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US SEC warns companies about making potentially misleading green investment claims

12 April 2021 Amena Saiyid

The US Securities and Exchange Commission (SEC) is warning financial advisers, firms, and private funds against making potentially misleading green investing claims.

In a risk alert issued 9 April, the SEC said a Division of Examinations review uncovered some instances of potentially misleading statements regarding environmental, social and governance (ESG) investing processes and representations regarding adherence to global ESG standards.

Despite some companies' claims to have formal processes in place, SEC staff uncovered a lack of policies and procedures related to ESG investing including those that were either not "reasonably designed" to prevent violations of law, or that were not implemented. SEC staff also found that documentation of ESG-related investment decisions was weak or unclear, and that compliance programs did not appear to be reasonably designed to guard against inaccurate ESG-related disclosures and marketing materials.

SEC staff also observed fund holdings dominated by issuers with low ESG scores.

In line with SEC plans

The SEC's risk alert is in line with plans Acting Chair Allison Herren Lee announced in late February to begin reviews of climate and other ESG-related investment disclosures in compliance with its 2010 guidance, which for the first time referenced climate impacts as a material risk affecting a company's bottom line.

Although the decade-old guidance was seen at the time as a significant action, it did not establish any metrics or standards for reporting risk. This omission on the SEC's part gave rise to a variety of voluntary frameworks and standards that studies argue have since resulted in a patchwork of climate risk reporting regimes and incomplete and inadequate disclosures from companies.

The SEC's risk alert confirmed what a joint 11 February report by the nonprofit Environmental Defense Fund and New York University School of Law's Institute for Policy Integrity uncovered, as well as a separate 19 February study by the Center for American Progress.

Both reports pointed to the lack of consistency in reporting of climate and related environmental impact disclosures.

'Walk the walk'

"If firms are going to make ESG claims, they should be prepared to 'walk the walk, not just talk the talk,'" Margaret Peloso, a partner with Vinson & Elkins and a member of the firm's ESG practice, said 12 April.

In other words, "firms should be sure to have the processes and data in place to be able to substantiate the ESG claims they are making to investors," said Peloso.

The SEC concluded its alert by reiterating what Lee has been saying since taking the helm of the agency in January, that market participants should document important stages of their ESG investing process and make sure internal controls are in place to ensure no claim is overstated.

"The division 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," it wrote.

Posted 12 April 2021 by Amena Saiyid, Senior Climate & Energy Research Analyst, IHS Markit

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