Jason M. Daniel and Cynthia M. Mabry are partners and Kenneth J. Markowitz is a consultant at Akin Gump Strauss Hauer & Feld LLP. This post is based on an Akin Gump memorandum by Mr. Daniel, Ms. Mabry, Mr. Markowitz, Cynthia Perez Angell, Leana N. Garipova, and Bryan C. Williamson. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (discussed on the Forum here); and Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Max M. Schanzenbach and Robert H. Sitkoff (discussed on the Forum here).
The Securities and Exchange Commission’s (SEC, or Commission) Division of Examinations (Division) recently issued a Risk Alert highlighting staff observations from examinations of investment advisers, registered investment companies and private funds (firms) engaged in environmental, social, and governance (ESG) investing. This post summarizes the Risk Alert, including focus areas and observations of deficiencies and internal control weaknesses, as well as recommendations of effective practices relating to ESG investing that may be helpful in developing and enhancing a firm’s compliance practices.
As investor demand for ESG information rises, the need for investment firms to align their disclosure with actual practice and to integrate compliance personnel into their ESG-related practices will continue to grow.
I. On which areas has SEC staff focused its examinations of firms engaged in ESG investing?
The staff continues to examine whether firms accurately disclose their ESG investing approaches and adopt and implement policies, procedures and practices that accord with their ESG-related disclosures. In particular, the staff noted that its examinations would focus on, among other matters, portfolio management, performance advertising and marketing and compliance programs.