We have become particular about the ESG investing topics we cover these days, but this one caught our attention. Last week, the SEC filed charges against investment advisory firm Inspire Investing LLC for
“making misleading statements and for compliance failures related to the execution of its ‘biblically responsible investing’ strategy.
According to the SEC’s order, Inspire Investing represented that it used a data-driven methodology to evaluate companies and that it would not invest in companies that had ‘any degree of participation’ in certain enumerated business practices that Inspire determined did not align with biblical values. However, the SEC’s order finds, from at least 2019 to March 2024, Inspire Investing in fact relied on a manual research process and did not typically perform research on individual companies to evaluate them for eligibility under its investing criteria. According to the SEC’s order, Inspire Investing also lacked written policies and procedures setting forth a process for evaluating companies’ activities as part of its investment process, which at times resulted in inconsistent application of its investment criteria. As a result, Inspire Investing invested in companies engaged in activities that did not align with Inspire Investing’s own stated criteria and in which the advisory firm represented that it would not invest.”
Initially, one might think this action is about ESG investing strategies and a reflection of the SEC’s stance on the matter (even in light of their recent disbanding of the ESG Task Force), but in reality it isn’t. It is about how a firm’s actual investment practices are inconsistent with their stated specific investment goals, not undertaking supporting research and the lack of written practices and procedures. While some may see this as a weakness in SEC’s approach to ESG, I think it is just the opposite.
Just because ESG might be viewed as an ambiguous topic or overall strategy doesn’t give you a get out of jail free card. Quite the opposite – it begs specificity and clarity at all points, and ESG investment strategies must comply with the same requirements that any other investment strategy must follow in relation to formalizing investment goals, practices and procedures.
Our members can learn more about SEC enforcement actions here.
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