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Keeping you in-the-know on environmental, social and governance developments

The SEC released its 2022 Examination Priorities and – hold on to your hats – ESG investing is the second of five significant focus areas. The Division promotes compliance with federal securities laws through on-site exams, outreach, publications and, where appropriate, referrals to the SEC’s Division of Enforcement. According to the document:

There is a risk that disclosures regarding portfolio management practices could involve materially false and misleading statements or omissions, which can result in misinformed investors. This risk may be compounded by:

(1) the lack of standardization in ESG investing terminology (e.g., strategies that are referred to as sustainable, socially responsible, impact investing, and environmental, social, and governance conscious, which incorporate ESG criteria);

(2) the variety of approaches to ESG investing (e.g., a portfolio may be labeled as ESG because of consideration of ESG factors alongside traditional financial, industry-related, and macroeconomic indicators, among others; other portfolios may use ESG factors as the driving or main consideration in selecting investments; or some portfolios engage in impact investing seeking to achieve measurable ESG impact goals); and

(3) the failure to effectively address legal and compliance issues with new lines of business and products.

The Division will continue to focus on ESG-related advisory services and investment products (e.g., mutual funds, exchange-traded funds (ETFs), and private fund offerings). Such reviews will typically focus on whether RIAs [SEC-registered investment advisers] and registered funds are:

(1) accurately disclosing their ESG investing approaches and have adopted and implemented policies, procedures, and practices designed to prevent violations of the federal securities laws in connection with their ESG-related disclosures, including review of their portfolio management processes and practices;

(2) voting client securities in accordance with proxy voting policies and procedures and whether the votes align with their ESG-related disclosures and mandates; or

(3) overstating or misrepresenting the ESG factors considered or incorporated into portfolio selection (e.g., greenwashing), such as in their performance advertising and marketing.

The Division also clarifies a more general matter:

With our name change last year to the Division of Examinations, some have speculated that the removal of ‘compliance’ from the Division’s name was intended to deemphasize our long-standing focus on, and commitment to, promoting compliance and to empowering compliance officers. Rest assured, that is not the case… While many registrants demonstrate the value and importance they place on compliance, far too often we examine registrants where that is not the case. 

This is a clear message that the SEC expects compliance and governance to be a fundamental component of ESG.

What This Means

This is a pretty clear and specific roadmap for what the Division will be looking at in terms of ESG management on the part of portfolio managers, investment advisors and registered funds. Interestingly, it somewhat parallels recent information requests made by the Texas State Comptroller to some of the state’s financial service providers concerning consistency of those firms’ actions versus their ESG positioning. The Division’s statements are also closely aligned with the proposed climate disclosure expectations published last week.

While the Division priorities and the Texas Comptroller actions are focused on financial services/investment firms, they can also be seen as offering guidance to manufacturers/operating companies. That is worth some consideration.

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The Editor

Lawrence Heim has been practicing in the field of ESG management for almost 40 years. He began his career as a legal assistant in the Environmental Practice of Vinson & Elkins working for a partner who is nationally recognized and an adjunct professor of environmental law at the University of Texas Law School. He moved into technical environmental consulting with ENSR Consulting & Engineering at the height of environmental regulatory development, working across a range of disciplines. He was one… View Profile