Peter Altman and Stacey Mitchell Quoted in Private Equity Law Report Article Series on SEC Scrutiny of ESG Practices

Private Equity Law Report has quoted Akin Gump litigation partner Peter Altman and environment and natural resources partner Stacey Mitchell in a two-part article series on the SEC’s scrutiny of private funds’ environment, social and governance (ESG) practices.

The first article, “OCIE’s Targeting of ESG Investing Practices in Recent Examinations and What It Means Going Forward,” analyzes the increased scrutiny of ESG investing by the SEC’s Office of Compliance Inspections and Examinations (OCIE) and looks at what it could mean for fund managers. It reports that, as record amounts of cash flow into ESG-focused strategies and new products surge, the SEC has been forced to acknowledge ESG’s growing role in the investment landscape.

According to Altman, “ESG is a front-of-mind topic for both public reporting companies and private fund managers, and it’s no surprise that the SEC’s examination function is looking at the potential risks created by the rising interest in that style of investing.”

Altman added that he does not think the SEC will raise questions about individual investments, as the SEC exam function is not “typically in the business of evaluating whether somebody made a good or a bad investment.” Instead, though, he said the OCIE will likely focus on whether a manager invested in what it said it was going to invest in.

“You can imagine a scenario where somebody puts together an ESG fund and, for performance reasons, starts to drift away from that strategy in search of higher yields by moving into gray areas as to whether its investments fit within the disclosure it has previously given,” explained Altman.

The second article, “How Fund Managers Can Identify and Mitigate Risks From the SEC’s Increased Focus on ESG Investing,” looks at some of the risks associated with ESG investing and provides some steps managers can take to mitigate those risks in advance.

Metrics and benchmarks used for evaluating ESG investments are one risk area for private funds to manage, the article notes, with Mitchell pointing out there are many competing frameworks for evaluating ESG factors, and the landscape continues to evolve.

“ESG evaluation and reporting are in their nascent stages,” said Mitchell. “Different companies are using different approaches, but we are nearing the point where entities are getting better at identifying which standards they’re following, at using metrics and at reporting those practices to investors.”

Still, ESG-focused PE firms cannot avoid making tough choices. “Metrics, just like any other accounting, create both opportunity and risk,” Mitchell noted. “The greater risk is in not identifying a metric at all and continuing with puffery or unclear standards. Investors are starting to really care about this topic, and they will not be satisfied with puffery as they become savvier.”

While ESG is a relatively new priority for regulators, Altman said, “There have been environmentally focused PE funds for a long time now, whether they have been in renewables, water, responsible mining, forestry or things along those lines.” As a result, the article notes, many firms can leverage their existing ESG disclosures and practices during an examination.

Mitchell added that even those PE funds without a specific environmental niche are unlikely to be completely caught off-guard by ESG questions. “There is a growing recognition that there are real financial risks and costs associated with not acting on climate,” she observed.

“For example, what if I’m a fund manager investing in companies located in certain portions of the country that have been hardest hit by storms that will worsen with climate change?” Mitchell suggested. “Is that a sound investment, or am I going to lose money on it? There’s a real financial link to the risks and rewards associated with those metrics now.”