Climate Change Emerges as a Compliance Focus for SEC
By Dave Michaels
WASHINGTON -- Securities regulators are sharpening their focus
on whether asset managers that tout funds as socially responsible
are picking stocks that align with that cause, and whether the
firms support environmentally-friendly policies at companies they
have invested in.
The Securities and Exchange Commission said Wednesday that it
plans to boost examinations of such fund managers this year,
showing how an area long seen as a niche is crucial for many
investors. The SEC's move is its latest step to seize a bigger role
in the corporate debate over issues such as climate change, which
big investors such as BlackRock Inc. have helped advance.
Climate change is one of the hottest considerations for
investors who give priority to environmental, social and governance
risks at companies whose shares they own. The rise of ESG funds
also has become a partisan lightning rod in Washington, with
Republicans questioning their performance record and Democrats
looking for ways to give the segment a boost, including through
pension funds and retirement portfolios.
The SEC polices disclosures that investment managers make to
their shareholders, including whether those statements align with
their strategies. Significant gaps, such as a fund that touts an
ESG focus but invests mostly in polluting industries, could run
afoul of SEC rules.
The regulator also is checking how ESG-oriented funds vote on
environmental matters that appear on annual shareholder ballots,
the SEC said in a report issued Wednesday. SEC examiners don't fine
firms but can order them to fix compliance deficiencies or refer
their findings to the SEC's enforcement division, which is how many
investigations are started.
"It does raise questions about how the SEC will approach proxy
voting by mutual funds and other investment advisers," said Betty
Moy Huber, co-head of Davis, Polk & Wardwell LLP's ESG group.
"The SEC recognizes the asset-management industry can wield
enormous influence here, so [these exams] are a gigantic tool in
One of the SEC's core jobs is examining how financial firms such
as asset managers and brokerage firms follow investor-protection
laws. The SEC conducted 2,950 exams last year, a 4.4% drop from
2019, it disclosed Wednesday.
The SEC began examining how ESG funds work in 2019, sending
letters to firms that asked for a list of stocks they had
recommended to clients, models for judging which companies are
environmentally or socially responsible, and the best- and
worst-performing ESG investments. Wednesday's announcement signals
the regulator is now approaching the subject in a more systematic
The SEC last week opened a review of how public companies have
complied with climate-change disclosure requirements. The agency
has long told companies to report material environmental risks, but
regulators are now working on new guidelines tailored to how
companies discuss climate-change-related risks.
"Through these and other efforts, we are integrating climate and
ESG considerations into the agency's broader regulatory framework,"
Acting SEC Chair Allison Herren Lee said in a written statement
The Biden administration has nominated Gary Gensler as the
agency's permanent chairman. At his Senate nomination hearing on
Tuesday, Mr. Gensler said he would enforce disclosure of material
climate-related risks and signaled many investors want to see more
"In 2021, there's tens of trillions of dollars of invested
assets that are looking for more information about climate risk,
and I think then the SEC has a role to play to help bring some
consistency and comparability to those guidelines," Mr. Gensler
told members of the Senate Banking Committee.
SEC examiners this year also will review whether online
brokerage firms are adequately handling customer orders when they
sell them to high-speed trading firms to execute, the agency said.
That practice, known as payment for order flow, became a flashpoint
in the debate over the role of individual investors in the trading
in January that caused GameStop Corp. shares to rise from $20 to
Many of the online brokers, including Robinhood Financial LLC,
don't charge trading commissions but earn money through the
payments provided by the high-speed traders, which trade with its
Write to Dave Michaels at firstname.lastname@example.org
(END) Dow Jones Newswires
March 03, 2021 15:31 ET (20:31 GMT)
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