Hearings started Tuesday in a high-profile Ontario securities case that could test how far regulators should go to enforce funds’ environmental, social and governance (ESG) claims.

The Ontario Securities Commission (OSC) has accused Purpose Investments and its CEO, Som Seif, of overstating how much the firm’s holdings had been tested under an ESG framework in 2019, and of taking an “ad hoc” approach to ESG supported by limited data until at least 2020. 

Seif has said he will contest the OSC’s enforcement action at hearings before the Capital Markets Tribunal, arguing that the OSC itself did not have ESG standards at the time of many of the allegations, and that the OSC’s complaint does not allege investor losses. 

“We scratch our heads as to why this is an enforcement case, yet here we are,” Seif said in an online video before the hearings. “Good regulators and good registrants need each other. But that partnership requires registrants to push back when a regulator has overreached,” he added in a LinkedIn post.

The OSC complaint says that although Purpose said in 2019 it would be “fully integrating” ESG principles, by the time it produced a formal ESG policy in 2023, the policy only applied to a subset of funds. While Purpose got ESG data from Sustainalytics in fall 2020, personnel previously used “stale” data or accessed the funds indirectly through Bloomberg Terminals, the regulator alleges.

At the hearings on Tuesday, OSC lawyers presented examples of its correspondence with Purpose and Seif’s public statements, arguing that Purpose espoused principles like “ESG Always,” even during periods when its ESG policy applied only to a subset of actively managed funds.

David Hausman, a lawyer for Purpose, pushed back on the claim that the case was about “greenwashing.” He said that Purpose did persistently increase the integration of ESG across its funds during the period in question, until it eventually reached its goal for all but one fund. Hausman argued that the regulator’s rules about sales communications don’t apply to the conversations with reporters, which were referenced by the OSC.

The OSC is seeking steep penalties against one of Canada’s most prominent investors. Seif was an early mover in creating active ETFs, and was on the founding team of Toronto fintech Wealthsimple. In 2019, Seif began encouraging money managers to follow Purpose in adding an ESG lens to investing.

The regulator has asked the Tribunal to consider temporarily or permanently banning Seif from securities trading and from acting as a CEO of any investment fund. 

“The tribunal will now decide whether this belongs in the same category as the most serious frauds in its history. I will let that speak for itself,” Seif said in his LinkedIn post. 

The case examines a period when the OSC has otherwise been accused of falling short on investor protection issues. Between 2011 and 2021, the OSC collected 28 per cent of the fines it issued, and failed to issue warnings in cases between 2016 and 2021 where it had enough evidence to do so, a 2021 Ontario auditor general report found. A follow-up report in 2023 found the securities watchdog had been slow to implement some reforms. 

While the OSC issued guidance for ESG-focused investment fund managers in 2022 and 2024, the guidance relied on existing securities requirements and didn’t create any new legal obligations. Purpose added details about ESG to its prospectuses in 2022 and made further updates to align with Canadian Securities Administrators guidelines in 2023. 

The OSC’s complaint about Purpose, filed late last year, said the firm’s statements were “misleading” and that it is cracking down on the accuracy of ESG claims and prospectus accuracy to protect the public from “greenwashing.” 

Some in the sustainable finance industry argue the OSC and other financial regulators, like the federal Office of the Superintendent of Financial Institutions, should be keeping an eye on investment funds’ ESG claims. 

“As a client, if someone would say they use ESG for their products, you probably expect an impact,” said Olaf Weber, a professor at the Schulich School of Business who focuses on sustainable finance. “It shouldn’t be different from other claims that the financial industry makes.” 

Canada’s greenwashing rules remain a patchwork compared with Europe, where funds with ESG terminology in their names must prove 80 per cent of their investments meet ESG thresholds. The rules pushed 64 per cent of notified funds to change their names and 56 per cent to strengthen their sustainability focus between May 2024 and 2025. Meanwhile, Canada’s anti-greenwashing rules under the Competition Act were scaled back last year after the government determined they had actually led companies to disclose less about environmental initiatives. 

Mathilde Dufour, who leads sustainability research at Europe-based sustainable investing firm Mirova, said firms in the early 2010s had to spend a “great deal of time” building internal frameworks. The need for regulation became apparent in the following years as a rush of rivals jumped on the ESG trend—with varying degrees of ESG frameworks behind their investments. 

Rules like the 80 per cent threshold in Europe helped even the playing field, she said, because they are broad enough to limit the risk of greenwashing while still allowing flexibility across different investment approaches, Dufour said. “The balance that the ESG, or the sustainable finance industry, has to reach is not to wait for the perfect framework data to be able to act, but to be really transparent on the limitations that you can have.”

Yaz Palanichamy, an Ontario-based research analyst at IT consulting firm Info-Tech, said he spends a lot of time helping local companies determine how to track their ESG data.  

“The overall data quality of preparedness that [an] organisation needs to do to be mature and smart and nimble with ESG is a critical question that they’re struggling to face,” he said.

The Capital Markets Tribunal is scheduled to hear arguments about the Purpose case on 20 additional dates through September.

Editor’s note: This story has been updated with more details from Tuesday’s hearing.