SEC issues ESG risk alert

Registered investment advisors are struggling with ESG disclosures and their policies and procedures, the SEC says in a new risk alert.

Portfolio managers’ ESG practices didn’t line up with their compliance disclosures, firms didn’t have adequate controls to keep investors up to date on ethical investment trends, and advisors struggled to sync proxy votes to proxy voting policies and offered “unsubstantiated or otherwise potentially misleading claims” about their ESG programmes, a new US Securities and Exchange Commission risk alert states.

The Division of Exams also says it found:

  • “Inadequate controls to ensure that ESG-related disclosures and marketing are consistent with the firm’s practices.”
  • That compliance programmes weren’t focused on relevant ESG questions. Some firms “lacked policies and procedures addressing their ESG investing analyses, decision-making processes, or compliance review and oversight”, the risk alert states. Commission staff “also noted a lack of policies and procedures to ensure firms obtained reasonable support for ESG-related marketing claims”. Advisors “had difficulties in substantiating adherence to stated investment processes, such as supporting claims made to clients that each fund investment had received a high score for each separate component of ESG”.
  • Compliance staff often had “limited knowledge of relevant ESG issues… For example, compliance controls and oversight for reporting to sponsors of global ESG frameworks and responses to requests for proposals and due diligence questionnaires appeared to be ineffective”, regulators say.


The good news, examiners found, is that some advisors were on top of their ESG regimes. Regulators offer some tips from the best of the bunch:

  • Keep it simple, stupid. Regulators hail advisors who “prominently” communicated that “for separately managed client accounts, their ESG investing approach involved relying on unaffiliated advisors to conduct the underlying ESG analysis and allocating client assets among ESG-oriented mutual funds managed by those unaffiliated advisors. The staff also noted clear disclosures in client-facing materials where clients were offered choices among standardised portfolios focused on particular ESG issues, or alternatively, customised separately managed accounts designed to accommodate particular client preferences”.
  • Offer clients ESG “factors that could be considered alongside many other factors” such as “clear and prominent disclosures… that adherence to certain global ESG frameworks did not necessarily alter long-standing and seemingly contrary investment strategies”.
  • Detail “how firms approached the UN-sponsored Principles for Responsible Investment or Sustainable Development goals”.
  • Write, adopt and enforce policies and procedures that are specific to ESG investing, “including specific documentation to be completed at various stages of the investment process (eg, research, due diligence, selection, and monitoring)”.
  • Integrate compliance staff into ESG practices. Regulators found that “where compliance personnel” were involved in ESG activities from the ground up, they tended to be “more knowledgeable about firms’ ESG approaches and practices”. More than that, “firms were more likely to avoid materially misleading claims in their ESG-related marketing materials and other client/investor-facing documents”, the alert states.

Read the alert below.

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