SEC’s Examinations Division Highlights ESG Compliance Deficiencies

In a recent Risk Alert, the SEC’s Division of Examinations provided observations of deficiencies and internal control weaknesses from examinations of advisers and funds regarding ESG investing.  During these examinations, the staff observed instances of potentially misleading statements regarding ESG investing processes and representations regarding the adherence to global ESG frameworks. The staff noted, despite claims to have formal processes in place for ESG investing, a lack of policies and procedures related to ESG investing; policies and procedures that did not appear to be reasonably designed to prevent violations of law, or that were not implemented; documentation of ESG-related investment decisions that was weak or unclear; and compliance programs that did not appear to be reasonably designed to guard against inaccurate ESG-related disclosures and marketing materials. A client alert from Ropes & Gray discusses the alert in detail and particularly in light of the SEC’s other ESG initiatives. The Ropes & Gray lawyers observed that the alert provides “more concrete guidance than we have seen to date regarding the Division’s expectations for effective compliance policies and controls in this area.” Meanwhile, Commissioner Hester Peirce issued a statement that struck a cautious note on the alert. Peirce stated that the issuance of an ESG-specific risk alert should not be interpreted as a sign that ESG investment strategies are unique in the eyes of examiners. “As with any other investment strategy, advisers and funds should not make claims that do not accord with their practices, and our examiners will be looking for that consistency between claims and practice. Our examiners are not—and will not be in this space—merit regulators. The SEC’s role is not to assess whether any particular strategy is a good one, but to ensure that investors know what they are getting when they choose a particular adviser, fund, strategy, or product.”