The SEC Division of Examinations (the "Division") observed compliance deficiencies related to environmental, social and governance ("ESG") products and services offered by investment advisers, registered investment companies and pooled investment vehicles.

In a Risk Alert, the Division observed the following deficiencies of firms engaged in ESG investing:

  • inconsistent portfolio management practices and disclosures;

  • inadequate controls with regard to the maintenance, monitoring and updating of ESG-related investing guidelines, mandates and restrictions for clients;

  • proxy voting inconsistent with stated objectives;

  • unsubstantiated or potentially misleading approaches regarding ESG investing;

  • insufficient controls for ensuring that ESG-related disclosures and marketing are in line with the firm's practices; and

  • insufficient compliance programs for addressing relevant ESG matters, particularly when compliance personnel had minimal knowledge of relevant ESG matters or oversight over ESG-related disclosures and marketing arrangements.

The Division stated that examinations of investment advisers and funds that engage in ESG investing concentrate on, among other things, the firms' (i) portfolio management, including ESG-related policies, procedures and practices, (ii) performance advertising and marketing, including regulatory filings and client/investor-facing documents and (iii) compliance programs, including written policies and oversight of ESG investing practices and disclosures.

The Division noted the following practices as effective in conveying material aspects of a firm's ESG investing approach:

  • clear and specific disclosures tailored to a firm's approach to ESG investing and aligned with the firm's existing practices;

  • policies and procedures concerning a firm's ESG investing practices that cover critical aspects, including research, due diligence, selection and monitoring; and

  • employing compliance personnel that are well-informed regarding the firm's distinct ESG-related practices.


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