“The proposed amendments seek to categorize certain types of ESG strategies broadly and require funds and advisers to provide more specific information in fund prospectuses, annual reports and adviser brochures based on the ESG strategies they are continuing,” the SEC said.
Approved by a 3-to-1 margin, the rule will be open for public comment for 60 days after it is published in the Federal Register. Gensler was joined by commissioners Allison Herren Lee and Caroline Crenshaw in endorsing the proposal; Commissioner Hester Peirce voted no. There is a vacancy in the Commission.
Additionally, the SEC approved another proposed rule On Wednesday, it would punish companies that name funds “likely to mislead investors about a fund’s investments and risks”.
In his statement supporting the ESG disclosure proposal, Gensler said the SEC has observed an increasing number of funds promoting themselves as “green”, “sustainable” and “low carbon”. An estimate from the US Forum for Sustainable and Responsible Investing puts the value of the “US sustainable investing universe” at $17.1 trillion, Gensler noted.
Gensler said funds that claim to consider ESG factors should disclose to investors the ESG factors they consider, as well as the strategies they use. This may include whether the fund tracks an index, includes or excludes certain assets from its investment mix, uses proxy voting or engagement to achieve certain objectives, or aims to have a specific impact. The SEC defines them as integration funds, which “integrate ESG factors alongside non-ESG factors into investment decisions,” according to one agency. fact sheet that accompanied the ESG disclosure proposal.
A second type of fund, called ESG-focused funds, are defined by the SEC as funds for which ESG factors are a material or primary consideration. ESG-focused funds would be required to provide detailed disclosures outlining the specific impact they seek to achieve and summarizing their progress in achieving those impacts, “including a standardized ESG strategy summary table.”
A subset of ESG-focused funds, called impact funds, would be required to disclose how they measure progress toward their goal. For example, funds focused on environmental factors would have to disclose “the carbon footprint and weighted average carbon intensity of their portfolio,” which would also include greenhouse gas (GHG) emissions, the SEC said.
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 that the fund may use in connection with its consideration of GHG emissions,” the fact sheet reads.
Funds that disclose that they do not consider GHG emissions as part of their ESG strategy would not be required to report this information.
Lance Dial, a partner at Morgan Lewis, said if the rules are adopted as written, investment advisers and investment firms will need to put in place many other policies and procedures to generate information that meets the requirements. . Companies will need to use data analytics to calculate certain metrics required under the rules, such as GHG emissions from investments in a particular fund. It may also require hiring outside consultants, he said.
“I don’t see these rules as pushing anyone out of the ESG space, but investment advisers will have a lot more work to do,” he said.
Dial said he was also interested in feedback from portfolio managers who manage ESG funds on how they would incorporate these new rules into their company’s disclosure framework.
Larry Godin, senior director and head of KPMG’s national practice for asset and wealth management, regulatory risk and compliance, said the two proposed rules “reflect the important steps the Commission has taken to provide investors greater transparency regarding fund strategies”.
“In the absence of a universally accepted definition of ESG, the SEC is seeking to combat greenwashing by placing greater responsibility on investment advisers to disclose, in sufficient detail, the investment process used to arrive at decisions made within a portfolio,” Godin said. “The goal is to ensure investment decisions are consistent with a fund’s name and investor expectations.”
Steven Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets at non-profit organization Ceres, said the new rules will combat greenwashing in the ESG investment fund industry.
“The huge growth in the number and variety of ESG funds available shows that analyzing ESG risks and opportunities is a common strategy for creating long-term value for investors,” he said. “But better and more consistent information is essential to help investors take advantage of this dynamic and growing market.”
Many in the investment advisory community took note of the $1.5 million fine the SEC announced on Monday against BNY Mellon for “inaccuracies and omissions” about the ESG mutual funds it issued. managed for three years.
According to the SEC, BNY Mellon has told investors via mutual fund prospectuses and in written responses to requests for proposals that the mutual funds it manages have received “proprietary ESG quality reviews” as part of of the investment research process. The agency determined that such reviews had been done for some of the managed mutual funds in question, but had not been done for all, particularly the layered funds.
Peirce, the only commissioner who voted against the proposal, said BNY Mellon’s enforcement action is proof that the SEC should simply apply the rules and laws that already apply.
“A New rule to combat greenwashing…should not be a high priority,” she said in a dissenting statement.
She also argued that the definition of what constitutes ESG factors in an investment strategy is not clear enough.
“How accurately do we consider determining whether a fund has incorporated ‘ESG factors’ into its investment selection process when we have not defined exactly what those factors are? Pierce said. “‘I’ll know when I see it’ is not a currently accepted practice in administrative law.”
The latest rules proposed by the SEC are the most recent parts of the agency’s ESG disclosure regime, joining a proposal ordering climate-related disclosures by public companies published in March. The comment period on this proposal was recently extended until June 17.
The climate-related disclosure rule is a potentially far-reaching mandate that, if passed, would require all public companies to quantify, measure and disclose their effect on the environment. The rule would order public companies to include information on how climate-related risks affect their strategy, business model and outlook; how the company’s board and management oversee climate-related matters; and any plans to transition to a lower carbon footprint.
Passing the climate-related disclosure rule “will go a long way to closing the gaps for investor funds,” Dial said.