Reading the Tea Leaves on the SEC’s Disbanding of its Enforcement ESG Task Force

News sources recently reported that the SEC has quietly disbanded its Climate and ESG Task Force for in its Division of Enforcement (the “ESG Task Force”), which had formed in early 2021 under then-Acting Chair Allison Lee and continued under Chair Gary Gensler.  We have received questions from clients regarding what, if anything, this development may mean for asset managers.  Below are some thoughts:

• The SEC reported that the disbanding of the ESG Task Force reflects the ESG Task Force’s success, with an SEC spokesperson telling Bloomberg that “[t]he strategy has been effective, and the expertise developed by the [ESG] task force now resides across the Division [of Enforcement].”
  • In its short history, the ESG Task Force brought a number of high-profile enforcement actions against SEC registrants, including asset managers.  These cases include cases against in 2022 and 2023 alleging, in some instances, misstatements and omissions relating to ESG considerations and alleged failures to adopt and/or follow ESG-related policies and procedures.  The ESG Task Force also brought significant actions against operating companies such as Vale S.A. and Keurig Dr Pepper Inc., more recently.
• While there is credibility to the SEC’s narrative regarding the disbanding of the ESG Task Force, it is also true that the Commission and its staff have in recent months been publicly deemphasizing the role of “ESG” in actions they are taking.
  • For example, on September 19, the SEC announced an action against an investment adviser for allegedly making misleading statements and alleged compliance failures relating to its “biblically responsible investing” strategy.  The SEC’s press release does not mention ESG (much less the ESG Task Force), and the settlement order’s only mentions of ESG are (a) a registrant’s name and (b) a direct quote taken from the a white paper written by the relevant investment adviser.  The SEC and its staff have previously attributed greater prominence to the ESG-related components of the action.
  • The SEC has also removed the ESG Task Force’s individual page from the SEC’s website.  Its page used to list various ESG-related enforcement actions and displayed various remarks by Commissioners relating to ESG issues.
  • We have noticed that routine examinations of funds and advisers are increasingly omitting some of the previously standard ESG-focused requests from their initial exam request letters, even where the firms being examined offer ESG-specific products and strategies.
  • Last year, the SEC removed ESG as a topic of focus in its 2024 exam priorities.
• Although there is no longer a formal ESG Task Force and the SEC has seemingly been publicly downplaying the role of ESG in its actions, that does not mean issues relating to ESG are off the SEC’s radar.  An SEC spokesperson told Responsible Investor that “[i]f we see another uptick in misleading or false claims around ESG by issuers and ESG investing by advisers… we will use the same tools we’ve used in the past to hold those violators accountable.”
• ESG also remains on the SEC’s rulemaking agenda.  According to the SEC’s most recently posted agenda:
  • The adoption of “enhanced disclosures” by certain advisers and registered funds relating to their ESG practices is scheduled to be adopted by October 2024.
  • A proposal to enhance disclosures relating to the diversity of public company board members and nominees is scheduled to be proposed by April 2025.
  • A proposal to enhance disclosures regarding human capital management is scheduled to be proposed by April 2025.
• Additionally, the SEC continues to litigate on behalf of its operating company climate disclosure rules, as discussed in previous Viewpoints posts (see, e.g., here).

Given the above, notwithstanding the public-facing deemphasis on ESG coming out of the SEC, we would recommend that clients continue to consider their ESG-related risks and applicable disclosures for accuracy, ensure applicable compliance policies are adopted (as appropriate) and followed with relevant testing conducted, and continue to monitor the SEC for further regulatory developments.

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