On May 25, 2022, the U.S. Securities and Exchange Commission (“SEC”) issued two ESG related proposals applicable to investment funds. The first proposal pertains to amendments to the Fund “Names Rule”, which adds new requirements for funds that consider ESG factors in their investment practices. The second proposal requires enhanced ESG disclosures by investment Advisers and Investment companies. The proposed changes have been published in the Federal Register and the last date for receipt of comments is August 16,2022.
This article focuses on the second proposal – ESG Disclosures for Investment Advisers and Investment Companies. The details about the first proposal(“Funds Rule”) can be accessed here.
Background
The lack of disclosure requirements for ESG themed Funds has led to an information asymmetry between investors and the investment advisors, which could lead to exaggerated or misleading claims on the actual consideration of ESG factors in investment decisions of the fund.
The proposed rule and form amendments are aimed at providing consistent ESG disclosure standards which will allow investors to make informed ESG investments. The proposal’s ESG-related strategy disclosure framework is expected to enable investors to evaluate if the measures taken to address ESG goals and portfolio allocation are in line with a fund or adviser’s ESG marketing statements.
The proposal would also require disclosure of portfolio level GHG emissions information for environmentally focused funds.
Proposed Amendments
ESG Strategy Disclosure for Funds and Advisers
Under the amendments proposed, funds would be required to consider ESG factors in their investment process to disclose additional information regarding their strategy. Based on the ESG investment strategy, ESG funds can be classified into three types.
- Integration Funds. These are funds that integrate ESG factors just as they integrate non-ESG factors in investment decisions.
- ESG-Focused Funds. These are funds for which ESG factors are a significant or main consideration.
- Impact Funds. These are a subset of ESG-Focused Funds, and aim for a particular ESG impact.
Each of the three types of funds above are required to disclose their strategy, goals and performance in line with their stated purpose.
These are in line with the Article 6, 8 and 9 of SFDR, more about which you can read here.
Additional Disclosure Regarding Impacts and Proxy Voting or Engagements
Certain ESG-Focused Funds would be required to disclose details about their strategies, including their impacts goals and key metrics to measure their performance against the goals. Funds would also be required disclose their proxy voting or ESG engagements, if these engagements play a key role in their ESG strategy implementation.
GHG Emissions Reporting
Disclosure of the carbon footprint and the weighted average carbon intensity of their portfolio would be required for ESG-Focused Funds that consider environmental factors in their investment strategies.
For Integration funds that consider GHG emissions, additional information about how the fund considers GHG emissions (including the methodology and data sources) will have to be disclosed.
The amendments proposed by the SEC rule on the ESG Disclosures for Investment Advisers and Investment Companies can be accessed here.
About NordESG
NordESG is an advisory firm helping corporates develop, articulate and execute their ESG and sustainability strategies. Our work includes sustainability performance reporting support under various ESG frameworks, strategy development or conducting materiality assessments. By doing so, we help businesses meet their disclosure compliance requirements like CSRD but also help them proactively communicate their strategy to other stakeholders like investors, customers and local communities in which they operate. Our work is focused mainly on Europe and North America. You can get in touch by e-mail or book a free discovery call by following this link.
