On March 30, 2022, the U.S. Securities and Exchange Commission (SEC) Division of Examinations announced its 2022 examination priorities. The SEC will continue to focus on environmental, social and governance (ESG) investing and whether Registered Investment Advisors (RIAs) and registered funds accurately disclose their ESG investment approaches.   

The SEC considers the following compounding risk factors:

  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, such as:
    • “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.”
  3. “The failure to effectively address legal and compliance issues with new lines of business and products.”

The SEC ESG review will typically focus on whether RIAs 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.”

Warning

The SEC continues to look for ways to punish firms that are overstating or misrepresenting their ESG marketing claims. Any firm that mentions ESG in its marketing or investor communications is well advised to establish a strong ESG governance structure and review its ESG policies, practices and documentation. ESG policies and procedures need to be further led by actual examples that mirror the stated ESG policy and objectives.

Simply put, firms need to do what they say, say what they do AND document it, too. Following this advice is the best way to survive an SEC ESG exam.

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If you need help walking the ESG walk (and not just the talk), please contact a member of our advisory consulting team today.