Compliance teams ‘front and center’ on ESG

With the SEC’s proposed rules requiring funds to back up their ESG claims, firms are turning to compliance and training to avoid enforcement crosshairs.

The private fund industry is increasingly relying on compliance professionals to oversee ESG programs, especially now that the SEC is scrutinizing firms for potential greenwashing.

Panelists at PEI’s Private Fund Compliance Forum said compliance teams are “front and center on ESG,” since one of the main functions of a compliance officer is ensuring the accuracy of claims made to investors.

“The CCO performs many of the necessary tasks relating to ESG, including oversights of policies and procedures, training, testing and surveillance,” one private fund lawyer observed.

It’s no surprise, then, that some firms are adding ESG-focused compliance officers.

“These people will focus solely on ESG and really shore up the compliance behind it. They are connecting dots and confirming things that may have been overlooked the past few years,” the lawyer said.

And ESG compliance is only becoming more important since the SEC on Wednesday proposed a rule that would require funds that consider ESG in their investment processes to disclose more information. The proposed rule says impact funds with an ESG-related investment objective would have to disclose how they measure progress toward that goal.

Funds for which ESG investing is a significant or primary consideration would be required disclose standardized data backing up their ESG claims, including information about the greenhouse-gas emissions produced by the companies or issuers in their portfolios.

The regulator is also focusing on “greenwashing,” and on Monday fined BNY Mellon Investment Adviser $1.5 million for allegedly misstating and omitting information about ESG investment considerations for mutual funds that it managed.

“The SEC is effectively saying that the marketing materials and the prospectus for those funds suggested an ESG analysis of the portfolio that the adviser was not able to substantiate,” a legal vice-president and CCO of a private equity firm said. “I think that’s something that we’re going to see more, so you have to have that compliance oversight and you have to be ready to back up your claims.”

Practice what you preach

Regardless of firms’ ESG claims, panelists at the forum said that it is important to make sure practices are consistent with disclosures.

“The SEC’s sanctioning on ESG should have woken us all up to make certain that you’re actually following the practices that you’ve articulated internally in your policies, in your investor disclosures and in your marketing materials,” the PE legal vice-president and CCO said.

“If we’re going to learn anything from the BNY Mellon enforcement, it’s that the [SEC’s] staff is going to hold us to our own standards,” one private equity general counsel and CCO said during another panel. “If we say we’re going to do something, then we need to do it.”


One reason some firms may not be in compliance with their own policies and procedures is simply that employees don’t know about them or understand them. Here, training is critical.

“We’ve realized that you really can’t implement an ESG program unless the investment professionals know what the firm is trying to do” with its ESG program, said the PE legal vice-president and CCO. “The investment professionals and the analysts need to know how to evaluate the carbon footprint of a portfolio company that the firm is investing in, or what ESG improvements they can make.”

Compliance professionals should also be talking to investor relations and marketing personnel to find out what they are telling investors and portfolio companies, ensuring those communications are consistent with the firm’s disclosures and its policies.

Making sure there is a consistent message, that it is the right message and that all the investment professionals and executives at the firm are on the same page when it comes to ESG is critical to keeping firms out of the SEC’s enforcement crosshairs, panelists concluded.