The advent of a new political administration provides more impetus for tightenting compliance generally and for scrutiny of climate and ESG activiities (such as investment and proxy voting). As such, we assume there will be a great emphasis on these topics for the next several years.
The SEC EXAM Risk Alert, issued April 9, 2021, highlighted matters as follows regarding exams of advisers and funds, "The staff will continue to examine firms to evaluate whether they are accurately disclosing their
ESG investing approaches and have adopted and implemented policies, procedures, and practices
that accord with their ESG-related disclosures. Examinations of firms claiming to engage in
ESG investing will focus on, among other matters, the following:
- Portfolio management...
- Performance advertising and marketing...
- Compliance programs,..."
The Staff focus on specific areas of concern which have emerged from past examinations:
- "Portfolio management practices were inconsistent with disclosures about ESG approaches...
Controls were inadequate to maintain, monitor, and update clients’ ESG-related investing
guidelines, mandates, and restrictions...
- Proxy voting may have been inconsistent with advisers’ stated approaches...
- Unsubstantiated or otherwise potentially misleading claims regarding ESG approaches.,,
Inadequate controls to ensure that ESG-related disclosures and marketing are consistent
with the firm’s practices. T..
- Compliance programs did not adequately address relevant ESG issues...
The staff also observed that compliance programs were less effective when compliance
personnel had limited knowledge of relevant ESG-investment analyses or oversight over
ESG-related disclosures and marketing decisions...."
The Staff also outlined things that worked!
"Disclosures that were clear, precise and tailored to firms’ specific approaches to ESG
investing, and which aligned with the firms’ actual practices....
Policies and procedures that addressed ESG investing and covered key aspects of the firms’
Compliance personnel that are knowledgeable about the firms’ specific ESG-related
Please refer to the Risk Alert for a complete discussion.
SEC Risk Alert: https://www.sec.gov/files/esg-risk-alert.pdf
In a similar vein, the CFTC announced that it was creating a Climate Risk Unit to focus on climate risks associated with the derivatives and other markets it oversees. Basically, the CFTC is trying to understand the potential impact on markets from climate change, "The CRU is intended to accelerate early CFTC engagement in support of industry-led and market-driven processes in the climate—and the larger ESG—space critical to ensuring that new products and markets fairly facilitate hedging, price discovery, market transparency, and capital allocation."
Please refer to the press release for a complete insight on the action.
CFTC Press Release announcing formation of a Climate Risk Unit: https://www.cftc.gov/PressRoom/PressReleases/8368-21