While the EU and other jurisdictions have been pressing ahead with ESG policy and regulations aimed at creating market clarity, the SEC has been way behind. However, recent developments demonstrate that a U.S. catch up is underway.
On March 4th, the SEC issued a press release announcing its “Climate and ESG Task Force,” which will “identify any material gaps or misstatements in issuers’ disclosure of climate risks under existing rules…[and] analyze disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies.”1
Additionally, in its 2021 priorities for examinations, the SEC stated it will include physical climate risks in its assessment of business continuity plans. “As climate-related events become more frequent and more intense, we will review whether systemically important registrants are considering effective practices to help improve responses to large-scale events.”2
As US SIF CEO Lisa Woll notes in Barron’s, “It is extraordinary that it took until 2021 to have a position focused on these matters, but it is a clear signal that the SEC understands the critical role that the climate crisis and a range of ESG issues play in the investment process.”3
Last week we kicked off our ESG Practice Playbook, in partnership with RIA Channel, and held our second session yesterday. Don’t worry if you missed them – you can still register and access the playbacks.
Several of the questions we received from the event related to definitions, how to know if an investment product is truly ESG, and how to compare different ESG strategies. These are foundational challenges for anyone embarking upon their ESG journey, which is increasingly challenging given the product expansion in recent years!
There are a multitude of ways a fund can include ESG in the investment process. It’s therefore critical to go beyond the fund name and marketing headlines and dig into the detail to understand the philosophy, use of data, alignment with shareholder engagement, and proxy voting policies, among other factors.
We’re encouraged to see the SEC taking a stronger educational role alongside integrating ESG into its enforcement procedures. Check out this SEC Investor Bulletin that defines an ESG fund and provides several considerations for performing ESG due diligence. https://www.sec.gov/news/press-release/2021-42