SEC Continues Focus on ESG Issues in 2023 Examination Priorities

Last month, the SEC issued its list of examination priorities for 2023.  Among the list of six priorities identified by the SEC in its press release was "Environmental, Social, and Governance (ESG)."  Specifically, the SEC stated that it would "continue its focus on ESG-related advisory services and fund offerings, including whether funds are operating in the manner set forth in their disclosures."  The SEC also announced that it would "assess whether ESG products are appropriately labeled and whether recommendations of such products for retail investors are made in the investors' best interest."

Notably, the announced examination priorities of the SEC have generally remained constant between 2022 and 2023.  The sole change to the examination categories identified in the SEC press releases of 2022 and 2023 was the addition of "New Investment Adviser and Investment Company Rules" to the list of 2023 examination priorities.  So, it appears that the Biden Administration SEC will generally continue its previous strategy with respect to examinations.

That said, there are certain differences with respect to how the SEC's focus on ESG examinations appears to differ between 2023 and 2022.  While both press releases note an emphasis on ensuring that ESG-related services and products operate in accordance with their ESG-related disclosures--a task that falls within the core mission of the SEC--the 2023 examination priorities also promise a focus on whether "ESG products are appropriately labeled" and on "whether recommendations of such products for retail investors are made in the investors' best interests."  In contrast, such a focus is absent from the announced 2022 examination priorities, which instead indicated an interest in "the voting of client securities . . . including whether the votes align with their ESG-related disclosures and mandates" and "whether there are misrepresentations of the ESG factors considered or incorporated into portfolio selection."  So, there may be a shift with respect to SEC examinations that prioritizes the well-being of retail investors rather than whether ESG funds voted their securities holdings in accordance with their ESG-related policies.

Of course, the key question will be how the SEC's examinations comport with their announced priorities.  For that, only the actual conduct of the SEC over the next year will provide an answer.