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SEC Division of Examination’s Review of ESG Investing

April 13th | 2021

The SEC recently issued a Risk Alert that highlights observations from recent exams of investment advisers, registered investment companies, and private funds offering ESG products and services.


With this Risk Alert, the SEC is sending a clear message that it will continue to evaluate whether firms are accurately disclosing their ESG investing approaches and have adopted and implemented policies, procedures, and practices consistent with their ESG-related disclosures.


In particular, the SEC will continue to focus on (1) portfolio management, which includes, among other things, a review of policies and procedures related to using ESG terminology, due diligence in selecting investments, and proxy voting; (2) performance advertising and marketing, which includes review of regulatory filings, client presentations, RFPs, and other marketing materials; and (3) compliance programs, which includes a review of the firm’s written policies and procedures and their implementation, compliance oversight, and review of ESG investing practices and disclosures.


In its examinations, SEC staff have observed instances of potentially misleading statements regarding ESG investing processes and representations regarding the adherence to global ESG frameworks. The Risk Alert notes instances where despite claims to have formal processes in place for ESG investing, firms actually did not have policies and procedures related to ESG investing; or had policies and procedures that did not appear to be reasonably designed, or that were not implemented. The SEC also observed documentation of ESG-related investment decisions that was weak or unclear and compliance programs that did not appear to be reasonably designed to guard against inaccurate ESG-related disclosures and marketing materials.


The Risk Alerts goes on to describe three characteristics of firms that had effective ESG practices: (1) the firms’ disclosures were clear, precise and tailored to their specific approaches to ESG investing and aligned with the firms’ actual practices; (2) the firms had policies and procedures that addressed ESG investing and covered key aspects of their relevant practices; and (3) the firms had compliance personnel that are knowledgeable about their specific ESG-related practices.


This Risk Alert is a must read for those entities with ESG product offerings. These firms may also consider adding ESG related items to their routine reviews and/or external, third party mock audits to be sure their ESG claims match reality.

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