The recently established SEC climate and ESG task force published its first risk alert on 9 April. The alert highlights the task force’s approach to reviews and observations following recent reviews of investment advisers, registered investment companies and private funds offering ESG products and services. The alert focuses on three areas:
When reviewing firms claiming to engage in ESG investing, the SEC will typically focus on:
- portfolio management - a review of the firm’s ESG policies, processes and practices and use of ESG-related terminology, due diligence and other investment selection and monitoring processes. It will look to see if these are all consistent with the ESG disclosures and marketing materials;
- performance advertising and marketing - a review of all marketing material including those distributed to investors as well as filed with regulators; and
- compliance programs - a review of the firm’s policies and procedures for implementation, compliance and review of ESG investing practices and disclosures.
- Poor ESG practices observed
The following observations which constitute poor ESG practices were made in recent reviews:
- portfolio management practices were inconsistent with investor disclosures about ESG approaches;
- controls were inadequate to maintain, monitor and update investor ESG-related investing guidelines, mandates and restrictions;
- there were unsubstantiated or otherwise potentially misleading claims regarding ESG approaches;
- there were inadequate controls to ensure ESG-related disclosures and marketing are consistent with the firm’s practices; and
- compliance programs did not adequately address relevant ESG issues.
- Good ESG practices observed
The following observations with constitute good ESG practices were made in recent reviews:
- investor disclosures were simple and clear regarding the firm’s approach to ESG investing;
- there were clear and prominent investor disclosures that ESG factors are considered alongside many other factors;
- the firm had detailed and specific ESG policies across the entire portfolio management process; and
- compliance personnel were knowledgeable about the firm’s specific ESG-related practices.
The US rule maker has not made any indication of an intention to legislate in this area (unlike the EU with SFDR). However, based on prior experience with SEC focus areas (e.g. presentation of past performance figures) these risk alerts and any resulting enforcement action will serve as a guide on best practice in lieu of actual legislation. Therefore, this risk alert will serve as an important guide for fund managers looking to make ESG related products available to US investors. For non-US managers; it has limited scope - if making an ESG related product available to US investors, non-US managers should be mindful of best practices in this area and seek to adhere to them.