Asset Management Report 2021

July 16, 2021


Table of Contents:

  • ESG Investing Trending Upwards

  • SEC Division of Examinations Issues Risk Alert on ESG investing

  • The SEC Division of Examinations Announces FY2021 Examination Priorities

ESG Investing Trending Upwards

ESG investing has become a major area of interest in recent years, with Refinitiv Lipper reporting that[1] “assets under management [AUM] for US RI [responsible investing] funds rose 7.05% from $940.5 billion on December 31, 2020, to $1.007 trillion on March 31, 2021.” Over 85% of the AUM invested in RI funds was done via actively managed funds.

Based on recent Bloomberg Intelligence[2] research:

  • Europe accounts for over half of global ESG AUM
  • The US investment in ESG opportunities continues to expand
  • ESG assets are projected to reach $53 trillion by 2025, up from nearly $38 trillion at the end of 2020

The above research is in line with Mazars’ own data regarding the growth of ESG investing in Europe, the US and Asia. While the ESG universe is still emerging in the US, it is more mature in Europe and other parts of the world. In response to growing public interest in ESG assets and investment advisers and funds have expanded their approach to ESG investing and increased the number of product offerings.

Recent Regulatory Attention to ESG Investing 

In response to the expansion of investment offerings around ESG assets, the SEC’s focus on ESG investing has also increased.

Mazars Insights:

The political composition of the SEC commissioners have shifted since the Senate confirmation of Chair Gensler to the SEC. With Chair Gensler replacing Jay Clayton, there are now three Democrats (including the chair) and two Republicans vs the previous split being three Republicans and two Democrats. The Biden administration and Chair Gensler have made it very clear that putting requirements for climate risk and general ESG disclosures, as well as some regulatory “teeth” around how to regulate the asset management industry and their ESG claims. In our view, we expect that these changes will definitely come in the short-term. As you review the summary of the recent speech’s and public statements given by the SEC Commissioners, it is also very clear that there is a significant divergence of opinion between the Commissioners on next steps.

Highlights from the end of 2020 to present:

  • The ESG Subcommittee of the SEC Asset Management Advisory Committee (the “AMAC”) provided multiple written updates to the AMAC throughout 2020 and presented preliminary recommendations to the AMAC in December 2020.[3]
  • In March 2021, the SEC announced the creation of a Climate and ESG Task Force within the SEC’s Division of Enforcement (the “Task Force”) with an initial focus on identifying any material omissions or misstatements in issuers’ disclosures concerning climate risks under existing rules. In addition, the Task Force was to analyze disclosure issues and compliance shortfalls in investment advisers’ and funds’ ESG strategies.
  • On March 15, 2021, the SEC requested public input related to 15 climate change related questions; with a 90-day comment period.[4]
    • Over 550 public comments received
  • On March 19, 2021, Commissioner Elad Roisman gave a speech to the AMAC titled “An Honest Conversation about ESG Regulation.”[5]Commissioner Roisman noted the polarizing nature of discussing ESG. However, he stated that “it is entirely reasonable for a person to feel that climate change deserves immediate attention from lawmakers and still question whether the SEC mandating new disclosures from US public companies is an appropriate step for the agency.”
    • He continued by posing questions to the AMAC panelists who represented asset managers. The questions revolved around: (a) How asset managers have gauged investor interest in ESG products, (b) What ESG information do they need for issuers? Why do they need it, and how do they obtain it? (c) How have European mandates factored into their decision making? (d) How would comparability of ESG disclosure help, and why is it important?
    • Commissioner Roisman also asked about the expected involvement by the SEC in supervising a third-party standard setter for ESG disclosures, and regarding the burden for public companies to provide investors with the potential additional disclosures.
  • On April 14, 2021, Commissioner Hester Peirce issued a public statement titled “Rethinking Global ESG Metrics.”[6] Commissioner Peirce requested that those that are pushing for a common international disclosure framework consider the potential drawbacks. The key drawbacks she discussed are as follows:
    • Standardized metrics will constrain decision making, stifle innovation.
    • ESG metrics (unlike financial accounting) are not readily comparable across issuers and industries.
    • The strength of the US financial system is based on investor-focused rules; rather than a stakeholder-focused regime. A stakeholder-focused regime would increase costs, decrease the attractiveness of US financial markets, and distort the allocation of capital.
  • On May 24, 2021, Commissioner Allison Herren Lee gave the keynote at the 2021 ESG Disclosure Priorities Event,[7] presenting a robust defense of increased climate risk and ESG disclosures, highlighting certain “myths” and providing responses to those myths.
    • Myth #1: ESG matters (indeed all matters) material to investors are already required to be disclosed under the securities laws.

