SEC Issues Risk Alert to Firms Offering ESG Investment Vehicles

The Securities Exchange Commission on Friday warned firms of “deficiencies and internal control weaknesses” that examiners have observed in reviews of investment advisers and funds offering environmental, social and governance-related investment vehicles or accounts. While ESG investment has risen in popularity recently, the SEC noted in a risk alert on Friday that “this rapid growth in demand, increasing number of ESG products and services, lack of standardized and precise ESG definitions present certain risks.”

Going forward, the SEC noted that examiners “will continue to examine firms to evaluate whether they are accurately disclosing their ESG investing approaches and have adopted and implemented policies, procedures, and practices that accord with their ESG-related disclosures.” Specifically, the SEC will focus on portfolio management practices regarding ESG investments; performance advertising and marketing; and compliance programs.

Firms offering ESG investment products should “evaluate whether their disclosures, marketing claims, and other public statements related to ESG investing are accurate and consistent with internal firm practices,” the SEC said. “Additionally, firms should ensure that their approaches to ESG investing are implemented consistently throughout the firm where relevant and are adequately addressed in the firm’s policies and procedures and subject to appropriate oversight by compliance personnel. Lastly, firms should also consider taking steps to document and maintain records relating to important stages of the ESG investing process.”