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Statement on the Staff ESG Risk Alert

April 12, 2021

On Friday, the SEC’s Division of Examinations published a risk alert,[1] describing the areas on which the staff is focusing in examinations of registered investment advisers’ and funds’ ESG offerings.[2] This alert comes as many financial firms are finding gold in the green—they are offering ESG products because it is lucrative to do so. Therefore, as I have noted previously, asset manager accountability in the ESG space is important.[3] Firms claiming to be conducting ESG investing need to explain to investors what they mean by ESG and they need to do what they say they are doing. This same rule applies no matter what label an adviser puts on its products and services. I commend the staff for seeking, through this alert, to aid firms and their compliance officers in assessing their ESG claims and practices preemptively in their own organizations.

This risk alert, however, like its companion documents on the SEC’s “Climate and ESG Risks and Opportunities” webpage, needs some context. As an initial matter, the risk alert might cause some to ask, “Is ESG different?” The answer is that the issuance of an ESG-specific risk alert should not be interpreted as a sign that ESG investment strategies are unique in the eyes of examiners. As with any other investment strategy, advisers and funds should not make claims that do not accord with their practices, and our examiners will be looking for that consistency between claims and practice. Our examiners are not—and will not be in this space—merit regulators. The SEC’s role is not to assess whether any particular strategy is a good one, but to ensure that investors know what they are getting when they choose a particular adviser, fund, strategy, or product.

The risk alert’s discussion of how the staff will review advisers’ proxy voting processes must be read with the Commission’s two recent proxy voting interpretive releases in mind.[4] The Commission, through these releases, describes considerations for investment advisers who assume voting authority for their clients. While not applicable only to advisers using ESG strategies, these Commission statements remind advisers that proxy voting, when such authority is undertaken on behalf of the client, is subject to advisers’ fiduciary duty and must be undertaken in the client’s best interest. Sometimes, not voting at all may be in the client’s best interest. Voting to reflect the investment adviser’s views when they do not also reflect those of the client would be a violation of the adviser’s fiduciary duty.

Another question raised by the risk alert is do firms need a special set of policies and procedures for ESG? The answer to this question is no. Firms need not have a separate set of policies and procedures for any investment strategy. Rather, firms’ policies and procedures should be designed around the investment strategies the firm employs, whatever those strategies are. The risk alert identifies as an example of a good practice at firms with “multiple ESG investing approaches” “separate specialized [portfolio management] personnel.” Neither this risk alert nor other staff documents can impose new obligations on registrants. However, a firm’s disclosures about its personnel should match the reality. Likewise, as is the case with any investment strategy, compliance personnel in an ESG firm should be familiar with the firm’s business so that they can build and operate an effective compliance program for the firm, but they need not be experts in ESG, whatever that may be.

Some readers of the risk alert might ask whether the SEC will make its own assessments of whether an investment is consistent with an ESG investment approach. The staff’s role is not to second-guess investment decisions through an SEC-created ESG scoring system; rather, it is to understand whether firms are adhering to their own ESG claims. If those ESG claims include relying on proprietary or third-party scoring services, the staff will want to understand the due diligence the adviser has done on that scoring service, as well as the work the firm does to ensure its adherence to the framework it has chosen. The great variety of takes on ESG makes it all the more important that the SEC not attempt to insert its own views in the investment advisory process.

As with many other ESG-related matters, this risk alert raises questions of its own, but I hope that, on the whole, it will be a useful tool for firms that sell ESG products and services and a useful protection for the investors that buy them.


[1] SEC, Division of Examinations, “Risk Alert: The Division of Examinations’ Review of ESG Investing” (Apr. 9, 2021), https://www.sec.gov/files/esg-risk-alert.pdf.

[2] SEC, Division of Examinations, “2021 Examination Priorities” (Mar. 3, 21),https://www.sec.gov/files/2021-exam-priorities.pdf.

[3] See, e.g., Hester M. Peirce, Commissioner, SEC, Lucy’s Human: Remarks at Virtual Roundtable on The Role of Asset Management in ESG Investing Hosted By Harvard Law School and the Program on International Financial Systems, https://www.sec.gov/news/speech/peirce-lucys-human-091720.

[4] See Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, Release No. IA-5325 (Aug. 21, 2019), 84 Fed. Reg. 47420 (Sept. 10, 2019) and Supplement to Commission Guidance Regarding Proxy Voting Responsibilities of Investment Advisers, Release No. IA-5547 (July 22, 2020). Both documents are on-point because the risk alert explains that examinations will look at “whether proxy voting decisionmaking processes are consistent with ESG disclosures and marketing materials.”

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