SEC’s New ESG Disclosure Proposal Aims to Increase Transparency

On May 25th, the U.S. Securities and Exchange Commission (SEC) released proposed rule amendments and form changes for investment advisers and investment companies related to environmental, social, and governance (ESG) disclosures and reporting.

The proposed rulemaking, if adopted, would apply to investment advisers, business development companies, registered investment advisers, certain unregistered investment advisers, and investment companies. The proposal would require additional disclosures and transparency around investment strategies, including:

• ESG Strategy Disclosure for Funds and Advisers
  The proposed rule and disclosure amendments would require ESG strategies to disclose information regarding how ESG factors are considered. The proposal takes a layered approach, with the amount of required disclosure scaling based on how important ESG factors are to the fund’s strategy. The proposal segments ESG approaches into three categories:
  • ESG Integration – Strategies that consider ESG factors alongside non-ESG factors but do not prioritize ESG factors relative to other factors considered, will be required to disclose how ESG factors are incorporated into their investment funds.
  • ESG-Focused – Strategies for which ESG factors are a significant or main consideration (e.g., screens for carbon emissions or board diversity) would be required to include a more detailed disclosure and a standardized overview of the fund’s ESG strategy (i.e., the criteria and data used to achieve these investment goals).
  • Impact – Strategies that seek to achieve a particular ESG outcome would be required to disclose how it measures progress towards its ESG outcomes.
• Additional Disclosure on Proxy Voting or Engagements
  Some ESG-Focused Funds will have to provide additional information around the fund’s use of proxy voting and issuer engagements as part of the fund’s strategy.
• Greenhouse Gas Emissions Reporting
  ESG-Focused Funds that consider environmental factors will be required to disclose their carbon footprint and the weighted average carbon intensity of their portfolio. However, funds that do not consider greenhouse gas emissions in their ESG strategy would not be required to report this information.

Next steps

The proposal will be open for public comment for the next 60 days. Comments may be submitted to the SEC by emailing rule-comments@sec.gov and reference IA-6034 & IC-34594.

Firms with strategies that fall into one of the three affected categories should begin preparing now for enhanced disclosure expectations regarding ESG factors in their investment strategies.

How we help

Our ESG Advisory Practice will continue to monitor the SEC’s ESG actions and offer additional guidance as more information becomes available. We can also help the affected advisers prepare for these proposed amendments with:

• Policy and procedure development and review
• Disclosure verification
• Marketing disclosures and review
• Portfolio performance assessment

To discuss the SEC’s proposed rules, or to hear our team’s perspective on this and other ESG issues, please contact our ESG Advisory Practice.

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