SEC maintains ESG focus despite absence in exam priorities


Just because ESG wasn’t mentioned in the SEC’s examination priorities doesn’t mean that ESG regulation is out of mind for the agency.

The Securities and Exchange Commission didn’t mention reviewing the use of environmental, social and governance factors in investment recommendations and strategies as an emphasis of its investment advisor exams in 2024 in a document it released Monday.

That’s a sharp contrast from its priority lists of the last couple of years, in which ESG was prominent. The absence of the topic was first noted by Bloomberg Law.

Even though ESG was excised from the examination preview document, the theme still courses through SEC enforcement and rulemaking.

“It would be a mistake to construe that exclusion as an indicator that ESG is no longer a priority for the SEC,” said Kurt Gottschall, a partner at the law firm Haynes Boone and former director of the SEC’s Denver office.

The agency recently fined a subsidiary of Deutsche Bank $19 million for making misleading statements about incorporating ESG factors into its ESG-integrated actively managed mutual funds and separately managed accounts.

Last year, the SEC brought enforcement actions against Goldman Sachs Asset Management and BNY Mellon for compliance violations involving ESG investing. Those cases are highlighted on an agency webpage devoted to its enforcement task force on climate and ESG issues.

On the rulemaking side of the agency, the SEC recently issued a final regulation designed to combat greenwashing by expanding a rule that requires fund names to reflect their investment strategies. Two other rules are pending — one on public company climate disclosures and another to strengthen ESG disclosures by investment advisors and investment companies.

All of those actions “in their totality show that the SEC remains focused on ESG,” said Carlo di Florio, global advisory leader at ACA Group and a former director of the SEC examination program.

The financial industry should pay attention to the agency’s body of work on ESG and not be lulled to sleep by the 2024 examination priorities, he said.

“I don’t read too much into it,” di Florio said. “Firms should continue with rigor and diligence to operate their ESG risk and compliance programs. They should not relax at all. They should continue to do the work they’re doing in this area.”

The SEC suggested the priorities document is a just starting point, not a destination.

“The published priorities are not exhaustive and will not be the only issues addressed in FY24 examinations,” an SEC spokesperson said in a statement.

When the SEC probes for compliance deficiencies, fraud and risk, it transcends specific topics, said Leah Malone, a partner at Simpson Thacher & Bartlett and head of its ESG and sustainability practice. Shortfalls in those areas apply to a range of investing activities.

“The ESG label doesn’t make this something so different that it needs to be called out separately,” Malone said. “It’s part of the natural examination process that the SEC does in the ordinary course. It’s baked into their mission of protecting investors and ensuring accurate disclosures.”

The absence of ESG in the 2024 exam priorities could reflect the fact that there are pending ESG rules, Gottschall said. When final regulations are issued over the next few months, they may go into force in 2025. Compliance with those rules could be a priority.

“I anticipate [ESG] will be back in future years,” Gottschall said.

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