SEC, NASAA Issue Alerts on ESG Investing

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What You Need to Know

  • Both regulators focused on lack of standards to govern ESG investing.
  • Without consistent definitions and standard practices, investors can be misled.
  • The SEC recommends that all firms promoting ESG investing evaluate their disclosures and consider documentation.

The growing popularity of investments that focus on environmental, social and governance factors, coupled with the lack of global standards for ESG investing, has led federal and state securities regulators to issue alerts about these investments.

The SEC’s Division of Examinations has issued a Risk Alert to highlight findings from recent exams of investment advisors, registered investment companies, and private funds offering ESG products and services. The agency had announced in March that the division would enhance its focus on climate- and ESG-related risks as part of its 2021 priorities.

The North American Securities Administrators Association (NASAA) has issued an advisory for investors.

“The financial services sector is now claiming to offer more ESG funds, and further claim to have thoroughly researched companies that incorporate these values,” the advisory stated.  “However, all ESG funds may not be created equal, and investors should be aware if an investment is right for them, and their risk tolerance.”

The Forum for Sustainable and Responsible Investment estimated in its 2020 annual report that sustainable investing accounted for $17.1 trillion in assets at the start of 2020, or one-third of professionally managed assets.

What SEC Examiners Found

The SEC agrees, noting in its Risk Alert that some advisors and funds consider ESG factors along with many other factors, while others focus just on investments that have more favorable ESG profiles, and still others simply do negative screening to exclude certain issuers or include companies that pledge to improve their ESG-related practices.