Environmental, social and governance factors have played a key role in private funds operations throughout 2022 and the last several years. Growing regulations and legal standards by which fund managers are measured are still being established in order to keep firms in check. As a result, many fund managers are still figuring it as they go.

The U.S. Securities and Exchange Commission and the U.K.’s Financial Conduct Authority are focused on the ESG-related concern of “greenwashing.” This is the exaggeration of a fund manager’s ESG practices or impact to gain a competitive advantage by marketing a financial product as furthering ESG goals when the manager or product does not meet advertised standards. The SEC proposed a new rule that would impose a stringent new ESG disclosure regime.

New ESG rules to avoid greenwashing have been imposed to prevent misleading marketing practices but to also compel more detailed and standardized disclosures to the SEC and other advisory organizations. Regulatory bodies are more interested in how managers are describing their ESG and investment strategies and whether the reality matches with the strategy. In essence, regulatory organizations are looking to make sure fund managers “say what they do, and do what they say.”

Additionally, fund managers are seeing regulatory bodies focus on the risk if hindsight bias. Statements and assertions in pre-investment marketing materials may be evaluated differently in hindsight as changing standards become adopted.

Some key takeaways for private fund managers delving into the world of ESG are ESG is here to stay, the scope will only expand and become more detailed, strict compliance with stated policies and procedures as well as disclosure of obligations and expectations will be key. Managers should also avoid biting off more than they can chew in terms of limitations, promises or disclosure obligations, and say what you do and do what you say.

-Cole Lipsky