising ESG expectations, these internal safeguards are essential.

Broader ESG Compliance Trends

The SEC has recently ramped up its scrutiny of ESG funds, targeting firms that misrepresent or fail to adhere to their stated ESG criteria. This enforcement action aligns with previous cases where the SEC found inconsistencies in ESG-labeled funds, such as the 2022 actions against Goldman Sachs Asset Management and BNY, underscoring the agency’s commitment to ensuring transparency and honesty in ESG disclosures.

The agency has shown it will rigorously examine every element of an adviser’s ESG strategy, and any disconnect between what’s promised and what’s practiced will lead to enforcement. While these cases focus on public securities, the SEC’s message resonates across all asset classes with a clear takeaway: ESG accountability is non-negotiable.

7 Key Takeaways for Investment Managers

For investment managers, this case is a potent reminder of the importance of rigorous due diligence and robust compliance processes. Relying solely on third-party data without comprehensive oversight can lead to costly compliance issues. Here are seven key takeaways for investment managers.

1. Conduct an ESG Statement Inventory

Start by compiling all ESG-related statements the firm has issued, from fund disclosures to pitch books and client presentations. The SEC has shown it will scrutinize even informal claims, so firms must ensure they can back up all ESG promises with evidence of actual practices. Review each statement to confirm it’s both accurate and fully supported. All new ESG claims should be vetted and documented before being communicated to clients.

2. Revisit ESG Policies

Review the firm’s ESG policy and ensure that each component accurately reflects which funds and strategies it covers. The SEC won’t overlook broad or misleading ESG claims. A clear, specific policy helps eliminate ambiguity about which products are held to ESG standards.

3. Strengthen ESG Screening Processes

Develop clear internal policies that define and enforce ESG criteria across all investments. Assign specific compliance and investment team members to oversee these policies, ensuring they are consistently applied and regularly updated to meet regulatory standards. This approach safeguards the integrity of ESG offerings and prepares firms for any SEC review.

4. Enhance Third–Party Data Verification

Regularly audit third-party ESG data providers to confirm alignment with the firm’s ESG standards. This includes sample checks, understanding vendor methodologies, and ongoing evaluations of provider credibility. A strong vendor management process ensures data accuracy and strengthens the firm’s position should regulators question external data reliance.

5. Clear Disclosure Practices

Maintain transparency in all fund disclosures by clearly explaining ESG criteria, screening methods, and any limitations. Avoid overpromising; instead, be upfront about any exceptions to ESG screening. Regularly update disclosures to reflect any policy or data changes, helping build investor trust and reduce greenwashing risk.

6. ESG Training for All Team Members

Training is key to reducing greenwashing risk. Regular sessions should bring investment, compliance, marketing, and ESG professionals up to speed on the firm’s ESG policies, emphasizing the importance of consistency. This training builds a strong compliance culture and reinforces the stakes of getting ESG right.

7. Implement an ESG Recordkeeping Checklist

Track compliance by creating a checklist of all required records for ESG implementation. Establish a process for maintaining these records so they’re readily accessible if the SEC requests them. This proactive documentation can be a vital safeguard in any examination.

The Bottom Line

The SEC’s action against WisdomTree underscores the urgent need for transparency, consistency, and rigorous oversight in ESG fund management. This case serves as a reminder that ESG claims must be backed by concrete, verifiable practices aligning with investor expectations and regulatory standards.

In today’s ESG-driven market, relying on third-party data or making unsupported claims is insufficient. Firms must proactively audit, train, and document their ESG practices, from screening processes to disclosures. By taking these steps, firms can mitigate enforcement risk and build lasting trust with investors, positioning themselves as leaders in responsible investing.

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