Commissioner Lee notes that under the securities laws, “disclosure is only required when a specific duty to disclose exists.” The implication is that because the securities laws do not have any explicit ESG disclosures (i.e. there is no duty to disclose); information important to an investor would not necessarily be disclosed.

  • Myth #2: Where there is a duty to disclose climate and ESG matters, we can rest assured that such disclosures are being made.

She notes that specific disclosure requirements (rather than an abstract concept of materiality) would increase the likelihood of disclosing information that would be material to reasonable investors.

  • Myth #3: SEC disclosure requirements must be strictly limited to material information.

Commissioner Lee refers to Section 7 of the Securities Act of 1933 which “gives the SEC full rulemaking authority to require disclosures in the public interest and for the protection of investors. That statutory authority is not qualified by ’materiality.’…The idea that the SEC must establish the materiality of each specific piece of information required to be disclosed in our rules is legally incorrect, historically unsupported, and inconsistent with the needs of modern investors, especially when it comes to climate and ESG.”

  • Myth #4: Climate and ESG are matters of social or “political” concern, and not material to investment or voting decisions.

The commissioner states that investors have been clear about climate risk and ESG concerns as being material. Therefore just because it has social/political implications does not reduce its materiality to investors.

  • On June 3, 2021, Commissioner Elad Roisman gave a speech titled “Putting the Electric Cart before the Horse: Addressing Inevitable Costs of a New ESG Disclosure Regime” to the ESG Board Forum.[8] Commissioner Roisman’s speech stated that he does not believe any additional changes are required.
    • “I feel like a broken record, but our disclosure framework already requires public issuers to provide information that is material to investors, including information one might categorize as E, S, or G.  The Commission has explicitly interpreted our rules to require disclosure of the material effects of climate change on a business.  We also amended Regulation S-K last year to require disclosures regarding human capital.  To the extent that other material risks to a company can be categorized as E, S, or G, I do not see a legal justification for failing to disclose that information under our existing rules.”
    • However, Commissioner Roisman also provided his views on how to adapt the potential new requirements to balance the benefits against the costs.
      • Scale disclosures for public companies
      • Be flexible in sources, methodologies, and level of precision – especially where information is difficult to obtain (since the reporting entity might not control the source of the information).
      • Provide safe harbors for reporting entities who are making their best effort to comply with the new disclosures.
      • Consider whether the information should be furnished, rather than filed. This will allow the information to be provided to stakeholders without the added liability that a filing with the SEC would indicate.
      • Consider an extended implementation period.
      • On June 22, 2021, in a speech at the National Investor Relations Institute titled “Can the SEC Make ESG Rules that are Sustainable?” Commissioner Roisman reiterated his view that there are key questions that must be answered prior to promulgating new rules.[9]
    • On June 16, 2021, the US House of Representatives passed the “Corporate Governance Improvement and Investor Protection Act.” The bill is headed to the US Senate next. The slim margin by which it passed the House (215 Yeas -214 Nays) shows how divided Congress is on this issue.

SEC Division of Examinations Issues Risk Alert on ESG investing[10] 

In April 2021, the SEC Division of Examinations (the “Division”) released a risk alert because of recent findings from examinations of ESG financial products and services provided by investment advisers and funds. It provides  concrete guidance regarding the Division’s expectations for effective compliance policies and controls in this area.

