Securities and Exchange Commission examiners are asking probing questions about how private fund advisers are managing their sustainable investment commitments and disclosures, a veteran securities lawyer tells affiliate publication Regulatory Compliance Watch.

“They’re also asking about side letters – are there ESG commitments in them?” Seward & Kissel partner Debbie Franzese says. “If you’re focused on ESG, how has it affected your proxy voting policies? How have you engaged with management of portfolio companies? If you use third parties for scoring, how do you conduct due diligence?”

The Commission is currently weighing new rules on ESG disclosures that would apply to public companies. Franzese says the document requests she’s seen – coupled with last year’s ESG risk alert (RCW, April 9, 2021) – suggest that regulators think ethical, climate and governance matters are part and parcel of private fund advisers’ fiduciary duties.

“It’s not just a question of promoting values,” Franzese says. “There’s a view – and it’s administration-wide, not just the SEC – that ESG risks are material, and you have to have a handle on them for whatever business you’re in.”

Show your work


Franzese and her Seward colleagues have just authored a new chapter on ESG and private funds for a lawyers’ textbook. They argue that too many private fund advisers are looking at ESG integration from the wrong end of the telescope. Start with your firm’s investment priorities, Franzese says, and then tailor your sustainable goals (disclosures, etc) to those priorities. This has been a consistent theme from experts in the emerging ESG compliance field (RCW, November 5, 2021).

“It’s really important to be connected to the investment team,” Frazese tells RCW. “They’re the ones that are researching the portfolio companies, they’re the ones speaking to portfolio company management, they’re the ones that are doing the deep dives. You need to start with the strategy of the investment team and then work your way back to what makes sense for procedures and then communicate back to the investors.”

As ever, the key to acing exams is to show your work, Franzese says. If your firm isn’t worried about the growing intensity of hurricanes, say, explain to your investors why you’re not worried.

Other tips

Among some things to think about, Franzese and her colleagues include:

  • Who pays? If you’re going to hire vendors to evaluate ESG policies or claims, figure out who gets the bill—the adviser or the investors? “Advisers should also review their clients’ governing documents to determine whether additional disclosure regarding these expenses is warranted and what expenses can properly be borne by clients.”
  • How will you engage? “If a manager intends to be more active with… U.S.-listed issuers,” Franzese and her colleagues say, “it will need to consider a variety of additional legal issues, including those related to material, nonpublic information, regulatory filing requirements … and compliance with U.S. proxy rules.”
  • Who checks? Whatever P&Ps you settle upon, you’ll have to either hire or delegate (and empower) a “compliance/legal staff responsible for, among other things, reviewing investment memoranda and related back-up materials regarding the firm’s consideration of ESG factors…”
  • Remember the ‘primary lessons’ of the 2021 risk alert (RCW, April 9, 2021). Advisers must have “policies and practices that are (i) tailored to their business, (ii) accurately, clearly and consistently disclosed … and (iii) demonstrably and consistently followed by all firm personnel, and maintained, monitored and amended as needed.”
  • Take ‘a holistic approach’ to disclosures. Involve and educate “different groups throughout the firm” so that everyone understands your fund’s ESG goals, strategy and P&Ps. “For example, to the extent a manager has dedicated investor relations professionals, these individuals will often be the direct recipient of investor requests relating to ESG and will need the knowledge and training to appropriately, accurately and consistently respond to such requests …”

How are you managing your ESG policies? Share your best ideas with your colleagues by e-mailing Bill.