On the heels of adding scrutiny into impact and environmental, social and governance (ESG) investing to its exam priorities, and creating a task force to uncover compliance violations related to ESG, the SEC has issued ESG-investing guidelines.

In a recently released investor bulletin, the SEC warned against being taken in by just any fund or financial product purporting to be ESG-oriented.

“A portfolio manager’s ESG practices may significantly influence performance,” said the bulletin. “Because securities may be included or excluded based on ESG factors rather than traditional fundamental analysis or other investment methodologies, the fund’s performance may differ (either higher or lower) from the overall market or comparable funds that do not employ similar ESG practices.”

The SEC points out that it can be difficult for the end investor to know exactly what they’re getting with an ESG investment. Some of the factors in ESG investing are not defined by federal securities laws and may, as a result, be subjective and can be defined in different ways between different funds and sponsors.

Complicating the matter, many ESG investments use ESG as just one of a myriad of factors used in securities selection, said the SEC, and every fund weighs ESG factors differently against each other and other more traditional factors. Different funds may also define ESG factors using different criteria. Furthermore, some funds using ESG factors don’t necessarily define themselves as ESG funds.

The SEC also warned that many ESG funds have higher expense ratios than non-ESG funds, and that “paying more for expenses will reduce the value of your investment over time.”

The commission offered the following tips for ESG investing:

• Read all of a fund’s available information, including filings on the SEC’s EDGAR database.
• Understand all of the fees and expenses the fund charges.
• Make sure the fund’s strategy is consistent with financial as well as ESG-oriented goals.

The SEC also recommended that ESG investors ask the following questions:

• Is ESG a core component of the fund’s investment process, or one of many factors used to select investments?
• How much emphasis does the fund place on ESG versus other factors?
• How does the fund weight each of the three ESG factors within its holdings?
• What criteria within each factor are being used to determine holdings?
• How do fees compare with other investment options?
• Do the fund’s published holdings match the end investor’s expectations for included and excluded holdings?
• How does  the fund explain its ESG practices, and how do they impact the performance and risk of the fund?
• Is the fund using ESG practices relevant and of importance to the end investor?