The U.S. Securities and Exchange Commission (SEC) issued a Risk Alert, highlighting its observations from recent examinations of investment advisers, registered investment companies, and private funds that offer ESG products and services. According to the alert, the SEC has identified instances of potentially misleading statements regarding ESG investing processes and representations made by funds and advisers.
The risk alert is being issued as the SEC has recently significantly increased focus on ESG investing and climate-related issues. In a speech last month, SEC Acting Chair Allison Herren Lee said that climate and ESG have moved “front and center for the SEC,” as they have become key issues for investors. Lee also said that the SEC will focus its efforts on ESG and sustainability issues, including disclosure, improvements to the shareholder proposal process, proxy voting issues, and enhancing focus on climate and ESG in the SEC’s annual examinations.
According to the SEC alert, its examinations have found both deficiencies and internal control weaknesses by investment advisers and funds regarding ESG investing, as well as observations of effective practices. Some of the problem areas uncovered by the exams included portfolio management practices that did not align with disclosures about ESG approaches, inconsistencies between ESG-related proxy voting claims and actual practice, and compliance programs that didn’t address adherence to the firms’ stated ESG frameworks.
The SEC staff also found instances of marketing materials that made unsubstantiated or potentially misleading claims regarding the risk and reward characteristics of ESG investing.
The Risk Alert concluded:
“The Division encourages market participants promoting ESG investing to clients, prospective clients, investors, and prospective investors to evaluate whether their disclosures, marketing claims, and other public statements related to ESG investing are accurate and consistent with internal firm practices. Additionally, firms should ensure that their approaches to ESG investing are implemented consistently throughout the firm where relevant and are adequately addressed in the firm’s policies and procedures and subject to appropriate oversight by compliance personnel. Lastly, firms should also consider taking steps to document and maintain records relating to important stages of the ESG investing process.”