Say what you do and do what you say

ESG and sustainability funds

Matt Giordano

Matt Giordano

Partner, Audit, KPMG US

+1 617-988-6327

We’re over 100 days in to the new administration and are starting to get a clearer picture of the regulatory priorities that will impact asset managers. The Biden administration and the U.S. Securities and Exchange Commission (SEC) will have an enhanced focus on climate and ESG issues and their enhanced focus will certainly have an impact on public and private funds.

In March, the Division of Examinations announced its 2021 Examination priorities and one of the focus areas includes a greater focus on climate-related risks. In addition, the SEC issued a press release, to announce the creation of a climate and ESG Task Force in the Division of Enforcement. It appears when it comes to ESG or sustainable funds, the SEC will continue to focus on disclosure and ensuring that funds have consistent and adequate policies and procedures in place. So, if I can give one piece of advice to ESG or sustainable fund managers – or really any registered fund manager – it’s: Say what you do and do what you say.

In the prior administration, we saw the SEC’s Office of Inspections and Examinations, now called the Division of Examinations, paying more attention to policies and procedures that funds establish when it comes to disclosure for ESG or sustainability funds. ESG and sustainable investing is a high growth investment area in terms of both the amount of investible assets and the number of ESG or sustainable products available. Any time there is increased interest from retail and institutional investors on a specific investment product or strategy, we see increased attention from regulators.

So how should asset managers prepare to meet this increased focus? They should ensure they establish clear policies and procedures that investors and regulators can easily examine in order to understand how the fund makes decisions about the types of investments they include in their fund. An investor should be able to easily decern if a fund is considered “ESG” or “sustainable” based on investments in companies that are ensuring specific diversity goals are in place, or if they are carbon neutral, or if they are supporting companies that are trying to create sustainable solutions for example. Once those policies and procedures are in place, asset managers need to make sure they are following them.

When it comes to ESG or sustainability funds, or any investing, it’s important that retail investors trust the products they are investing in. So, my biggest piece of advice to the industry is: Say what you do and do what you say. For example, clearly disclose your policies and procedures and ensure you review those policies and procedures to make sure you are adhering to them. This will go a long way to building trust with investors and staying out of trouble with regulators.