On March 30, 2022, the Securities and Exchange Commission (SEC) released its 2022 Examination Priorities report. In the report, the SEC announced the areas for the year that it intends to focus considerable effort, which included Environmental, Social and Governance (ESG) investing. The SEC targeting ESG is likely news to very few; however, the formal statement by the SEC in the Examination Properties report nonetheless underscores the incredible importance of taking a measured approach to all types of advertising, marketing, ESG statements, or other information disclosures that touch on ESG factors. Investment firms that fail to do so are likely opening themselves up to significant risk of enforcement action and penalties.
Background of SEC Targeting ESG
In March 2021, the SEC formed the Climate and Environmental, Social and Governance Task Force (ESG Task Force) within its Division of Enforcement. Hand in hand with the legal world’s attention on greenwashing in 2021, the SEC’s ESG Task Force was created for the sole purpose of investigating ESG-related violations. At the same time, the SEC also announced that it intended to create rules for company disclosures related to ESG factors, including climate disclosures. The goal of the SEC ESG decision is to create standardized, comprehensive disclosure requirements, making it easier for investors to compare between companies.
The SEC’s actions were well-timed, as 2021 saw an enormous increase in investor demand for ESG-related and ESG-driven portfolios. There is considerable market demand for ESG portfolios, and whether this demand is driven by institute influencers or simple environmental and social consciousness among consumers is of little importance to the SEC – it simply wants to ensure that ESG activity is being done properly, transparently and accurately.
On March 17, 2022, the SEC proposed rule was announce that requires SEC-registered companies to include certain climate-related disclosures in their registration statements and periodic reports, including information about climate-related risks that are reasonably likely to have a material impact on their business, results of operations, or financial condition, and certain climate-related financial statement metrics in a note to their audited financial statements. The required information about climate-related risks also would include disclosure of a registrant’s greenhouse gas emissions.
While likely to be the subject of legal challenges if make a final rule, the SEC’s greenhouse gas disclosure rule is nonetheless the biggest example to date of the SEC targeting ESG investment issues.
SEC’s 2022 Examination Priorities
As part of the focus on ESG investment issues, the SEC made clear that it will scrutinize disclosures by registered investment advisors (“RIA”) that advertise ESG strategies or that allege that they take into consideration ESG criteria. The goal of the SEC’s efforts is to ensure that false, inaccurate or misleading statements are not made to the public about investment options. The SEC recognized that due to the current lack of uniformity in ESG investment metrics or factors, there is risk to investors due to firms using a wide array of ESG measuring techniques. It was this same lack of uniformity, of course, that led the SEC to announce its recent proposed rule for greenhouse gas disclosures.
The SEC indicated that its focus in 2022 will be to ensure that RIAs are “(1) accurately disclosing their ESG investing approaches and have adopted and implemented policies, procedures, and practices designed to prevent violations of the federal securities laws in connection with their ESG-related disclosures, including review of their portfolio management processes and practices; (2) voting client securities in accordance with proxy voting policies and procedures and whether the votes align with their ESG-related disclosures and mandates; or (3) overstating or misrepresenting the ESG factors considered or incorporated into portfolio selection (e.g., greenwashing), such as in their performance advertising and marketing.”
Significance of SEC’s Step
The SEC’s examination priorities will place a heightened level of scrutiny on RIAs, many of which already use ESG statements in their marketing of investments. It is important to use sound and reasonable marketing statements in promoting certain investment platforms, while at the same time ensuring that, in the absence of a uniform approach, any ESG measurements or metrics used in analyzing investment options must ensure that adequate due diligence is used in measuring investments.
CMBG3 Law LLC has represented clients in ESG’s environmental and social related issues for years. We regularly consult with private equity, banking, and investment world firms to identify future risk potentials from portfolios under consideration, and assist issuers and investment world firms alike with ESG related issues. For more information about our ESG and risk assessment consulting services, please contact John Gardella (617-279-8225).