SEC Scrutinizing ESG Funds

Jones Day

Jones Day

The U.S. Securities and Exchange Commission ("SEC") is scrutinizing the methodologies and criteria of investment funds that embrace environmental, social, and governance ("ESG") strategies as record amounts of money flow into ESG funds.

In response to client/investor demand, the number of investment funds that embrace ESG strategies has significantly increased. While this relatively new investment style is capable of yielding societal benefits, it also presents compliance and regulatory challenges for investment managers (e.g., ensuring that investments meet, and continue to meet, the often amorphous disclosed investment criteria).

Recently, as confirmed by press reports, the SEC's examination branch, the Office of Compliance Inspections and Examinations, has conducted exams of investment advisers that manage investment funds that take ESG-related factors into consideration when making investment choices for clients.

On these exams, as one would expect, the SEC staff is focusing on a broad array of topics such as: (i) whether the adviser adheres to the UN Principles for Responsible Investment; (ii) what ESG investments have been made and sold, and why; (iii) whether the adviser has its own or uses a third party's ESG scoring system, and how the scoring system works; (iv) proxy voting information concerning ESG matters; and (v) information about service providers engaged by the adviser that assist in ESG-related diligence. These and other ESG-related exam questions are the SEC's way of ensuring that fund managers are managing their client funds in accordance with their stated strategy.

Of course, SEC examinations go hand in hand with being a registered investment adviser. The foregoing is just a reminder that it is important for investment advisers to have systems in place to ensure that their activities in the relatively new ESG space comport with the disclosures they make to clients/investors

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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