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The US Securities and Exchange Commission (SEC) is warning
financial advisers, firms, and private funds against making
potentially misleading green investing claims.
In a risk alert issued 9 April, the
SEC said a Division of Examinations review uncovered some instances
of potentially misleading statements regarding environmental,
social and governance (ESG) investing processes and representations
regarding adherence to global ESG standards.
Despite some companies' claims to have formal processes in
place, SEC staff uncovered a lack of policies and procedures
related to ESG investing including those that were either not
"reasonably designed" to prevent violations of law, or that were
not implemented. SEC staff also found that documentation of
ESG-related investment decisions was weak or unclear, and that
compliance programs did not appear to be reasonably designed to
guard against inaccurate ESG-related disclosures and marketing
materials.
SEC staff also observed fund holdings dominated by issuers with
low ESG scores.
In line with SEC plans
The SEC's risk alert is in line with plans Acting Chair Allison
Herren Lee announced in late February to
begin reviews of climate and other ESG-related investment
disclosures in compliance with its 2010 guidance, which for the
first time referenced climate impacts as a material risk affecting
a company's bottom line.
Although the decade-old guidance was seen at the time as a
significant action, it did not establish any metrics or standards
for reporting risk. This omission on the SEC's part gave rise to a
variety of voluntary frameworks and standards that studies argue
have since resulted in a patchwork of climate risk reporting
regimes and incomplete and inadequate disclosures from
companies.
The SEC's risk alert confirmed what a joint 11 February report by the
nonprofit Environmental Defense Fund and New York University School
of Law's Institute for Policy Integrity uncovered, as well as a
separate
19 February study by the Center for American Progress.
Both reports pointed to the lack of consistency in reporting of
climate and related environmental impact disclosures.
'Walk the walk'
"If firms are going to make ESG claims, they should be prepared
to 'walk the walk, not just talk the talk,'" Margaret Peloso, a
partner with Vinson & Elkins and a member of the firm's ESG
practice, said 12 April.
In other words, "firms should be sure to have the processes and
data in place to be able to substantiate the ESG claims they are
making to investors," said Peloso.
The SEC concluded its alert by reiterating what Lee has been
saying since taking the helm of the agency in January,
that market participants should document important stages of their
ESG investing process and make sure internal controls are in place
to ensure no claim is overstated.
"The division encourages market participants promoting ESG
investing to clients, prospective clients, investors, and
prospective investors to evaluate whether their disclosures,
marketing claims, and other public statements related to ESG
investing are accurate and consistent with internal firm
practices," it wrote.
Posted 12 April 2021 by Amena Saiyid, Senior Climate and Energy Research Analyst
