By: Turnkey Trading Partners

Turnkey is often the so called, “Tip of the Sword” when it comes to industry changes and announcements. Our large breadth of customers allows our team to identify changes in audit trends and examiner behavior. One change that we’ve recently come across is NFA asking firms about Environmental, Social, and Governance (“ESG”) programs. As of the date of this article no CFTC regulations or NFA rules are in place over this area. It is however, our view that obligations may soon be forth coming based on recent auditor behavior.

SEC Makes Its Move

Many readers may recall that the SEC made headlines earlier in 2022 when it announced it would begin making regulating ESG statements and programs an agency priority. The SEC issued the following Risk Alert and has since created a comprehensive ESG section at its website.  Turnkey covered some of what has been happening in the ESG space as part of our quarterly training for Q2 2022.  Usually when one regulator makes a move into a new target area of enforcement it isn’t long before others follow. This is what gives us pause and made our team re-evaluate NFA’s recent examination questions.

NFA Asking Questions

During recent reviews of Turnkey customers NFA has asked the following question:

Does the firm market its sustainability or offer any products (trading programs, pools etc.) that are marketed as being socially conscious (ESG – Environmental, Social, Governance)?

If the answer to that question is that your firm does offer such products you should begin considering NFA’s follow up questions. It is a near certainty that NFA will ask if the firm has a policy governing it’s ESG marketing efforts. NFA will ask for ESG centric marketing materials and information about investment strategies there related. Each follow-on request made by NFA will need to be addressed with care.

Looking at existing SEC guidance it appears the following could be CFTC or NFA emphasis areas:

  • Claims of portfolio or strategy management plans that confirm to an ESG standard but in practice are inconsistent when put into practice relative to stated objectives.
  • Inadequate controls to maintain and monitor ESG statements, directives, and overall ESG disclosures to customers or investors.
  • Misleading statements, branding, or key words that potentially entice investors or customers into transacting with a registrant. Such statements can be due to potential or blatant omissions of key facts, reimbursement arrangements, or unsubstantiated claims which cannot be supported.

Developing An ESG Program

While CFTC and NFA member firms are not explicitly required to have an ESG policy as of the date of this article, it would be wise to consider what such a policy might look like. At a basic level, so-called ESG experts seem to agree that the following steps should be considered when putting in place a corporate ESG program.

Assessment: Decide what if any ESG priorities are most important to your firm, its customers, investors, and other key stakeholders including applicable regulators. Determine what your company policy or position is related to these priorities as they are identified.

Evaluation: Next determine how well the company is meeting its ESG priorities identified from the assessment above as of today.

Set Goals and Benchmarks: Put in place a plan to maintain current benchmarks, improve, and optimize business practices.

Identify Gaps: Put in place a methodology for evaluation and benchmarking of gaps while working to achieve ESG goals and benchmarks.

Make Adjustments: After identifying gaps identify ways to clearly identify and measure outcomes based on what success should look like for the company’s unique ESG approach. Set regular review periods to adapt your policy as change is needed or failures are identified.

Provide Updates: Adequate ESG disclosure requires truthful updates to customers, investors, and other stakeholders to show business objectives align with stated ESG objectives. This is particularly true to ensure that marketing of ESG objectives is not misleading.

What’s Next?

Turnkey has been one of the country’s leading consulting firms for more than 15 years. During this period we’ve generally observed a pattern in how new regulatory obligations emerge. It is our opinion that CFTC and NFA firms will be asked to develop ESG programs in the near future. What CFTC, NFA, and Exchange rules related to these policies might look like is still anyone’s guess. Turnkey’s view is that firms that engage in brokerage or trading within environmental commodities, various energy products, and other renewables should start to consider how they might implement an ESG policy.  As Turnkey learns more about NFA’s expectations we will continue to assist our clients to meet their regulatory obligations in this new and involving area.