OCIE Adds ESG/SRI to Routine Adviser Exam Requests

In a sign of the times, the SEC’s Office of Compliance Inspections and Examinations is now including document requests relating to ESG, SRI, Impact, responsible, sustainable, green, ethical, impact or good governance investments recommended to advisory clients. A review of OCIE’s most recent document request suggests that advisers should take a moment to revisit their preservation of all due diligence materials, including meeting notes, related to ESG investments. Advisers can anticipate enquiry into the adviser’s “internal definition of any terms that related to ESG and/or SRI”, each factor utilized, and written policies and procedures relating to the application of such factors. OCIE’s inquiry will include adherence to the UN Principles for Responsible Investment and written documentation of the adviser’s consideration of these principles in its investment processes. OCIE will request also a 15-step table of every ESG investment, including how that investment scored on the adviser’s ESG scoring system. While the balance of the exam request is to be expected (all ESG advertising, all performance returns, all books and records, all vendor contracts, all client agreements, etc.) some aspects of OICE’s line of enquiry may not be as intuitive. OCIE is interested in (i) how profitable ESG investing turns out to be – looking for top 5 winners and losers; (ii) the adviser’s due diligence files and “personal notes” of meetings with management of portfolio companies, of meetings with customers and/or with investment consultants; and (iii) the receipt of any awards. For advisers that engage external firms to conduct periodic mock SEC exams, one would think ESG compliance testing might be included in your next exercise.

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