Site icon BoardAndFraud

Environmental, Social, and Governance or ESG


Environmental, social, and governance (“ESG”) criteria are standards for a company’s operations that socially conscious investors use to screen potential investments.  Recall that on March 4, 2021, The Securities and Exchange Commission (“SEC”) announced the creation of a Climate and ESG Task Force in the Division of Enforcement.  Kelly L. Gibson, the Acting Deputy Director of Enforcement, will lead the task force and oversee a Division-wide effort, with 22 members drawn from the SEC’s headquarters, regional offices, and Enforcement specialized units.  The ESG Task Force will develop initiatives to identify ESG-related misconduct proactively but will be limited to enforcing existing disclosure requirements rather than formulating additional ESG-related disclosures. The task force will also coordinate the effective use of Division resources, including using sophisticated data analysis to mine and assess registrants’ information to identify potential violations. Also, the Task Force will evaluate and pursue tips, referrals, and whistleblower complaints on ESG-related issues and provide expertise and insight to teams working on ESG-related matters across the Division.

In a March 15 speech at the Center for American Progress, SEC Acting Chair Allison Herren Lee made clear that “no single issue has been more pressing for me than ensuring that the SEC is fully engaged in confronting the risks and opportunities that climate and ESG pose for investors, our financial system, and our economy.”

John Coates, Acting Director, Division of Corporation Finance, on March 11, 2021, made remarks at the 33rd Annual Tulane Corporate Law Institute.  He said, There remains substantial debate over the precise contents and details of what ESG disclosures might or should encompass. Part of the difficulty is in the fact that ESG is at the same time very broad, touching every company in some manner, but also quite specific in that the ESG issues companies face can vary significantly based on their industry, geographic location, and other factors.

Coates outlined seven questions about ESG disclosure that need to be answered:

Well, not too long after the Task Force was announced and remarks/statements were made by the SEC on April 9, 2021, the SEC released a Risk Alert (“Alert”).  In the Alert, the SEC observed investment advisers, registered investment companies, and private funds engaged in environmental, social, and governance investing, making “potentially misleading statements” regarding ESG investing processes and adherence to global ESG frameworks. The staff noted, despite claims to have formal processes in place for ESG investing, a lack of policies and procedures related to ESG investing; policies and procedures that did not appear to be reasonably designed to prevent violations of law, or that were not implemented; documentation of ESG-related investment decisions that were weak or unclear; and compliance programs that did not appear to be reasonably designed to guard against inaccurate ESG-related disclosures and marketing materials.

Below is additional information regarding these observations.

The staff also observed that compliance programs were less effective when compliance personnel had limited knowledge of relevant ESG-investment analyses or oversight over ESG-related disclosures and marketing decisions. For example, compliance controls and oversight for reporting to sponsors of global ESG frameworks and responses to requests for proposals and due diligence questionnaires appeared to be ineffective. Also, the staff noted weaknesses in compliance controls regarding performance metrics included in marketing materials (such as risk, returns, and correlation metrics) and a lack of compliance review of the data underlying those measures.

Despite the above, there were also observations of effective practices.  The SEC encourages market participants promoting ESG investing to clients, prospective clients, investors, and prospective investors to evaluate whether their disclosures, marketing claims and other public statements related to ESG investing are accurate and consistent with internal firm practices.

Enforcement and Being Proactive

Remember, in December 2020, the SEC settled charges against The Cheesecake Factory and warned it “will continue to scrutinize COVID-related disclosures to ensure that investors receive accurate, timely information.”  No matter how the cake is sliced, there appears to be a consensus that more aggressive enforcement is coming. So what should you do now?  Here are some suggestions.

I welcome your thoughts and comments.


Jonathan T. Marks, CPA, CFF, CFE


April 9, 2021, SEC Division of Examinations Risk Al

Mike Volkov

Please follow and like us:
Skip to toolbar