On March 30, 2022 the U.S. Securities and Exchange Commission ("SEC") announced its 2022 examination priorities. Among the "significant focus areas" is Environmental, Social, and Governance ("ESG") investing. SEC examiners will be scrutinizing disclosures by registered investment advisors ("RIA") that advertise ESG strategies or claim to incorporate certain ESG criteria, to ensure disclosures regarding portfolio management practices do not involve materially false and misleading statements or omissions.
The SEC has already flagged ESG investments as potentially higher-risk for investors due to a lack of standardized ESG terms and the various strategies that could reasonably carry the "ESG" label (e.g., incorporating ESG factors vs. prioritizing ESG factors vs. aiming to "achieve measurable ESG impact goals"). The SEC's recent proposed rule to enhance and standardize climate-related disclosures is a first step towards creating a uniform disclosure framework that would mitigate some of these risks.
In the meantime, SEC examiners will continue to focus on ESG-related advisory services and investment products (including mutual funds, exchange-traded funds (ETFs), and private fund offerings) to ensure these funds:
- Are accurately disclosing their ESG investing approaches;
- Have implemented policies and procedures to ensure their ESG-related disclosures are in compliance with federal securities laws, including review of portfolio management;
- Are voting client securities in accordance with proxy voting policies and procedures and in alignment with their ESG-related disclosures and mandates; and
- Are not overstating or misrepresenting the ESG factors considered or incorporated into portfolio selection (e.g., greenwashing), such as in their performance advertising and marketing.
SEC examiners also may assess and compare any exchange advisory services offered to issuers regarding ESG initiatives.
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