Uyeda explained, “an adviser can only pursue an ESG investment strategy if the client expresses a desire to pursue such a strategy after receiving full and fair disclosure regarding the salient features of the strategy, including the strategy’s risk and return profile.” The commissioner notes that asset managers and advisers have a fiduciary duty to their clients to provide full disclosure of strategy details. Uyeda observed another compliance challenge with ESG strategies: namely, they’re sometimes not fully and fairly disclosed to clients. “Although ESG investing is wildly popular, it is difficult to ascertain exactly what ESG means, so it is challenging to identify when an ESG investment strategy is properly labeled as such.” īeyond the risk of mislabeling a strategy, Mr. “Touting a product as being ‘ESG’ is good for business,” Mr. Uyeda explained that demand for ESG investments has been rapidly growing, with such investments garnering higher fees than traditional alternatives. The commissioner’s remarks include numerous words of caution for any asset manager or adviser offering ESG options. With this theme as context, and following other recent enforcement actions, SEC Commissioner Mark Uyeda delivered remarks about ESG concerns in late January to the California ‘40 Acts Group, a nonprofit forum that facilitates discussions regarding matters that impact the investment management industry. “In response to investor demand,” the SEC explained, “ are increasingly branding and marketing their funds and strategies as ESG.” But when they do so, “they must establish reasonable policies and procedures governing how the ESG factors will be evaluated as part of the investment process, and then follow those policies and procedures, to avoid providing investors with information about these products that differs from their practices.” ![]() For example, at the end of November it announced a $4 million settlement with Goldman Sachs for alleged failures to follow its own ESG policies and procedures when choosing investments for two mutual funds and one separately managed account strategy. The SEC has thus been focused on the issue of false ESG claims. ![]() ![]() While investors certainly gravitate towards ESG options, the resulting market demand has created a financial incentive for advisers to brand strategies and investments as ESG even when the categorization may be a stretch. As more investors seek to align their portfolios with their values, asset managers and financial advisers are increasingly offering environmental, social, and governance (ESG) products and strategies.
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