ESG Strategy and Compliance: What Governs This Today?

In 2021, with the change in administrations in Washington, D.C., the subject of Environmental, Social and Governance (“ESG”) came to the forefront in the Unites States. As indicated in previous blogs written by Oyster, the SEC has embraced ESG with various personnel appointments, efforts to obtain comments from both industry and consumers for potential rule promulgation, and the inclusion of investment-related matters of ESG as an examination priority of the SEC for 2021.

However, the SEC has been involved as far back as the 1980’s and 1990’s as it relates to public company/issuer disclosure of ESG-related matters. On February 8, 2010, the SEC issued an interpretive release, “Commission Guidance Regarding Disclosure Related to Climate Change.” The purpose of this release was to “provide guidance to public companies regarding the SEC’s existing disclosure requirements as they apply to climate change matters.”

In respect to climate change disclosures, the 2010 release noted four areas which may trigger disclosures by public companies:

  • Impact of Legislation and Regulation. Significant developments in federal and state legislation and regulation regarding climate change may trigger disclosure obligations under SEC rules and regulations, such as pursuant to Items 101,103, 503(c) and 303 of Regulation S-K.
  • International Accords. Registrants should consider, and disclose when material, the impact on their business of treaties or international accords relating to climate change. Registrants whose businesses are reasonably likely to be affected by such agreements should monitor the progress of any potential agreements and consider the possible impact in satisfying their disclosure obligations based on the Management’s Discussion and Analysis and materiality principles.
  • Indirect consequences of regulation or business trends. Legal, technological, political, and scientific developments regarding climate change may create new opportunities or risks for registrants. These developments may create demand for new products or services or decrease demand for existing products or services.
  • Physical impacts of climate change. Significant physical effects of climate change, such as effects on the severity of weather including floods, hurricanes, sea levels, the arability of farmland, and water availability and quality have the potential to affect a registrant’s operations and results.

As we move further into 2021 and 2022, broker-dealers and investment advisors should look to the information in the 2010 SEC release when establishing items, including procedures for reviewing existing/new products offered, business continuity plans, and “Methods of Analysis, Investment Strategies and Risk of Loss,” which is addressed as Item 8 on Form ADV Part 2. They should also refer to the release for purposes of being able to discuss ESG issues with their clients.

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

About The Author

Bill Reilly is a respected financial services professional with over 35 years of consulting and regulatory experience. Bill leverages his industry expertise and relationships with state and federal regulators and self-regulatory organizations to guide broker-dealers, investment advisers and law firms providing legal representation through both proactive and reactive regulatory processes and compliance issues.

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