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The SEC’s Enforcement Division is taking a close look at ESG funds’ share lending & proxy voting practices and related disclosures, according to this Bloomberg article. Specifically, the SEC wants to know whether ESG funds that market their influence on corporate action are recalling loaned shares before votes occur.

As covered in our “Share Lending” Practice Area, this complicated practice can impact voting outcomes. Here’s an excerpt from Bloomberg explaining why the SEC is now connecting it to ESG claims:

Investment firms typically lend out shares to other financial firms to settle trades or to help short sellers wagering against a company. Asset managers have argued publicly that there are policies in place to prevent firms from borrowing securities solely for the purpose of voting on shareholder resolutions.

For ESG fund managers, the practice of short-selling can raise specific challenges. Short-term bets against companies could make it harder for an ESG fund manager to influence a portfolio company to become more sustainable over a longer period. It also creates the awkward appearance of aiding investors who are betting against the companies that the fund has deemed worthy investments.

Furthermore, supporters of the practice say, money managers can recall shares if they want to vote on shareholder resolutions to exercise their influence and power over an ESG-related issue facing a company.

The SEC has been signaling for a while that ESG funds’ proxy votes are of interest. John predicted over a year ago that ESG-themed mutual funds would be a “target-rich environment” for the SEC’s ESG enforcement task force, and that seems to be playing out with first-of-their kind enforcement actions.

On top of that, in May, the Commission issued a pair of proposals that would require funds to disclose more info about their proxy voting & ESG engagement strategies and would tighten ESG-fund naming conventions. (Lawrence blogged about those proposals – and the impact on portfolio companies – on PracticalESG.com.) Just this week, SEC Chair Gary Gensler tweeted a reminder that comments are due. Enforcement could get even more active if and when those rules are adopted. And as investors are held to closer account for their proxy votes, companies may see support for ESG proposals tick upward.

– Liz Dunshee