SEC Turns Watchful Eye on ESG

Author

ACA Group

Publish Date

Type

Compliance Alert

Topics

  • ESG
  • Compliance
  • SEC

A recent flurry of activity from the U.S. Securities and Exchange Commission (SEC) has made it crystal clear that environmental, social, and governance (ESG) will be a top priority in the near and long term. Although the focus itself likely isn’t a surprise to many, the ferocity of that focus may be. In the immediate term, any RIAs or fund complexes offering strategies that focus on sustainability (including using terms “socially responsible,” “impact,” “ESG conscious,” etc.) should take heed.

2021 Examination Priorities

The SEC’s Division of Examinations (the Division) released the FY 2021 Examination Priorities (Priorities) on March 3, 2021. Among the usual focus areas, two of the nine priorities are related to ESG topics, with a priority focus on climate and disclosure transparency. Notably, the Division will focus on widely available ESG products available through open-ended funds and ETFs, as well as those offered to accredited investors through other vehicles such as qualified opportunity funds, in order to:

  • Review for adequacy and consistency of disclosures;
  • Determine whether firm’s processes and practices match their disclosures;
  • Review fund advertising for false or misleading statements; and
  • Review proxy voting policies and procedures to assess whether they align with the strategies.

The overarching message is that disclosures must reflect what is actually occurring within the strategy – no more and no less. Attention will also be directed at how advisers are factoring climate change and other physical risks into their business continuity plans.

Climate and ESG Task Force

Directly on the heels of the Priorities, the SEC announced the creation of a Climate and ESG Task Force in the Division of Enforcement. The task force will proactively look for material disclosure gaps and compliance issues related to investment advisers’ and funds’ ESG strategies. The creation of the task force under the Division of Enforcement sends a strong message that the SEC means business and the industry can likely expect forthcoming enforcement cases.

The creation of the Climate and ESG Task Force follows Acting Chair Allison Herren Lee’s appointment of a Senior Policy Advisor for Climate and ESG, Satyam Khanna. Khanna is expected to advise the SEC on ESG matters and advance similar new initiatives across the agency’s offices and divisions.

ESG Risk Alert

An ESG Risk Alert is imminent according to comments by Peter Driscoll, director of the Division. The risk alert will be based on SEC examinations that were completed at the end of last year and likely in-line with the objectives of the Climate and ESG Task Force around disclosure.

ESG Funds – Investor Bulletin

On February 26, 2021, the SEC’s Office of Investor Education and Advocacy issued a bulletin to educate investors about ESG funds, putting some accountability into the hands of investors so they can make better informed decisions in this rapidly growing area. The bulletin includes an ESG primer to educate investors on what ESG means and the many different ways managers incorporate it into the investment strategy. Also included the bulletin is a list of questions investors should consider before making an investment into an ESG strategy. Arming investors with knowledge coupled with the SEC’s regulatory focus is sure to drive compliance throughout the ESG marketplace more quickly than the regulatory focus alone.

The SEC initiatives above, along with several supporting statements from the commissioners, point to an aggressive climate and ESG agenda. Advisers should take inventory of what is disclosed in marketing materials for ESG products to ensure alignment with policies and practices and to avoid greenwashing and other material misstatements.

How we help

ACA’s dedicated ESG advisory practice is here to help with services to assess and benchmark whether:

  • Practices and policies are consistent with marketing and advertising materials;
  • Disclosures are adequate and appropriate;
  • Proxy voting is consistent with the strategy; and
  • Climate risk is adequately integrated into business continuity plans.

To keep up to date on ESG insights and events, please subscribe to our mailing list and select ESG.

Questions?

If you have questions for us on any of the topics highlighted here and how we can help you, please reach out to our ESG advisory team to request a meeting.

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Join our webcast

Join us Tuesday, March 30 at 11:00 am EDT as ACA’s Carlo di Florio, Karen Foley, Alyssa Briggs, Pat Shea, and Christine Tetherly-Lewis discuss how the 2021 examination priorities may impact your firm and how you can prepare. Register here.

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