Last week, the SEC Division of Examinations issued a risk alert describing observations from recent examinations of investment advisers that manage and offer ESG investment options. The Risk Alert highlights observed deficiencies in several key areas that we expected the Staff to scrutinize using its traditional regulatory arsenal: advisers’ practices inconsistent with ESG disclosures, unsubstantiated or potentially misleading ESG claims, proxy voting practices inconsistent with ESG disclosures, and inadequate compliance programs or policies in the ESG area. Notably, the Risk Alert also identifies three observed “effective practices”: disclosures that were clear, precise and tailored to advisers’ specific ESG approaches; detailed compliance policies addressing advisers’ ESG investing approaches and practices; and compliance personnel knowledgeable about advisers’ ESG practices.
The Risk Alert provides the clearest roadmap to date of the areas the staff will focus on when reviewing ESG investing and the ways the staff will use current regulatory tools and requirements to remind advisers of the SEC’s expectations and shape their behavior. It also appears to raise the bar for advisers’ compliance personnel, whom the staff expects to be knowledgeable about advisers’ ESG investment analyses, practices, approaches and disclosures, as well as to be integrated and play an active role in overseeing advisers’ ESG-related processes.
Please click here to read the full alert memorandum.