Investors looking to put money into environmental, social, and governance (ESG) themed funds are sometimes being misled about the products on offer, according to the Securities and Exchange Commission (SEC).
The SEC’s investigation unit found that some firms may be violating securities laws and wrongly labelling funds.
“During examinations of investment advisers, registered investment companies, and private funds engaged in ESG investing, the staff observed some instances of potentially misleading statements regarding ESG investing processes and representations regarding the adherence to global ESG frameworks,” said the SEC.
The investigation found that some firms claimed to have formal processes in place for ESG investing, but did not have relevant policies and procedures. It also found policies and procedures that did exist did not appear to be reasonably designed to prevent violations of law, and in some instances were not implemented.
The SEC added it had found “documentation of ESG-related investment decisions that was weak or unclear, and compliance programs that did not appear to be reasonably designed to guard against inaccurate ESG-related disclosures and marketing materials”.
The regulator observed portfolio management practices that differed from what was required or stated in client or investor-facing documents such as advisory agreements. For example, staff noted lack of adherence to global ESG frameworks despite companies claiming such adherence, and also observed that, in some cases, fund holdings were dominated by issuers with low ESG scores, appearing inconsistent with those firms’ stated approaches.
In some instances, advisers did not have adequate controls around implementation and monitoring of clients’ negative ESG screens, such as prohibitions on investments in alcohol, tobacco, or firearms. Some did not have adequate systems to consistently and reasonably track and update preferences, leading to the risk that prohibited securities could be included in client portfolios.
These problems were exacerbated due to challenges with implementation and monitoring, despite contrary marketing claims touting processes for implementing positive screens.
The SEC did not name any individual firms or advisers.