Responding to concerns about the practice of “greenwashing” by investment advisers and investment companies, the Securities and Exchange Commission announced on May 25, 2022, proposed new regulations to establish disclosure requirements for funds and advisers that market themselves as having an ESG focus.
According to the SEC press release, the rules would “promote consistent, comparable, and reliable information for investors concerning funds’ and advisers’ incorporation of environmental, social, and governance (ESG) factors.”
The proposed changes would apply to registered investment companies, business development companies (together with registered investment companies, “funds”), registered investment advisers, and exempt reporting advisers (together with registered investment advisers, “advisers”).
According to the SEC’s Fact Sheet, the rules and form amendments would enhance disclosure by:
- Requiring additional specific disclosures regarding ESG strategies in fund prospectuses, annual reports, and adviser brochures;
- Implementing a layered, tabular disclosure approach for ESG funds to allow investors to compare ESG funds at a glance; and
- Generally requiring certain environmentally focused funds to disclose the greenhouse gas (GHG) emissions associated with their portfolio investments.
Layered Framework for Disclosures
The amount of required disclosure would depend on how central ESG factors are to a fund’s strategy and would follows a “layered” framework, with a concise overview in the prospectus supplemented by more detailed information in other sections of the prospectus or in other disclosure documents, all of which would be reported in the XML-based structured data language.
The proposal identifies the following three types of ESG funds:
Integration Funds. Funds that integrate ESG factors alongside non-ESG factors in investment decisions would be required to describe how ESG factors are incorporated into their investment process.
ESG-Focused Funds. Funds for which ESG factors are a significant or main consideration would be required to provide detailed disclosure, including a standardized ESG strategy overview table.
Impact Funds. A subset of ESG-Focused Funds that seek to achieve a particular ESG impact would be required to disclose how it measures progress on its objective.
Advisers that consider ESG factors would be required to make generally similar disclosures in their brochures with respect to their consideration of ESG factors in the significant investment strategies or methods of analysis they pursue and report certain ESG information in their annual filings with the Commission, including with respect to the advisory services provided to separately managed account clients and reported private funds.
Greenhouse Gas (GHG) Emissions Reporting
The proposal generally would require ESG-Focused Funds that consider environmental factors in their investment strategies to disclose additional information regarding the GHG emissions associated with their investments. These funds would be required to disclose the carbon footprint and the weighted average carbon intensity of their portfolio. The requirements are designed to meet demand from investors seeking environmentally focused fund investments for consistent and comparable quantitative information regarding the GHG emissions associated with their portfolios and to allow investors to make decisions in line with their own ESG goals and expectations. Funds that disclose that they do not consider GHG emissions as part of their ESG strategy would not be required to report this information. Integration funds that consider GHG emissions would be required to disclose additional information about how the fund considers GHG emissions, including the methodology and data sources the fund may use as part of its consideration of GHG emissions.
In his statement, SEC Chairman Gary Gensler summarized the proposal as follows:
“First, it would require funds that say they consider ESG factors to provide investors with information in the prospectus about what ESG factors they consider, along with the strategies they use. This could include, for example, whether a fund tracks an index, excludes or includes certain types of assets, uses proxy voting or engagement to achieve certain objectives, or aims to have a specific impact.
Second, a subset of those funds — ESG-focused funds, as defined in the proposal — also would need to disclose details about the criteria and data they use to achieve their investment goals, as well as more specific information about their strategies. These disclosures would enable investors to dig into the details of a fund’s strategy.
Third, the proposal would require particular types of ESG-focused funds to disclose relevant metrics. For example, certain funds would be required to report the greenhouse gas emission metrics of their portfolios, and an impact fund would be required to disclose metrics about and annual progress toward its ESG goals.”
The public comment period for the rule will remain open for 60 days after publication in the Federal Register.
For more information about these and other proposed SEC requirements, contact us. We are here to help.