Advisers welcome potential regulatory scrutiny of ESG investing

Advisers welcome potential regulatory scrutiny of ESG investing
Possible SEC involvement could bring more clarity to what qualifies as socially responsible
JAN 03, 2020

Investment advisers say regulatory scrutiny of socially responsible investing could provide a stronger foundation for a way of constructing portfolios that is becoming increasingly popular with clients.

A recent Wall Street Journal report indicated that the Securities and Exchange Commission has launched examinations of funds that say they invest in companies that advance environmental, social and governance goals, such as promoting sustainable development, slowing climate change and increasing diversity and inclusion.

The agency is probing the criteria and methodology used to choose companies for ESG funds, according to the Wall Street Journal. An SEC spokeswoman declined to comment on whether the agency is conducting ESG exams.

Investment advisers are hearing more and more from clients who want to take an ESG approach to their portfolios. Some welcome regulatory interest.

“There is a lot of confusion and misunderstanding about what ESG investing is,” said Allan Moskowitz, principal at Transformative Wealth Management. “The SEC might be doing us a favor. [It] could help clarify the criteria. There have to be ways of measuring different issues for different kinds of companies.”

ESG reporting can be confusing, said Ashlee deSteiger, founder of Gunder Wealth Management. For instance, there is no universally accepted way to quantify whether and how companies in different industries – such as banking and farming – operate sustainably.

The SEC might be able to help develop standard ESG definitions, reporting requirements and disclosures that would help advisers recommend investments for their clients.

“It’s paramount to do research that’s valuable,” Ms. deSteiger said. The ESG market “might have to step back and create a stronger foundation from a reporting standpoint.”

Dan Slagle, founding partner at Fyooz Financial Planning, also wants a clearer definition of ESG. He is not concerned about having to answer to regulators regarding ESG investments.

“At the end of the day, you should be able to justify your ESG selections, whether it’s with clients or the regulator,” Mr. Slagle said.

Oversight upside

There may be an upside of regulatory oversight for the ESG industry, said Lance King, counsel at Seward & Kissel.

“It may be an opportunity for regulators to gain a better understanding of the different ways that firms invest sustainably to -- among other things -- mitigate risk,” Mr. King said.

The Wall Street Journal article cited a recent Morningstar report showing that inflows to socially responsible investing funds grew to $17.67 billion through November of last year from $2.83 billion in 2015.

Regulatory oversight won’t slow ESG demand.

“Investors are increasingly clamoring for it,” Mr. King said.

Many of the young professional couples Mr. Slagle’s firm specializes in working with want to integrate ESG into their portfolios.

“From a broader perspective, I don’t think regulatory scrutiny is going to affect future ESG inflows,” Mr. Slagle said.

How the SEC approaches ESG oversight will be important, Mr. Moskowitz said.

“Is it politically motivated, or are they really trying to help?” he said. “If the SEC is really trying to help, it’s not a bad thing.”

Ethan Powell, chief executive of Impact Shares, welcomes SEC examinations of ESG in order to combat “green washing.” But he doesn’t want the agency to develop a strict ESG screen that allows only a few stocks to qualify.

“My hope is that the SEC doesn’t try to commoditize the ESG landscape because it’s nuanced,” Mr. Powell said.

Latest News

AI operating system race heats up as Nevis raises $70 million
AI operating system race heats up as Nevis raises $70 million

Tandems and Zeplyn roll out new AI agents and assistants as wealthtech firms compete to run more of advisors’ back-office work

Vestmark, Allspring team up on advisor-built model portfolios
Vestmark, Allspring team up on advisor-built model portfolios

Allspring’s active strategies join Vestmark’s tax-aware UMA platform as RIA adoption gains traction for custom portfolios

A successful AI workforce isn’t about agents, says Humanity Labs CEO
A successful AI workforce isn’t about agents, says Humanity Labs CEO

“A better tool does not on its own make a better outcome,” said Humanity Labs CEO Andrei Pop.

Envestnet eyes RIA benefits of Vestmark deal
Envestnet eyes RIA benefits of Vestmark deal

“[Vestmark] bring to us the very scaled sponsor trading,” said Envestnet’s Sue Burton.

FinCEN rule "essentially dead" for U.S. firms, compliance experts warn
FinCEN rule "essentially dead" for U.S. firms, compliance experts warn

With 99.9% of companies now exempt from ownership reporting, advisors face widening gaps in client due diligence data.

SPONSORED Built on insurance experience to deliver on long-term promises

Knighthead Life entered the market with a competitive MYGA. A strong launch earned advisor confidence and paved the way for FIAs.

SPONSORED In the Age of AI, Trust Becomes the Advisor's Greatest Asset

As AI makes financial information more accessible than ever, Lana Hock explains why human judgment, trust, and empathy remain the qualities clients value most in a financial advisor