Mazars Insights:

Asset managers would do well to heed the advice of famed psychologist Carl Jung, who once said, “you are what you do, not what you say you’ll do.” We believe that the SEC’s risk alert can be summarized in this manner  as well. Asset managers should ensure that their claims about ESG investing can be substantiated, and that the impact of investing in ESG is appropriately measured, evaluated, and adjusted (as needed). The Division’s findings focused on the gap between the advertising of ESG investing vs. the reality of the investing philosophy and management. Do asset managers have the appropriate systems, processes, and controls in place to ensure that they are investing in a manner that is consistent with their stated strategy? How have compliance programs been created to adapted to the asset managers stated ESG strategy?  

Examination Focus Areas 

  • Portfolio management: review of the firms’ policies, procedures, and practices related to ESG and their use of ESG-related terminology; due diligence and other processes for selecting, investing in, and monitoring investments in view of the firms’ disclosed ESG investing approaches; and whether proxy voting decision-making processes are consistent with ESG disclosures and marketing materials.
  • Performance advertising and marketing: review of the firms’ regulatory filings; websites; reports to sponsors of global ESG frameworks, to the extent the firms have communicated to clients and potential clients a commitment to follow such frameworks; client presentations; and responses to due diligence questionnaires, requests for proposal, and client/investor-facing documents, including marketing materials.
  • Compliance programs: review of the firms’ written policies and procedures and their implementation, compliance oversight, and review of ESG investing practices and disclosures.

Observations by the SEC Staff

  • Portfolio management practices were inconsistent with disclosures about ESG approaches.
    • Advisers should take care to review their Form ADV and their other disclosures and reconcile against their actual investment origination and management processes.
  • Controls were inadequate to maintain, monitor, and update clients’ ESG-related investing guidelines, mandates, and restrictions.
    • Are there sufficient controls in place to ensure that the investment advisor can monitor and screen the investments in the manner that they advertise?
    • Are the controls precise enough to provide the required level of oversight?
  • Proxy voting have been inconsistent with advisors’ stated approaches.
    • Advisors should take care to review their approach and reconcile against their actual proxy voting policies and practices.
  • Unsubstantiated or otherwise potentially misleading claims regarding ESG approaches.
    • This observation is not unique to ESG investing. Advisors should always ensure that disclosures surrounding investment approaches are transparent and provide clients/prospects with any disclosures on conflicts of interest, related party transactions, and be able to substantiate the advisor’s internal approach to ESG investing (including explanations for any investments that might indicate “style-drift”).
  • Inadequate controls to ensure that ESG-related disclosures and marketing are consistent with the firm’s practices.
    • Are there controls in place to ensure that the marketing information matches the actual processes? How are changes in processes (or marketing/go-to-market strategy) addressed via the controls?
    • Are the controls precise enough to provide the required level of oversight?
  • Compliance programs did not adequately address relevant ESG issues.
    • Advisors should develop specific compliance programs to ensure that the firm is appropriately addressing the risks of non-compliance that is applicable to their investment strategy and approach.
    • Are the compliance personnel knowledgeable about the firms’ specific ESG-related practices?

The SEC Division of Examinations Announces FY2021 Examination Priorities

The SEC Division of Examinations (the “Division”) recently announced 2021 examination priorities, signaling an increase in scrutiny and enforcement among asset and wealth management firms. The Division will enhance its focus on risks related to RIA compliance programs, aspects of registered investment company operations, RIAs to private funds, financial technology, which includes digital assets and transition of London Inter-Bank Offered Rate (LIBOR). We have summarized the respective focus areas for each notable asset management industry related examination priority below.

