The SEC’s Division of Examinations issued a Risk Alert summarizing its observations of numerous deficiencies and internal control weaknesses, as well as a sampling of effective practices, gleaned from its exams of investment advisors’, registered investment companies’, and private funds’ “ESG” (in its broadest sense) investing practices and disclosures. The Alert is aimed at highlighting areas of risk and facilitating improved practices and disclosures among covered firms. While the bulletin is geared toward the covered firms that engage in ESG investing, it is equally educational for investors exploring and seeking to understand the risks associated with ESG investment options and companies whose ESG scores/ratings from whatever source(s) are among the data points cited as a basis for firms’ portfolio development and disclosures
SEC Commissioner’s Peirce’s equally informative responsive statement seeks to place the Risk Alert in relevant context that includes SEC examinations and advisers’ and funds’ obligations generally (i.e., outside of the ESG-specific context), as well as the SEC’s two recent proxy voting interpretive releases (here and here, which we reported on here and here, respectively). More specifically as respects proxy voting, in response to the Risk Alert’s observations about investment advisers’ and funds’ proxy voting practices being potentially inconsistent with their ESG-related disclosures, promotional materials, stated approaches, and/or voting policies, Peirce reminds advisers that proxy voting is subject to their fiduciary duty to act in the client’s best interest, which may mean not voting at all, but certainly means not casting votes that reflect the adviser’s views unless they also reflect those of the client.
As previously reported, the SEC’s 2021 OCIE Examination Priorities encompass climate and ESG.
See these articles: “SEC Identifies Potentially Misleading Claims by Funds Regarding ESG Investing Practices” (ESG Today), “SEC Review Highlights Potentially Misleading ESG Practices Among Funds” (WSJ), “SEC flags ‘potentially misleading claims’ by ESG fund managers” (Responsible Investor), and “SEC Finds Some Funds That Say They’re Green Really Aren’t” (Bloomberg).