Why advisers should consider adopting ESG compliance policies now


Environmental, social and governance (ESG) investments and compliance has topped the news charts yet again. Between the Securities and Exchange Commission (SEC) making ESG compliance a top exam priority for 2022 and recent charges against top-tier investment advisers, you would be hard pressed to visit a news site or peruse a social media app without seeing some reference to it.

What is ESG compliance? Those three letters, which have gained popularity among investors, can often equate to significant compliance risk for financial advisory firms that don’t understand the ins and outs of recent rulings. In this post, we’ll break down what ESG compliance is, why it matters and best practices for implementing ESG policies.

What is ESG compliance?

According to Investopedia, “Environmental, social, and governance (ESG) criteria are a set of standards for a company’s behavior used by socially conscious investors to screen potential investments. Environmental criteria consider how a company safeguards the environment, including corporate policies addressing climate change, for example. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.”

While many financial advisory firms still grapple with the complexity of ESG compliance factors and how to best implement policies that reflect their clients’ interest, the SEC has made their stance on ESG compliance clear, including it as a top exam priority for the second year in a row.

Unfortunately, ESG isn’t as straight forward as three short letters. Contributing to the ESG compliance complexity is a lack of industry-wide classifications, delineating what constitutes ESG investments and how to accurately relay that information to investors. In the worst cases, this has led to misinformation and misleading marketing or communications impacting investor decisions.

To help resolve some of this compliance risk and protect investors interested in ESG-focused portfolios, SEC exams will focus on whether or not advisory firms are:

“(1) Accurately disclosing their ESG investing approaches and have adopted and implemented policies, procedures, and practices designed to prevent violations of the federal securities laws in connection with their ESG-related disclosures, including review of their portfolio management processes and practices.

(2) Voting client securities in accordance with proxy voting policies and procedures and whether the votes align with their ESG-related disclosures and mandates.

(3) Overstating or misrepresenting the ESG factors considered or incorporated into portfolio selection (e.g., greenwashing), such as in their performance advertising and marketing.”

Why does it matter to financial advisers?

Simply put, when it comes to their investments, your clients care about ESG-related factors, asking more and more for those factors to be taken into consideration in managing their portfolios.  In fact, as Natixis reported, “data shows that between our 2019 and 2021 outlooks, the percentage of institutional investors implementing ESG rose by 18%, climbing from 61% to 72%.”

It doesn’t stop there. The SEC’s recent enforcement actions prove that they aren’t taking ESG compliance lightly, having charged and fined those institutions who fail to live up to the appropriate benchmark.

What does that mean for you?

Even financial advisory firms that do not offer an explicit ESG strategy should consider getting ahead of client requests. At a high level, best practices include:

  1. Instructing representatives on what directives the firm will consider and how it must be documented.
  2. Implementing policies and procedures for how such directives will be documented and carried out.
  3. Leveraging outside experts to ensure all ESG-related rules and guidelines are followed.

ESG has hit the radars of clients and regulators alike…and based on the industry-wide attention it has garnered, it doesn’t appear to be going anywhere any time soon. Ensuring you have the policies and procedures in place to meet client demand and remain in compliance is critical to your ongoing success. Ready to see how NRS can help your firm? Let’s schedule a time to talk!

About the Authors

Courtney Bowling

Courtney joined NRS in 2021 and is based in Austin, Texas. Courtney delivers comprehensive compliance solutions to all types of investment management firms. As a consultant, Courtney works closely with each firm’s officers and senior staff to identify regulatory obligations, unique conflicts of interest and other risks to assist in the development, implementation and testing of a comprehensive compliance program tailored to the firm’s practice.

Courtney has over 10 years of experience in the financial services industry serving on both the regulatory side and in the private sector. Early in her career Courtney worked for the Texas State Securities Board, first as a Financial Examiner conducting inspections of Texas-registered investment advisers and broker-dealers, and then as an attorney in the Inspections and Compliance Division. In 2014 Courtney moved to the private sector, accepting a position as the Chief Compliance Officer for a fixed-income broker-dealer. Since then, Courtney has served as the Chief Compliance Officer for investment advisers, including an adviser to private funds, registered investment companies, and a registered municipal adviser.

Courtney earned her Bachelor of Business Administration degree in Accounting from Texas Wesleyan University, her Juris Doctor degree from Texas Wesleyan University School of Law (now known as Texas A&M University School of Law) and is a member of the Texas state bar.