Message from America: US financial regulators taking aim at ESG

InvestmentNews' special projects editor Liz Skinner highlights the latest ESG regulatory developments across the pond

While European regulators are well ahead of Americans in terms of putting rules into place aimed at ensuring ESG investments are transparent and recommended appropriately, President Joe Biden’s administration is leading a US charge in that direction.

Over the past month, a host of government actions, mostly notably from the Securities and Exchange Commission (SEC), suggest the United States aims to catch up. Regulators are making climate change and environmental, social and governance investing a top priority.

From how it examines the activities of financial advisers to what it requires public companies to reveal about ESG issues and their climate risk, the SEC is on the case. There’s been such a flurry of activity in this direction, that the agency has set up a new webpage that will be continuously updated to help the public keep track.

The acting chairman of the SEC, Allison Herren Lee, described it as an “all-of-SEC approach” aimed at getting investors the information they need for their financial futures.

The agency’s intense focus on ESG issues is expected to continue after the Senate confirms Gary Gensler, the administration’s nominee to be SEC chair. Gensler recently voiced support for expanding corporate ESG disclosures during a Senate Banking Committee hearing.

Compliance exam priorities

In one move, the SEC said it will emphasise climate risk and step up its reviews of compliance with financial advice rule Regulation Best Interest in examinations this year. The agency said investors are increasingly demanding investment strategies focused on sustainable and socially responsible factors and as a result will more closely assess disclosures by registered investment advisers and fund complexes regarding sustainable investment products. It also will review related advertising, policies, practices and proxy voting procedures.

Legal experts are suggesting firms do an internal assessment of how they define ESG and the terminology they use.

And late last week, the SEC’s Division of Examinations said the agency already has found instance of misleading claims as well as inadequate policies, procedures and documentation regarding investments that take ESG factors into consideration. It said some investment advisers were overpromising and underdelivering on ESG.

The agency also praised firms that made “disclosures that were clear, precise and tailored to firms’ specific approaches to ESG investing and which aligned with the firms’ actual practices” and employed “compliance personnel that are knowledgeable about the firms’ specific ESG-related practices.”

Expanding disclosure

The SEC is seeking public input through June 15 on plans to expand requirements for corporate disclosure of ESG issues and climate risk. Lee said the agency is updating 2010 guidance in light of developments over the last decade including market practices for gauging ESG risks and the advances in climate-change science.

Lee said the SEC is posing questions about data and metrics that cut across industries, the extent to industry-specific approach should be used, the existing voluntary climate disclosure and how a disclosure framework can be flexible enough to keep up with the latest market and scientific developments.

The “perceived barrier between social and market value is breaking down,” Lee said. ESG factors, such as human rights, human capital and climate change, are increasingly important to investors and have become central to portfolio construction.

Legal experts said increased disclosure rules would likely take years to be approved and it could be 2024 before compliance would be required from public companies.

It’s also issued an investor bulletin on ESG funds, and it’s working on enhancing transparency around proxy voting. Lee has also called for more disclosure and transparency about proxy voting by investment funds to ensure they’re expressing shareholder sentiment, particularly on ESG issues.

See also: – Message from America: Greener days projected in Biden White House

Other agency moves

Outside of the SEC, the Federal Reserve recently announced it plans to make climate change a major part of its Wall Street oversight, creating a new committee that will identify and respond to dangers a warming planet poses to the financial system.

The Financial Stability Climate Committee will be “charged with developing and implementing a program to assess and address climate-related risks to financial stability,” Fed governor Lael Brainard said in a recent speech. The US central bank is investing in research and modelling to get a handle on how climate events can threaten firms and the broader economy.

The Commodity Futures Trading Commission also has established a new unit to focus on climate change.


Natalie Kenway

Natalie is editor in chief at MA Financial covering ESG Clarity, Portfolio Adviser and International Adviser. She was previously global head of ESG insight for ESG Clarity and has been an investment journalist...