Currently, funds and registered advisers are subject to disclosure requirements concerning their investment strategies. However, there are no specific requirements about what a fund or adviser following an ESG strategy must include in its disclosures. Also, the information concerning how they consider ESG factors in their investment strategies is inconsistent. All these factors increases the risk of greenwashing and also makes it difficult for investors to understand the fundamental characteristics of an ESG fund or an adviser’s ESG strategy in order to make a more informed investment decision.
Proposed rules on ESG disclosure
Executive summary
The Securities Exchange Commission (SEC) has proposed for public comments new rules on the enhanced disclosures by certain investment advisers and investment companies about ESG investment practices. The proposed rules and form amendments are designed to create a consistent, comparable, and decision-useful regulatory framework for ESG advisory services and investment companies to inform and protect investors while facilitating further innovation in this area of the asset management industry.
Main content
- Proposed Fund Disclosures to Investors. The proposed rules would require registered funds to disclose to investors how they incorporate ESG factors into their investment selection processes and in their investment strategies.
- Adviser Brochure. Currently advisers registered with the SEC must deliver this brochure to each of their clients or prospective clients,to help them make more informed decisions. The proposed rules would amend it to include among other aspects:
- A description of the ESG factor or factors it considers for each significant investment strategy or method of analysis for which the adviser considers any ESG factors.
- Criteria or a methodology to evaluate, select, or exclude investments based on the consideration of ESG.
- A description of any relationship or arrangement.
- For advisers that have specific voting policies or procedures that include one or more ESG considerations, when voting client securities they would include in their brochures a description of which ESG factors they consider and how they consider them.
- Regulatory Reporting on Form N-CEN and Form ADV. The SEC proposes to amend these forms for registered funds and advisers respectively, to collect census-type information about funds’ and advisers’ uses of ESG factors using the structured XML-based data languages.
- Compliance Policies and Procedures and Marketing. The proposed rules include specific examples for funds and advisers to address the accuracy of ESG-disclosures made to clients, investors and regulators and portfolio management processes.
Next Steps
- Publication of the final document (date to be determined, consultation period ended on 16 July 2022).
- SEC proposes that the compliance date of any adoption of this proposal for the following items would be:
- 1 year following the effective date of publication: i) some proposed disclosure requirements in prospectuses and for Unit Investment Trusts (UITs); ii) the proposed regulatory reporting on Form N-CEN, and iii) the proposed disclosure requirements and regulatory reporting on Form ADV Parts 1 and 2.
- 18 months following the effective date of publication for additional information on ESG factors considered by the funds. For example, on methodology for calculating the greenhouse gas (GHG) emissions.
Download the technical note Proposed rules on ESG disclosure.