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SEC pronounces on investment in ESG funds

Regulatory team, Cadwalader Wickersham & Taft, New York, 2 March 2021

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The US Securities and Exchange Commission's Office of Investor Education and Advocacy or OIEA is offering investors a primer on environmental, social and governance or ESG funds.

In its paper the OIEA has described criteria that may fall under each of the three elements of ESG, which include:
(i) a company's effect on the environment, or the risk and opportunities for that company that relate to climate change;
(ii) a company's relationship with people and society, including the ways in which its supply chain addresses such issues; and
(iii) a company's transparency and ethics, along with the composition of its board of directors.

The OIEA asked investors interested in ESG funds to be aware:

  • of the inconsistency of private ESG ratings of issuers, as well as the inconsistency of 'rating' data that comes from third-party providers;
  • of the difference between a fund that focuses on ESG investing and those funds that consider ESG factors alongside traditional factors;
  • that funds may 'weigh' the three factors differently (e.g., a fund promotes governance policies, but places less stress on environmental or social impact);
  • that funds may focus on specific criteria within an ESG factor and neglect others (e.g., in terms of governance, a fund can focus on shareholder rights, but not on board of director diversity);
  • of looking at a fund's disclosure documents or publically available information to better understand how the fund incorporates ESG; and
  • that a fund does not have to be designated as 'ESG' to incorporate ESG factors in its decision-making.

Additionally, the OIEA called attention to the fact that ESG funds perform differently than funds without ESG parameters and recommended that investors ought to diversify their investments.

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