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US regulatory agencies, in particular the SEC, have recently issued multiple public statements regarding ESG investing. The SEC’s increased attention is clear from both the SEC’s public comments on the subject and not-so-hushed rumblings from market participants over the last 12 to 18 months about SEC examinations and ESG investing.
On consecutive days in early March, the SEC published its Division of Examination 2021 Examination Priorities and then announced the creation of a Climate and ESG Task Force within the Division of Enforcement.
In its Exam Priorities the Division of Examinations stated it will review the consistency and adequacy of the disclosures RIAs and fund complexes provided to clients regarding ESG strategies. It will determine whether the firms’ processes and practices match their disclosures, review fund advertising for false or misleading statements, and review proxy voting policies and procedures and votes to assess whether they align with the ESG strategies.
According to the SEC press release, the ESG Task Force will develop initiatives to proactively identify ESG-related misconduct and coordinate the effective use of the Enforcement Division’s resources. This will include the use of sophisticated data analysis to mine and assess information across registrants to identify potential violations and focus on identifying any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules. The ESG Task Force will also analyze disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.
Shortly thereafter, the US Department of Labor’s Employment Benefits Security Administration announced that it will not enforce the recently published final rules on ‘Financial Factors in Selecting Plan Investments’ and ‘Fiduciary Duties Regarding Proxy Voting and Shareholder Rights’. The DOL noted that “until the publication of further guidance, they would not enforce either final rule or otherwise pursue enforcement actions against any plan fiduciary based on a failure to comply with those final rules with respect to an investment, including a Qualified Default Investment Alternative, or investment course of action or with respect to an exercise of shareholder rights.”
Finally, in early April, the SEC’s Division of Examinations (formerly the Office of Compliance Inspections and Examinations) published a Risk Alert highlighting observations from recent exams of investment advisers, registered investment companies, and private funds offering [ESG] products and services. According to the Risk Alert, Examinations of firms claiming to engage in ESG investing will focus on three key areas: (i) portfolio management, (ii) performance advertising and marketing and (iii) compliance programs. In line with standard practice, the Division of Enforcement highlights common deficiencies observed during examinations as well as effective practices.
How Bovill can help
We can support you with mock examinations to help make sure you have the right systems and controls in place to meet the SEC’s expectations when it comes to ESG. We can also advise you on developing a global ESG program, working with our regulatory experts across the US and Asia.