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.
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