SEC to Examine Investment Advisors, Funds on ESG Investing Practices
The U.S. Securities and Exchange Commission (SEC) announced that ESG investing will be a priority area of focus for its Division of Examinations in 2023, guiding its monitoring and focused examinations of market participants including investment advisers and investment companies for the year.
ESG issues were initially added to the division’s priority list last year, following a risk alert issued in 2021, highlighting observations from its examinations that uncovered several potential ESG-related problem areas, including 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, as well as instances of marketing materials that made unsubstantiated or potentially misleading claims regarding the risk and reward characteristics of ESG investing.
Outlining the nature of the risks in this year’s “Examination Priorities” publication, the division noted that the focus on ESG investing comes as investment advisers and funds are competing for the rising investor demand for ESG-related investments and strategies, and are increasingly offering products employing these strategies and investments.
According to the division, the examinations will focus on ESG-related advisory services and fund offerings, assessing whether the funds are operating as described in their disclosures. The exams will also assess whether ESG products are appropriately labeled – this has emerged as a focus area for the SEC, which released proposed rules last year for ESG fund names and disclosures for funds and advisers that claim to integrate ESG factors into their investment products. The examinations will also focus on whether recommendations of ESG products for retail investors are made in the investors’ best interests.
SEC Division of Examinations’ Director Richard Best, said:
“Our examination program continues moving forward and remains committed to furthering investor protection through high-quality examinations and staying abreast of the latest industry trends and emerging risks to investors and the markets.”