Compliance Considerations for Adding ESG Assets to Your Client Portfolios

Investment Advisers who fail to adopt or acknowledge the societal mind-shift towards sustainability may lose out on potential investors.

Whereas such shifting trends may have been ignored several years ago, overlooking the importance of incorporating investments that adhere to responsible Environmental, Social, and Governance (ESG) practices may border on an investment adviser’s failure to act in the best interest of their investors.

However, it is advisable to take the necessary steps to mitigate risk when adding ESG investment assets to clients’ portfolios.

Environmental, Social, and Governance (ESG)

Over the last few years, there has been a steady rise in investors seeking to add investments that meet ESG criteria to their portfolios.

As the importance of sustainability becomes more apparent and the tax benefits compound, investors are prioritizing such investments and actively avoiding companies that do not display environmental and social responsibilities.

However, 2023 witnessed a major anti-ESG movement by several state legislators in what has become a battleground among the states shielding corporations from ESG ‘discrimination.’

Hundreds of anti-ESG laws were proposed; however, only a handful were passed, including anti-ESG investing laws, anti-boycott laws, and anti-discrimination laws against corporations in non-sustainable industries such as fossil fuels, agriculture, and firearms.

California, however, has successfully introduced four new ESG laws that will have a notable impact on public and private companies. New York is following suit, introducing four similar laws.

The SEC and ESG Investments: Potential Issues with Adding ESG Investments to Clients’ Portfolios

In the spring of 2021, the SEC established the Climate and ESG Task Force in an effort to regulate the growing trend of investments that purported to fit that criterion. The creation of the task force was partly in response to the growing issue of “Greenwashing,” a prevalent trend where companies hype up or falsify their sustainability efforts to attract investors.

In July 2023, the SEC introduced two new rules addressing disclosures for cyber incidents and risk management and addressing the issue of greenwashing. The final rule, which would require climate disclosures, remains in draft form, with a final proposal said to be submitted in April 2024.

Investment companies, advisers, broker-dealers, and others who have or plan to incorporate ESG investment assets into their clients’ portfolios should work with a seasoned Securities Regulatory Compliance attorney to ensure that they satisfy all regulations and are prepared for any proposed rules that may be introduced.

Jacko Law Group, PC works with firms and practitioners in the investment advisory space. We assist our clients in ensuring they meet and exceed the requirements of regulatory bodies and protect the hard work they do.

If you have regulatory compliance questions about adding ESG assets to your clients’ portfolios, please feel free to reach out to us at 619.298.2880 or email

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