Division of Examinations’ 2022 Exam Priorities: An Increased Focus on ESG

The U.S. Securities and Exchange Commission’s (“SEC”) Division of Examinations (“the Division”) released their annual Exam Priorities for fiscal year (FY) 2022 on March 30, 2022.

While these priorities mirror what the Division has focused on in recent years, (e.g., information security, standards of conduct, private funds), this year there is an increased focus on more thorough examinations of environmental, social, and governance (ESG) practices.

The Division’s focus on ESG is based on several issues that have emerged during the recent surge in investor interest in ESG-related topics that make it more difficult for investors to fully understand the risks they may be taking in their investments and disclosures. In particular, the Division notes that these practices lack standardization in terminology with inconsistent goals associated with ESG integration, and policies and procedures that are out of step with a firm’s operations.

Much of what the Division lays out for its ESG-related examinations aligns with how past examinations have been carried out, with a continued focus on issues such as accurate disclosures and the overstatement of performance. However, the elevation of ESG to a major focus area means that more firms, even those that do not manage ESG-labeled products, should expect ESG topics to be brought up during their exams. Firms should also expect examinations that dig deeper into topics like the firm’s carbon and climate accounting, proxy voting, portfolio engagement, and compliance oversight of ESG-related disclosures.

Our guidance

Firms should prepare for this heightened scrutiny around their ESG products and strategies in upcoming examinations by:

• Reviewing Public and Investor Commitments to ESG
  Similar to 2021, the Division will expect firms to be able to demonstrate “truth in advertising” when it comes to its disclosures on topics like sustainability and the environment. Firms should review marketing materials, sustainability reports, and other publications to ensure they can support their claims with data during an examination.
• Ensuring Proxy Voting and Engagement Strategies Align with ESG-Related Mandates
  The firm’s policies and procedures around proxy voting and portfolio company engagement should be reviewed to ensure the firm’s voting and engagement aligns with ESG-related disclosures and mandates.
• Monitoring Business Practices Related to ESG
  Firms will be expected to have policies and procedures to ensure ESG-related investment practices are accurate and aligned with ESG-related disclosures and review portfolio management practices.

Join our live webcast

On Thursday, April 14 at 1:00 PM EDT, we will host a special “ACA Consultant’s Corner” fireside chat discussing how the SEC's 2022 Priorities will impact ESG implementation strategies and investment products.

Register here

Resources

• SEC Division of Examinations 2022 Examination Priorities
• SEC Maintains Information Security and Operational Resilience Focus in 2022

Continued learning

• Navigating Uncertainty: Risk Management and the Regulatory Agenda
  Join us April 26 - 28 for ACA's Virtual Annual Conference where we’ll explore what regulatory priorities, emerging risks, and industry trends await compliance and risk professionals and how to navigate the changes ahead while moving forward with confidence. Register here.
   
• Regulatory Headwinds Webcast Series
  ACA will be hosting a series of fireside chats and webcasts surrounding the SEC's Priorities and recent rule proposals. See what's coming up next on our webcast calendar here.

How we help

If you have any questions about the alert or would like to learn more about our ESG advisory services, please contact us.