The SEC is proposing several disclosure and reporting requirements for funds and advisers pertaining to strategies that consider environmental, social, and governance (ESG) factors. The proposal is designed to help investors assess the degree to which ESG considerations are a part of a strategy, as well as the methodology and objectives of the strategy.
The SEC’s goals are not only to provide investors with much-needed information, but also to create a framework that provides a consistent, minimum level of disclosure across strategies. These requirements should also help to allay concerns around “greenwashing”—which refers to an investment manager exaggerating its ESG capabilities, or the extent and manner in which ESG metrics are used to select investments.
Background on Proposed Rule on ESG Disclosures
ESG investing encompasses a broad spectrum of approaches and a dizzying array of products that range from excluding certain industries to focusing on investments that are expected to provide a positive E, S, or G impact. Given the complexity of approaches and ultimate objectives of a strategy, it is difficult for investors to select a strategy that fits their goals. This proposal seeks to provide investors with a minimum level of information in a consistent framework to better inform investors and aid in making decisions that are consistent with their goals.
The SEC has segmented the ESG investing spectrum into three areas: integration, ESG-focused, and impact.
- Integration refers to strategies that incorporate ESG considerations into investment decisions alongside financial analysis. For these strategies, disclosure as to how ESG factors are assessed and integrated into investment decisions would be required.
- ESG-focused strategies emphasize ESG considerations as a primary input for investment decisions. These strategies would be required to provide more detailed disclosures in a standardized table format. Further, if environmental considerations are a part of the strategy, disclosure around greenhouse gas emissions would be required (carbon footprint and the weighted-average carbon intensity of the portfolio). Disclosure of data sources and methodology would also be required. Finally, if engagement/proxy voting is a component of the strategy, certain disclosures around policies and success measurement metrics would be needed.
- Impact strategies make investments that are expected to have a positive impact in one or more ESG areas. These strategies would be required to demonstrate how they monitor and measure the impact of each investment.
Requirements would be broad-based and encompass open-end funds, closed-end funds, business development companies, and investment advisers with disclosures in the appropriate reporting material (e.g., a fund prospectus or the adviser’s Form ADV).
Bottom Line
Investors need appropriate disclosures and information on strategies that carry an ESG moniker, and this proposal is designed to impose standardized reporting requirements that would further this goal. Concerns around a manager’s ability to engage in greenwashing could also be mitigated. Callan is in the process of reviewing the full proposal, which is now in the 60-day public comment period.
