SEC Targets ESG Investing for Exams
The SEC’s Division of Examinations has raised several concerns about investment firms offering products and services purported to incorporate environmental, social, and governance factors (ESG).
Based on recent exams, the Division has uncovered firms whose portfolio management practices do not comport with marketing claims about ESG screens or adherence to global ESG frameworks. Division staff also found firms that neglected to implement adequate monitoring of ESG-related investment directives or application of ESG screens (both positive and negative). Many firms also failed to implement proxy voting policies consistent with ESG mandates or client promises. Other identified problems included inflated performance advertising, a lack of compliance policies and procedures, and compliance personnel with limited ESG knowledge. The Examinations staff offered some best practices including more specific and descriptive disclosure language, detailed investment policies, and compliance monitoring. The Risk Alert notes that ESG investing was included as an examination priority in both 2020 and 2021.
Don’t say “ESG” unless you really mean it. If your firm wants to market ESG products, make sure that you disclose exactly what you mean, how you will implement your investments, and how you will monitor for compliance. Also, compli-pros at ESG firms must get up to speed so that they can implement and test policies and procedures.
To read the full Risk Alert, click here.