The SEC’s Division of Examinations (Examinations) recently issued an ESG-focused risk alert (Risk Alert) detailing, among other things, practices inconsistent with disclosures; inadequate policies and procedures; and ineffective compliance programs. Given the slew of SEC announcements and statements about ESG investing earlier in the year, the Risk Alert serves as a guide to fund managers looking for clues about what the SEC is and will be focusing on in examinations, as well as enforcement generally. Further, CCOs would be well advised to review the Risk Alert in light of reports that Examinations is already taking a more focused approach to reviewing managers’ ESG programs. This first article in a two-part series describes the regulatory context in which the Risk Alert was released; why an ESG-focused risk alert addresses both familiar and unique issues; and how to use the Risk Alert as a roadmap for anticipated SEC enforcement efforts. The second article
will dig into the details of the Risk Alert, providing nuanced advice on how to avoid the deficiencies set forth therein and establish the effective practices identified by SEC staff. See our two-part series: “OCIE’s Targeting of ESG Investing Practices in Recent Examinations and What It Means Going Forward
” (Jan. 21, 2020); and “How Fund Managers Can Identify and Mitigate Risks From the SEC’s Increased Focus on ESG Investing
” (Jan. 28, 2020).