The SEC’s Division of Examinations (Examinations) recently issued a risk alert focused on environmental, social and governance (ESG) investing (Risk Alert), detailing, among other things, practices inconsistent with disclosures; inadequate policies and procedures; and ineffective compliance programs. Given the slew of SEC announcements and statements about ESG investing issued earlier in the year, the Risk Alert serves as a guidepost to fund managers looking for clues about what the SEC is and will be focusing on in examinations, as well as enforcement generally. Further, CCOs would be well advised to review the Risk Alert in light of reports that Examinations is already taking a more focused approach to reviewing managers’ ESG programs. This first article in a two-part series describes the regulatory context in which the Risk Alert was released; why an ESG-focused risk alert addresses both familiar and unique issues; and how to use the Risk Alert as a roadmap for potential exams and anticipated SEC enforcement efforts. The second article
will dig into the details of the Risk Alert, providing nuanced advice on how to avoid the deficiencies it identifies and establish the effective practices noted by SEC staff. See our two-part series “Navigating the Evolving Legal and Regulatory ESG Investing Terrain”: Part One
(Nov. 19, 2020); and Part Two
(Dec. 10, 2020).