The Securities and Exchange Commission (SEC) said in a “risk alert” that some investment advisers, investment companies and private funds may have misguided investors about their approach to investing based on environmental, social and governance (ESG) principles.
The SEC found in an examination that some investment firms lacked sufficient policies and procedures for ESG investing, provided “weak or unclear” documentation for ESG-related decisions and pursued compliance efforts that did not appear to safeguard against flawed disclosures or marketing information.
- The SEC found “some instances of potentially misleading statements regarding ESG investing processes and representations regarding the adherence to global ESG frameworks,” according to a review by the Division of Examinations.
Investor demand for ESG-related products and services has rapidly increased in recent years, the SEC noted, while warning of risks from a “lack of standardized and precise ESG definitions.”
ING found in a survey that 72 out of 100 institutional investors and family offices in the U.S., Europe and Asia-Pacific are seeking better ESG outcomes in their portfolios.
Forty-two percent of institutional investors said last year that they incorporate ESG factors into investment decisions compared with 22% in 2013, according to a Callen survey of 102 institutional investors released in October.
One out of three survey respondents that do not take into account ESG factors when investing are considering doing so in the near future — nearly three times the proportion in 2019, Callan said.
Among institutional investors, endowments are the leading “ESG incorporator” and public plans are integrating ESG factors into decision-making at the fastest rate, Callan said. Forty-seven percent of pension funds managing more than $20 billion take into account ESG principles when investing.
The SEC Division of Examinations last month mentioned climate-related risks first in its description of priorities for this year.
“The division is enhancing its focus on climate and ESG-related risks by examining proxy voting policies and practices to ensure voting aligns with investors’ best interests and expectations,” Acting Chair Allison Herren Lee said in a statement. “We are integrating climate and ESG considerations into the agency’s broader regulatory framework.”
The division noted in its report that some investment companies did not follow through with commitments to clients on proxy voting. They made “public claims regarding clients’ ability to vote separately on ESG-related proxy proposals, but clients were never provided such opportunities and no policies concerning these practices existed.”
The SEC did not disclose the names of the companies that it examined or the extent of its review.
"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," SEC Commissioner Hester Peirce said in a statement Monday. "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."
Some companies managed their investment portfolios in ways that contradicted their public disclosures about their approaches to ESG principles, the division said. For example, they invested in companies with low ESG scores or failed to meet public commitments to follow global ESG frameworks.
Some companies also lacked controls that ensured they adequately took into account their clients’ investing preferences on ESG matters, the Examinations Division said.
Editor’s note: This story has been updated to include a statement from SEC Commissioner Hester Peirce.