ESG Investments - How Much Do You Really Know?

 “The Securities and Exchange Commission has charged BNY Mellon Investment Adviser for misstatements and omissions about Environmental, Social, and Governance (ESG) considerations in making investment decisions for certain mutual funds.” – Editorial Staff, Traders Magazine, May 24, 2022.

Essentially the SEC order found that between July 2018 and September 2021 BNY Mellon Adviser had stated or implied that the funds had undergone ESG quality review. That was not accurate. There was a $1.5 million settlement penalty.

SO HERE IS THE SEC NOW

The SEC’s proposed amendments to Form ADV, issued May 25, 2022, are meant to prevent such violations. The mission is that investors will have consistent, comparable and decision-useful data. Here is the SEC’s own press release on that.

There had been the joke that an ESG investment is anything the investment advisers declare It is. As flagged in this article I published in O’Dwyer’s Public Relations, overall there are no standards or criteria, as in the credit-rating industry. Therefore, it is usually difficult to discuss performance in a meaningful comparative way. That leaves investors without the information they need.

The Proposed Amendments are directed at registered investment advisers, certain advisers who are exempt from registering, investment companies, and business development companies.

There is a 60-day comment period which goes into effect when these are published in the Federal Register. If adopted, there will be a one-year transition period to comply.

Meanwhile, the ESG investment niche is exploding in growth. According to Bloomberg Intelligence, by the end the year the value of ESG global investments could reach $41 trillion and by 2025 $50 trillion.

PAUL WEISS DETAILS COMPLIANCE RISKS, PROVIDES FOUR RECOMMENDATIONS

The big nut for financial players is, of course, compliance, especially the nuances. Wall Street law firm Paul Weiss zeroes in on that in its Client Memorandum.

It points out two intersecting factors.

One is:

“Increased investor demand for ESG products, the expansion of various approached to ESG by advisory clients and a lack of standardized EGS terminology present a number of compliance risks for advisors.”

Simultaneously, is this:

“… recent SEC Risk Alerts and enforcement activity confirm that the SEC and its staff remain focused on whether advisers’ disclosures and marketing materials related to ESG investing are accurate and consistent with internal practices.”

Therefore, Paul Weiss makes these four recommendations for advisers:

  • Those incorporating ESG into their investment strategies/marketing, including for private funds, might consider reviewing their obligations under the Compliance Rule [Rule 206(4) -7 under the Investment Advisers Act of 1940, as amended] and the Marketing Rule [Rule 206(4) -1 under the Advisers Act].
  • On a specific level, it is smart to review the accuracy of ESG-related disclosures made to investors, prospective investors, and regulators in order to check if their compliance policies and procedures are in sync.
  • Implementing a review of portfolio management processes can help ensure that the portfolios are managed consistently with any ESG-related investment objectives which have been disclosed.
  • Avoiding overstating the extent of ESG factors in portfolio management can prevent being materially misleading.

PAUL WEISS HIGHLIGHTS EIGHT PROPOSED AMENDMENTS

The SEC proposal runs 362 pages. In its Client Memorandum Paul Weiss zeroes in on those Proposed Amendments relevant to advisers to private equity, credit and hedge funds as well as separately managed accounts.

PAUL WEISS ESG LEGACY

In April 2020 Paul Weiss was the first law firm to establish a specialized multi-discipline Sustainability-ESG practice. That was the brainchild of its Chairperson Brad Karp.

Currently seven full-time ESG lawyers work with 25 lawyers across the firm in other practices to guide business in both compliance and identifying opportunities. In April 2022, Law360 reported on how the demand for ESG services has “ballooned” over two years.

If the Proposed Amendments are adopted that demand from financial firms is likely to skyrocket.

Connect with Editor-in-Chief Jane Genova at janegenova374@gmail.com. Now and then she does communications assignments for professional services firms such as Paul Weiss.

 

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