SEC Makes Moves to Step Up ESG Enforcement
Tuesday, April 20, 2021

As investor demand for socially responsible investing continues to rise, the U.S. Securities and Exchange Commission (SEC) has increased its focus on compliance practices of investment advisors and funds. After the change in the presidential administration, it was anticipated that the SEC would again take up environmental, social, and corporate governance (ESG) reporting. While Commissioner Gary Gensler was not confirmed until this week, the Commission has already been positioning itself to act on this issue over the past several months. 

Last month, the Commission launched a new Climate and ESG Task Force likely to drive new initiatives. The Commission also announced the appointment of the first senior policy advisor for climate and ESG matters, Satyam Khanna. There are several topics that may be considered by Mr. Khanna and the Task Force for policy and rule changes, including environmental disclosure rules, diversity disclosures at the board and workforce levels, and political spending disclosures. In the meantime, the Task Force will focus on increasing enforcement of the existing legal framework applicable to ESG investments.

The recent enforcement actions reflect a new emphasis on public messaging. The SEC’s Division of Examinations recently completed a review of ESG investing. The review resulted in a risk alert based on the increasing number of ESG products and services without standardized definitions or industry practices. The Division encouraged investment advisors and funds to carefully evaluate public statements related to ESG investments and to ensure that internal policies and compliance mechanisms were sufficiently implemented to prevent violations of the law. The emphasis on public statements is especially important because the ESG Task Force has already “started working on plans and initiatives to look at potential, materially misleading statements and omissions,” according to Kelly L. Gibson, acting deputy director of the SEC’s enforcement division. Currently, any of those advisors and funds that fall short of the standards suggested by the Division of Examinations are potential targets for the SEC.

Overall, the Biden administration is expected to encourage ESG investing as part of its approach to addressing climate change. The administration has ordered a review of the prior administration’s rules on the issue. Investors and advisors can expect a new legal framework to develop quickly in the coming months and should remain informed of SEC actions and investigations related to this developing area of regulations. 

 

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