The SEC issued a risk alert from the Division of Examinations concerning "observations of deficiencies and internal control weaknesses from examinations of investment advisers and funds regarding ESG investing," as well as "observations of effective practices from such examinations." The issuance of a risk alert concerning ESG disclosures emphasizes the SEC's recent focus on climate change and related issues.
Although this risk alert did not identify a specific type of practice that the SEC would target as an enforcement priority, the SEC highlighted a wide range of potentially concerning practices, often stemming from the "variability and imprecision of industry ESG definitions and terms [that] can create confusion among investors." The SEC noted that "[a]ctual portfolio management practices . . . should be consistent with [] disclosed ESG investing processes or investment goals," suggesting that the SEC may institute proceedings against firms that it believes engaged in behavior that violated their stated standards.
This risk alert alert dovetails with other indications from the SEC that a significant update to ESG disclosure requirements, including those involving climate change, is likely forthcoming in the near future.
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.
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