With record money flowing into investment funds marketing themselves as socially responsible, it was only a matter of time before regulators stepped in to check how the cash is being invested.

The Securities and Exchange Commission has sent examination letters to firms who tout funds investing according to environmental, social or governance goals, The Wall Street Journal reported. The newspaper didn’t identity any specific firms, or how many received the letters. The SEC declined to comment to the newspaper.

One letter the SEC sent earlier this year to an investment manager with ESG offerings asked for details on how it judged which companies were environmentally or socially responsible and what stocks it recommended, the newspaper reported.

The SEC’s action highlights a flaw in ESG investing that even social-impact supporters point out: no standards or commonly acceptable system exists to measure how “green” a company is. The annual Global Impact Investing Network Investor Forum, which attracted thousands of attendees in October, introduced an approach to address the issue, but whether or not it will gain wide acceptance isn’t yet known.

The lack of standards has created a “scarlet letter” phenomenon, where companies can be singled out at random, SEC Commissioner Hester M. Pierce said in a speech in June. “We see labeling based on incomplete information, public shaming, and shunning wrapped in moral rhetoric preached with cold-hearted, self-righteous oblivion to the consequences, which ultimately fall on real people,” Pierce said.

Flows into funds focused on socially responsible investing have soared from $2.83 billion in 2015 to $17.67 billion this year through November, according to Morningstar. Boosted by tech-heavy portfolios, almost half — 48% — of large-cap sustainable funds performed better than the S&P 500 through November, according to Morningstar data.

  • The WSJ last month reported that eight of the 10 biggest U.S. sustainable funds were invested in oil-and-gas companies, which are heavily criticized by activists concerned about the environment. Gunmakers, casino operators and tobacco companies were generally avoided.
  • Anne Richards, CEO of Fidelity International, and Andreas Utermann, CEO of Allianz Global Investors, embraced social-impact investing at a forum last month in London. They said investors and the businessworld should switch their attention to what is best for society and the environment rather than continue their sole focus on economic growth and short-term gains.

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