The U.S. Securities and Exchange Commission (SEC) has proposed a rule requiring investment advisers and investment companies to make ESG disclosures.
2024-09-27 01:18:41
On May 25, 2022, the U.S. Securities and Exchange Commission (SEC) proposed amendments to the Investment Advisers Act of 1940 and the Investment Company Act of 1940 (the "Proposed Rules"), requiring registered investment advisers, certain exempt reporting advisers (collectively referred to as "advisers"), registered investment companies, and business development companies (collectively referred to as "registered funds") to provide enhanced disclosures regarding environmental, social, and governance ("ESG") matters.
ESG Disclosure Requirements for Registered Funds Under the Proposed Rules
The Proposed Rules would impose varying disclosure requirements on registered funds based on the significance of ESG factors in their investment strategies. The proposal categorizes registered funds (excluding unit investment trusts) into the following three types:
Integration Funds: These are funds that consider ESG factors in their investment selection process, but where ESG factors are "generally no more important than other factors in the investment selection process, and ESG factors typically do not determine whether to include or exclude any specific investment in the portfolio." Such funds will need to describe how ESG factors are integrated into their investment process.
ESG-Focused Funds: These are funds where ESG factors are a significant or primary consideration in (i) investment selection or (ii) engagement with portfolio companies. ESG-Focused Funds include (1) funds with names indicating that their investment decisions incorporate one or more ESG factors, and (2) funds whose advertising or sales literature indicates that ESG factors are a significant or primary consideration in their investment decisions. They also include (a) funds that track an ESG-focused index; (b) funds that apply screens based on ESG factors to include or exclude investments or specific industries; and (c) funds that have policies to vote proxies and engage with portfolio company management to encourage ESG practices or outcomes. Such funds will be required to provide detailed disclosures, including a standardized ESG Strategy Overview Table, explaining how the fund focuses on ESG factors in its investment process.
Impact Funds: This is a subset of ESG-Focused Funds that aim to achieve specific ESG impacts. For example, (i) a fund seeking current income while aiming to finance the construction of affordable housing units, or (ii) a fund seeking to promote clean water supply by investing in industrial water treatment and conservation portfolio companies. These funds will be required to disclose how they measure progress toward their objectives.
ADV Form Disclosure Requirements for Investment Advisers Under the Proposed Rules
Under the Proposed Rules, investment advisers that consider ESG factors as part of their advisory business will be required to include specific disclosures about their ESG strategies in their ADV forms (similar to the disclosures for registered funds described above). The proposal requires advisers to disclose their ESG investment strategies, certain relationships with related persons, and any ESG-related influences on proxy voting.
ESG Strategy Disclosures: Under the Proposed Rules, new Item 8.D would require advisers to describe the ESG factors considered for each significant investment strategy or method of analysis, including whether and how the adviser incorporates specific ESG factors or combinations of factors into its strategy management.
ESG Criteria/Methods: New Item 8.D also requires advisers to describe any criteria or methods used to evaluate, select, or exclude investments based on ESG factors.
Relationships with Related Persons: Advisers will be required to describe in Item 10.C any material relationships or arrangements with related persons that serve as ESG consultants or other service providers.
Proxy Voting: If an adviser has specific proxy voting policies or procedures that include one or more ESG considerations when voting client securities, the adviser will be required to describe in Part 2A of the brochure which ESG factors are considered and how they are considered.
The Proposed Rules are currently open for public comment and will remain so for 60 days after their publication in the Federal Register.