  • RIA Compliance Programs – Focus areas related to RIA compliance programs remain consistent with prior years, with a heightened focus on RIAs that have never been examined, including new RIAs and RIAs registered for several years that have yet to be examined. RIAs that are dually registered as, or are affiliated with, broker-dealers, or have supervised persons who are registered representatives of unaffiliated broker-dealers will also be prioritized for examination. The list of core areas for the examinations includes:
    • The appropriateness of account selection
    • Portfolio management practices, custody and safekeeping of client assets
    • Best execution
    • Fees and expenses
    • Business continuity plans
    • Valuation of client assets for consistency and appropriateness of methodology

As discussed in greater detail in the ESG sections above, the Division will also focus on product offerings with investment strategies that focus on sustainability. These areas are widely available to investors such as open-end funds and ETFs, as well as those offered to accredited investors such as qualified opportunity funds.

  • Registered Funds – Mutual funds and ETFs remain a focus. The Division intends to examine disclosures to investors, valuation, filings with the Commission, personal trading activities, and contracts and agreements. In particular, in connection with valuation and the resulting impact on fund performance, liquidity, and risk-related disclosures, the Division will review for investments in market sectors that have experienced stress due to the pandemic, such as energy, real estate, or products such as bank loans and high yield corporate and municipal bonds. In addition, the Division intends to review disclosures and practices related to securities lending. Furthermore, the Division plans to prioritize examinations of mutual funds or ETFs that have not been previously examined, or not examined in a number of years.
  • RIAs to Private Funds – Pension plans, charities, and endowments allocate significant portions of their assets in private funds. The Division will continue to focus on advisors to private funds, and will assess compliance risks, including a focus on liquidity and disclosures of investment risks and conflicts of interest. The Division will also focus on advisors to private funds that have a higher concentration of structured products, such as collateralized loan obligations and mortgage backed securities, to assess whether the private funds are at a higher risk for holding non-performing loans and having loans with higher default risk than that disclosed to investors. The Division will also examine advisors to private funds where there may have been material impacts on portfolio companies owned by the private fund (e.g., real estate related investments) due to recent economic conditions.
  • Digital Assets – The digital transformation is underway. The Division recognizes the evolution of the digital asset market and the adoption of distributed ledger technology in financial services. As a result, the Division will continue its focus on assessing:
    • Whether investments are in the best interests of investors
    • Portfolio management and trading practices
    • Safety of client funds and assets
    • Pricing and valuation
    • Effectiveness of compliance programs and controls
    • Supervision of representatives’ outside business activities
  • LIBOR Transition – In 2017 the UK’s Financial Conduct Authority (“FCA”) announced it would stop compelling banks to submit the rates required to calculate LIBOR after 2021. Recent statements issued by various industry groups such as LSTA and ISDA as well as the LIBOR administrator indicated that the one-day, one-month, six-month and one-year USDLIBOR rates will cease publication in June 2023. Meanwhile, the one- and two-week USD LIBOR rates will cease publication as of Dec. 31, 2021, although a synthetic rate may be available for legacy contracts after this date. Notwithstanding the June 2023 date, the U.S. banking regulators have previously advised that new financial contracts may not utilize LIBOR after Dec. 31, 2021.

    Currently, LIBOR remains the benchmark for trillions in financial contracts worldwide. For financial services firms including RIAs, broker-dealers, and investment companies, the LIBOR transition will have a far-reaching impact. To ensure a smooth discontinuation of LIBOR, the Division intends to engage with registrants through examinations to assess their understanding of any exposure to LIBOR, their preparations for the expected discontinuation of LIBOR and the transition to an alternative reference rate, in connection with registrants’ own financial matters and those of their clients and customers.

Key Contributors:

Charles V. Abraham

Partner, Financial Services Practice Leader


Samuel Pizzichillo

Senior Manager, Financial Services

Kenny Zhong

Senior Manager, Financial Services

Mazars USA LLP is an independent member firm of Mazars Group, an international audit, tax and advisory organization with operations in over 90 countries. With roots going back to 1921 in the US, the firm has significant national presence in strategic geographies, providing seamless access to 26,000 professionals around the world. Our industry specialists deliver tailored services to a wide range of clients across sectors, including individuals, high-growth emerging companies, privately-owned businesses and large enterprises.












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Disclaimer of Liability

The information provided here is for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation.

Mazars USA LLP is an independent member firm of Mazars Group.

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