The U.S. Securities and Exchange Commission seeks a makeover of ESG naming practices and disclosure requirements for certain investment firms. The financial regulator’s recently proposed amendments to rules and reporting forms are geared toward fund managers and investment advisors.
The goal is “to promote consistent, comparable, and reliable information for investors.” The proposed changes require additional disclosures regarding ESG strategies in prospectuses, annual reports, and brochures, and ESG funds would need to implement a layered, tabular disclosure to compare ESG funds. Certain environmentally focused funds would be required to disclose their holdings’ greenhouse gas (GHG) emissions.
“As investor interest in ESG investments has grown, so too have ESG investment products and services, said SEC Chair Gary Gensler in a statement. “For example, we’ve seen an increasing number of funds market themselves as ‘green,’ ‘sustainable,’ ‘low-carbon,’ and so on. While the estimated size of this sector varies, one estimate says that the ‘U.S. sustainable investment universe’ has grown to $17.1 trillion. Suffice it to say there are hundreds of funds and potentially trillions of dollars under management in this space.”
He noted that ESG could encompass a wide range of investments and strategies. For example, some screen out certain industries, and others ones that include certain industries. Some funds claim to have a particular impact on an issue, track board votes, or assert carbon emissions, labor practices, or water sustainability.
“When an investor reads current disclosures, though, it can be very difficult to understand what some funds mean when they say they’re an ESG fund,” he added. “There also is a risk that funds and investment advisers mislead investors by overstating their ESG focus. People are making investment decisions based upon these disclosures, so it’s important that they be presented in a meaningful way to investors.”
The amendments target three types of ESG funds. Integration funds are those that include ESG factors alongside non-ESG factors in investment decisions. The funds would have to state how ESG is incorporated into their investment process. Those that consider GHG emissions will also need to provide information about how they consider those emissions, such as methodology and data sources.
ESG-focused funds are those where ESG factors are a significant or primary consideration. The funds would need to provide detailed disclosures about their strategies. These include a standardized ESG strategy overview table, information about the impacts they seek to achieve, key metrics to assess their progress, and additional information about their proxy voting or ESG engagements.
ESG-focused funds would be required to disclose their portfolio’s carbon footprint and weighted average carbon intensity.
The third type of fund is impact funds. They are a subset of ESG funds that seek to achieve a specific ESG impact. These funds must disclose how they measure progress on their impact objectives.
Certain investment advisors would be required to disclose ESG information similarly to registered investment companies.
“I am pleased to support this proposal because, if adopted, it would establish disclosure requirements for funds and advisers that market themselves as having an ESG focus,” said Gensler. “ESG encompasses a wide variety of investments and strategies. I think investors should be able to drill down to see what’s under the hood of these strategies. This gets to the heart of the SEC’s mission to protect investors, allowing them to allocate their capital efficiently and meet their needs.”