The SEC Office of Investor Education and Advocacy ("OIEA") offered investors a primer on environmental, social and governance ("ESG") funds.
The OIEA described criteria that may fall under each of the three elements of ESG, which include (i) a company's impact on the environment, or the risk and opportunities for that company related to climate change, (ii) a company's relationship with people and society, including how its supply chain addresses such issues, and (iii) a company's transparency and ethics, and the composition of its board of directors.
The OIEA asked investors interested in ESG funds to be aware:
- of the inconsistency of private ESG ratings across issuers, as well as the inconsistency of "rating" data that comes from third-party providers;
- of the difference between a fund that focuses on ESG investing and those funds that consider ESG factors alongside traditional factors;
- that funds may "weigh" the three factors differently (e.g., a fund promotes governance policies, but places less stress on environmental or social impact);
- that funds may focus on specific criteria within an ESG factor and neglect others (e.g., in terms of governance, a fund can focus on shareholder rights, but not on board of director diversity);
- of looking at a fund's disclosure documents or publically available information to better understand how the fund incorporates ESG; and
- that a fund does not have to be designated as "ESG" to incorporate ESG factors in its decision-making.
Additionally, the OIEA called attention to the fact that ESG funds perform differently than funds without ESG parameters, and recommended that investors diversify their investments.
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