The Securities and Exchange Commission’s (SEC) Division of Examinations published a Risk Alert on April 9, 2021, with observations from recent examinations of investment advisers, registered investment advisers, and private funds that offer environmental, social, and governance (ESG) products and services.
Background
The Division issued the Risk Alert to 1) communicate its observations from past examinations and 2) address the Division’s areas of focus during upcoming examinations.
It is important to note that this communication does not represent any kind of new law or regulation; the Division is sharing areas of weakness that it has found in advisers’ practices as well as best practices. The Division expresses the concern that ESG-related disclosures and marketing practices may be misleading, as the Division finds that the disclosures are not always consistent with investment implementation policies and procedures and compliance monitoring.
In conclusion, 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.”
Bottom Line
The Division is proactively issuing this alert, which serves as a warning to market participants to ensure that their disclosures and marketing materials align with their actual investment and compliance practices. The Division is also providing examples of best practices for advisers to reference. The Division observes ESG product proliferation across asset classes; this alert should be welcome news to institutional and retail investors that are trying to wade through the morass of ESG product offerings to find products that truly align with investors’ ESG objectives.
Read the full Risk Alert here.
