The Securities and Exchange Commission (SEC) has made clear in recent months that it is paying keen attention to registered firms’ policies and procedures around environmental, social, and governance (ESG).

An April 9 risk alert from the agency’s Division of Examinations provides observations from recent exams of investment advisers, registered investment companies, and private funds offering ESG products and services. Increased investor demand has led to a proliferation of ESG-related investment offerings, the SEC said, from funds that merely consider ESG factors along with other trends that might influence a portfolio’s performance, to funds that pick and sort companies based on a demonstrated commitment to a particular factor, like minimizing their environmental impact. Some have created screens that choose investment options based on ESG subsets like sustainability, climate, or faith-based investing.

With all the attention being paid to ESG and climate-related issues by the SEC lately, one might think ESG-related risks are somehow different or unique. It is true the SEC under newly confirmed chair Gary Gensler may choose to implement a framework by which all ESG-related investments can be measured against. But that has not yet happened.

SEC Commissioner Hester Peirce, in a statement issued Monday responding to the risk alert, said ESG investment strategies are not unique in the eyes of examiners.

“As with any other investment strategy, advisers and funds should not make claims that do not accord with their practices, and our examiners will be looking for that consistency between claims and practice,” she said. “Our examiners are not—and will not be in this space—merit regulators. The SEC’s role is not to assess whether any particular strategy is a good one, but to ensure that investors know what they are getting when they choose a particular adviser, fund, strategy, or product.”

Whatever the claims or goals of the ESG investments in question, what SEC examiners are focusing on like a laser is whether these funds deliver on their promises—not promises of profit but whether a firm’s disclosures align with its investment practices. There is a lot of room for confusion, the SEC said in its risk alert, because “the variability and imprecision of industry ESG definitions and terms can create confusion among investors,” particularly retail investors.

“Actual portfolio management practices of investment advisers and funds should be consistent with their disclosed ESG investing processes or investment goals,” the risk alert said. Compliance professionals need to be knowledgeable of the firm’s ESG products and services, know how they are being described and marketed, and remain alert for divergence between what the disclosures say and what’s actually happening with their ESG offerings.

Here are some of the issues examiners found with ESG-related services and products:

  • Practices were inconsistent with disclosures about ESG approaches. For example, disclosures would falsely claim adherence to a global ESG framework. Or, disclosures would claim a portfolio contained holdings with high ESG scores but then had holdings with lower scores than advertised.
  • Inadequate screening controls, particularly in keeping up with investors’ negative screening demands. There were failings in this area at launch of a new portfolio and in managing the portfolio over time.
  • Misleading ESG claims, by either overstating the involvement of a particular investment advisor or by omitting or downplaying conflicts of interest between an advisor and an ESG product. Advisors to ESG funds would make claims the funds met certain criteria, but there would be no one in the firm’s compliance verifying these claims were true.
  • Compliance programs were less effective when compliance personnel had limited knowledge of ESG-related analyses and oversight, making it difficult for them to determine whether disclosures were accurate.