More money managers are coming out with ESG funds to capitalize on the next potential big investment theme. However, who’s to say these ESG funds are actually following environmental, social, and governance principles?
SEC Commissioner Elad Roisman recently underscored regulatory concerns for fund managers in the ESG category, especially on disclosures and internal compliance, the National Law Review reports.
Specifically, Commissioner Roisman’s raised two particular concerns, pointing to how fund managers are quantifying green or sustainability metrics and how the manager is fully disclosing whether an ESG focus improves or perhaps is a trade-off limiting returns.
Earlier in the year, the Securities and Exchange Commission’s Office of Compliance Inspections and Examinations (OCIE) identified ESG investment strategies as a focus for its 2020 Exam Priorities. The OCIE will begin to examine the accuracy and adequacy of disclosures for new or emerging investment strategies, notably those that incorporate ESG criteria.
The OCIE requests relating to ESG strategies have been fairly detailed, but the particular focus appears to be on whether disclosures adequately reflect the firm’s practices, and whether there are sufficient internal procedures in place to monitor and measure ESG-related investments in light of those disclosures, according to National Law Review.
Commissioner Roisman’s recent speech also revealed his personal view that the ESG space required more disclosure from asset managers, pointing out that more managers are asserting that ESG metrics are driving their investment decisions but there were no universal definitions for “green” or “sustainable” criteria for the funds. These socially responsible strategies can differ across the ESG spectrum.
In addition, there are concerns over “greenwashing”, or slapping on the label as a marketing tool without adequate due process or taking credit for more of an environmental impact than is warranted.
Roisman warned that fund managers should explain to investors what “E” “S” or “G” specifically stands for in the context of their strategies and how they incorporated them.
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