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SEC plans to investigate alternative data, ESG in 2021

Neudata News
11 Mar 2021

The US Securities and Exchange Commission’s Office of Compliance Inspections and Examinations has once again included alternative data in its list of examination priorities, signalling that the agency will continue closely watching how funds create and use data in 2021.

The department’s priorities — which were released earlier this month — have also revealed the regulator’s new focus on ESG topics. In fact, new disclosure requirements could vastly increase the amount of ESG data available to alternative data users, according to industry experts.

“That data is going to be very valuable in a number of ways,” according to Carlo di Florio, global chief services officer of ACA Group, who previously served as director of the OCIE from 2010-2013.

One way that increased disclosures could help firms is through analysis of their own data, which could let them compare how their ESG strategies are performing relative to benchmarks and to their competitors. But perhaps more interestingly, the increase in disclosures will require more companies — including private equity firms, for example — to reveal more data on the companies within their portfolios in order to attract more capital.

The result could be a wealth of additional, granular ESG data available for investors willing to parse public filings. Di Florio noted that the data being produced by these disclosure requirements is likely to be sophisticated, quantitative data rather than based on a principles-based qualitative regime.

Public filings data are already being used by investors to understand ESG metrics, but users often complain that companies are not legally required to disclose a large proportion of ESG metrics, leading to large gaps in data.

So far, the SEC has not provided much guidance on how exactly it will require firms to disclose ESG metrics, but its guidance has suggested that it will evaluate whether disclosures are fair and accurate and will check that firms are putting into practice the things they claim in their disclosures.

Gary Gensler, who has been nominated as SEC chairman by the Biden administration, covered the topic of ESG data in depth during his Senate hearing earlier this month, saying that investors were driving the demand for more data on climate risk, political contributions and minority board representation.

Evaluating compliance within ESG data can also be more straightforward compared with other types of alternative data, particularly from a material non-public information and privacy perspective. “Given the SEC’s various statements on ESG, I think the accuracy of the data and really understanding it will become more important from a regulatory perspective,” said Kelly Koscuiszka, special counsel at Schulte Roth & Zabel LLC.

The SEC included alternative data on its list of examination priorities for the first time in 2020, with the intent of keeping a closer eye on how managers are sourcing and storing data, and whether that data is appropriate or legal to use within their research process. At the time, it said very little about its approach, which some industry insiders interpreted as the agency taking time to learn about the industry before issuing official guidance.

Over the last 12 months, the agency has followed through on that commitment. The OCIE has been examining alternative data usage at a handful of large funds, particularly with respect to web-scraped data, Neudata previously reported.

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