ESG Risk Alert: Inadequate Controls, Policies and Procedures Concern SEC About ESG Practices Inconsistent With Disclosures (Part Two of Two)

An SEC priority has been ESG investing, as demonstrated by the regulator’s appointment of a task force within its Division of Enforcement and a special policy advisor, as well as the issuance of multiple statements from Commissioners. In May 2021, Chair Gary Gensler also testified before the House Financial Services Committee that ESG disclosure rulemaking was one of his top priorities, and Commissioner Allison Herren Lee delivered a speech that suggested a forthcoming climate-related disclosure framework. Amid the speeches and statements, the Division of Examinations (Examinations) recently issued an ESG-focused risk alert (Risk Alert) detailing deficiencies and effective practices observed during examinations. Managers with ESG investing programs should review the Risk Alert with an eye toward unique aspects of ESG investing that may make it more difficult to meet standards they have applied in the past to other strategies. This second article in a two-part series delves into the details of the Risk Alert, providing nuanced advice on how to avoid the deficiencies identified by the SEC staff and to establish effective ESG practices. The first article described the regulatory context surrounding the Risk Alert; the familiar and unfamiliar issues addressed therein; and ways to use the Risk Alert as a roadmap for anticipated enforcement. See our two-part series on the Examinations’ risk alert on compliance: “Limited Staffing, Marginalized CCOs and an Overall Lack of Resources at Fund Managers” (Jan. 26, 2021); and “Inadequate Annual Reviews, Poorly Implemented Policies and Other Key Takeaways” (Feb. 2, 2021).

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