SEC Issues Risk Alert on ESG Investments

ESG Risk AlertIn January 2021 the SEC began taking an enhanced approach to Environmental Social and Governance (“ESG”) investing. Since then, the SEC has issued no less than five announcements addressing a range of issues including reviews of public company disclosure of ESG issues, adding ESG reviews to their 2021 Examination Priorities and the creation of a task force to review, among others, issuers of ESG disclosures and compliance issues relating to investment advisors’ and funds’ ESG strategies.

On April 9, 2021, the SEC’s Division of Examinations issued a risk alert for ESG investing in response to heightened demand by investors for investment products and financial services that incorporate ESG factors. The risk alert was based upon observations from recent exams of investment advisors, registered investment companies and private funds offering ESG products and services.

The alert focused on three areas:

Examinations of Investment Advisors and Funds will focus on the accuracy of disclosing ESG investing approaches including:

  • a review of portfolio management practices
  • performance advertising and marketing
  • compliance programs; specifically whether the firm has adequate policies and procedures to address oversight and review of ESG investing practices and disclosures

Firms made potentially misleading statements referencing ESG investing processes and representations made in written disclosures. Other issues included:

  • portfolio management practices inconsistent with disclosures about ESG approaches
  • controls inadequate to maintain, monitor, and update clients’ ESG-related investing guidelines, mandates, and restrictions, and disclosures and marketing were inconsistent with the firm’s practices
  • compliance programs not adequately addressing relevant ESG issues, such as lacking policies and procedures addressing their ESG investing analyses, decision-making processes, or compliance review and oversight

Effective Practices included:

  • Disclosures that were clear, precise and tailored to firms’ specific approaches to ESG investing, and which aligned with the firms’ actual practices
  • Simple and clear disclosures regarding the firms’ approaches to ESG investing, such as the use of unaffiliated advisors to conduct the underlying ESG analysis and allocating client assets among ESG-oriented mutual funds managed by those unaffiliated advisors
  • Explanations regarding how investments were evaluated, such as using goals established under global ESG frameworks
  • Policies and procedures that addressed ESG investing and covered key aspects of the firms’ relevant practices, such as requiring specific documentation to be completed at various stages of the investment process (g., research, due diligence, selection, and monitoring).

One other observation indicated that compliance programs were less effective when compliance personnel had limited knowledge of ESG issues. Therefore, training should be a priority for firms operating in this area.

This risk alert provides a clear message that firms actively engaged in ESG-related activities and those who don’t know enough about ESG to determine whether they are required to develop and implement policies and procedures should enhance and/or develop effective policies and procedures.

Oyster Consulting can help firms view the opportunities and risks associated with ESG-related investment strategies from a strategic and compliance standpoint, including creating or updating existing firm policies and procedures.  Oyster Solutions software can turn your Compliance Program into actionable, customized workflows that help you assess and manage risks, automate compliance tasks and provide reporting, all on one platform.

Click here for more information or call (804) 965-5400 and one of your Relationship Managers will be happy to help.


About the Authors:  

Bill Reilly leverages his examination expertise and relationships with state and federal regulators and self-regulatory organizations to guide broker-dealers and investment advisers through both proactive and reactive regulatory processes and compliance issues. Among others Bill conducts FINRA Rule 3120, Supervisory Control Reviews, Annual Compliance Reviews for federally and state-covered investment advisers, creates and/or updates policies and procedures for opening and monitoring senior and vulnerable adult client accounts, has been retained as an expert witness by law firms representing industry participants in arbitrations and regulatory matters, updates policies and procedures for both broker dealer and investment advisers, and acts as an independent third party in reviewing firm activity prior to and as a result of regulatory actions and settlements.

Jeffrey Wilk started his career as an Advisor and has an impeccable track record of success in strategic planning and execution, business assessment, transformation and growth, and driving collaborative team dynamics and success. Jeff routinely delivers measurable double-digit P&L, Sales, and ROI results within entrepreneurial and enterprise size organizations. He has had strong success in varied business cycles, leading cross-functional teams to solve the most challenging and often “diplomatic” problems.  A respected Independent, Insurance, and RIA Channel Leader, he has first-hand experience with firms  ranging in size from 300 to 10,000 Advisors, and platforms from under $1B to over $100B in AUM. He was directly accountable for several Mergers/Acquisitions, platform transformations, patent-pending products, and operating model RFPs and overhauls, including delivering the industry’s first “Robo” platform. ​