ESG focus seen in new SEC exam letters

It doesn’t appear SEC examiners’ interest in advisers that pursue ESG strategies is dulling. In November 2022 we noted how the its ESG-related exams had started to become more granular, going deep into specifics like greenhouse gas emissions data and industry standards and frameworks.

Affiliate title Regulatory Compliance Watch has obtained two new Division of Examinations document request letters that dive into ESG. While many of the insights relate more directly to public markets strategies, there are learnings for private fund operators.

The first new exam letter resembles two prior request letters that RCW shared in June and July. Examiners wanted “a brief written explanation” for any ESG divestments that occurred during the exam period. They also wanted to see the “three most profitable and three least profitable” ESG investments. “Please also include a copy of all research and due diligence files (eg, personnel research notes, notes of meetings with issuer management personnel or with customers and consultants/experts, third-party analyst reports, issuer offering documentation, issuer financial statements, etc) for these investments that were used,” the letter reads.

Any ESG awards received by the firm were sought, along with any communications with clients “regarding receipt of such awards and recognitions”. Several items addressed ESG standards used by the firm and ESG scores. Communications with issuers around ESG were requested, along with copies of contracts with ESG service providers.

Exam of fund adviser

The second, new exam letter obtained by RCW focuses exclusively on ESG. This one went to a fund adviser. While it’s similar to the first letter described above, there are key differences. Examiners sought:

• • • Periodic compliance evaluations looking at the adequacy of the adviser’s ESG P&Ps.
    • A list of cash and collateral held in ESG funds.
    • Proxy cards showing votes for, against and abstentions.
    • Statements to investors about the adviser’s proxy voting processes.
    • Items on service providers. Examiners specifically named the service providers as “auditor, administrator, custodian, compliance consultant, outside legal counsel, executing brokers, valuation consultant and due diligence consultants”.
    • Any prospectuses shared about the ESG fund.
    • The “annual calendar” of the fund board “reflecting proposed approvals” along with the minutes of the ESG fund’s board.