Climate Risk Among SEC’s 2021 Compliance Priorities

Climate risks in the markets will be scrutinized closely this year by the Securities and Exchange Commission (SEC), which on Wednesday announced its examination priorities for 2021 amid greater calls for sustainability from the Biden administration.

The securities regulator will be reviewing proxy voting policies for investor risks on climate change and environmental, social, and governance (ESG) matters, SEC Acting Chair Allison Herren Lee said in a statement. It will also review firms’ business continuity plans in the event of climate-related physical disasters.

“Through these and other efforts, we are integrating climate and ESG considerations into the agency’s broader regulatory framework,” Lee said.

Climate change and ESG considerations are hotly contested among investors. Some believe the concerns have no place in investor portfolios, while others maintain that they are increasingly financially material to performance.

The SEC’s decision indicates how much attention it now gives to sustainable investments, once considered a marginal matter. This comes as more pension funds and asset managers make room for ESG strategies in their portfolios. And it dovetails with the new Biden administration’s environmental priorities.

The securities regulator will review whether firms’ practices actually match sustainability disclosures distributed to investors, particularly for ESG open-end funds and exchange traded funds (ETFs). The SEC will review funds for false or misleading statements, as well as analyze their proxy voting policies.

Along with business continuity plans related to physical disaster, the SEC will also examine whether investment firms are able to manage cyber risk as office workers continue to work from home. The securities regulator will scrutinize their ability to protect investors’ identities, prevent unauthorized access of accounts, and defend against phishing or ransomware attacks.

The agency also intends to scrutinize conflict of interest issues, such as adherence to Regulation Best Interest (Reg BI) standards for brokers and fiduciary duties for other investment advisers.

Investment firms will have to disclose conflicts of interest to retail investors, whose funds may be heavily affected by such risks. Products such as mutual funds, ETFs, municipal bonds, and other fixed-income securities, variable annuities, private placements, and microcap securities will be reviewed, the SEC said.

The regulator will also be looking at the risks of fintech. Keen to head off other incidents like the January fracas involving Robinhood, Citadel, and hedge funds, the SEC plans to review how digital brokerages are handling customer orders and making trade recommendations. It will evaluate whether investments of virtual assets, such as Bitcoin, are also in compliance.