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ESG regulations and reporting: is your firm equipped to meet federal standards?

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With environmental, social, and governance (ESG) topics now solidly part of mainstream investment conversations, lawmakers and regulators increasingly hold advisors, executives, and support staff accountable for properly disclosing ESG-related information. In addition, the Securities and Exchange Commission (SEC) continues taking a hard look at the wealth management industry to ensure that advisors and asset managers faithfully and appropriately market themselves and their ESG strategies to investors, as required by law.

Federal regulations and standards make it vital for advisors to meet certain thresholds regarding “going green.” To crack down on “greenwashing,” or falsely and unsuitably emphasizing ESG factors when they are not at play, regulators want advisors to provide transparency and clarity around ESG investments available to clients so that investors can adequately evaluate the underlying holdings of these strategies. 

While asset managers are most affected by these federal regulations, any registered investment advisor (RIA) who utilizes ESG strategies needs to double-check that they adhere to federal guidelines in their regulatory filings, particularly in Part 2A of their Form ADVs. 

 

  • Cleaning up ‘greenwashing’

Advisors need to approach ESG marketing, investing, and execution with consistency and a careful understanding of federal rules and regulations. For advisors utilizing ESG strategies at the center of their practice, disclosures need to reflect how and why those strategies are in place appropriately. The SEC has already fined at least one firm and its advisor for misstatements and omissions about ESG topics, and regulators will continue analyzing financial advisors’ practices to ensure compliance. 

Federal authorities are reportedly trying to distinguish between advisors who are talking the ESG talk and those who are genuinely walking the ESG walk. 

The SEC isn’t the only regulator changing the wealth management industry with new standards and regulations. The Department of Labor (DOL) is also weighing in for advisors working with employer-provided retirement plans and employee benefits. As a result, plan fiduciaries need to stay up to date with the DOL’s latest mandates, which govern how ESG factors are characterized and included within employer-sponsored retirement plans. 

Another challenge facing advisors is that ESG rules and regulations are new and morphing, even while enforcement actions garner headlines. “There has been an increase in ESG-related enforcement over 2022, focused on increasing transparency and reducing ‘greenwashing,'” according to a blog on corporations and capital markets published by Columbia University Law School. “In addition to continued ‘greenwashing’ litigation arising from ESG-related disclosures, financial institutions should be aware that ESG-related legislations and rules at the federal and state levels are increasingly subject to challenge in court, increasing the amount of uncertainty for companies subject to these requirements.”

 

  • Stay current on ESG regulations

Given the outsized ramifications of mistakes and the continuing evolution of ESG-related regulations, advisors may be tempted to avoid dealing with ESG topics altogether. That approach, however, ignores the global trends toward making these factors an essential part of investors’ financial decision-making. For example, in 2021, a record $649 billion was invested in ESG funds, smashing records from 2019 and 2020. 

Mindful of federal guidelines, regulations, and best practices, advisors can capitalize on this demand by offering their clients sustainable opportunities to increase their wealth in a way that resonates with their personalities, beliefs, and outlooks. In short, it’s a way of differentiating your practice from your competitors. 

Positioning your firm to meet and exceed federal standards can be simple. Some easy-to-follow steps include:

  • Reviewing your regulatory disclosures and updating them with the appropriate information and language, where necessary.
  • Evaluating your ESG offerings and models, assessing their characteristics, and avoiding “greenwashing” or other forms of risky marketing. 
  • Consulting with a sustainability- or compliance-oriented third party who can evaluate your firm’s offerings and ensure that your solutions align with federal regulations and requirements.

At intelliflo, we’ve been at the forefront of this paradigm shift, integrating customized ESG themes into models and making advanced rebalancing and trading easier than ever for advisors. 

Schedule a live demo to see how intelliflo can help you implement your clients’ ESG preferences into their investments while staying compliant and following the industry’s best practices.