The Securities Exchange Commission (SEC) continues to focus on enhancing Environmental, Social, and Governance (ESG) disclosures and has issued proposed regulations to cover registered investment companies, business development companies, and investment advisors.
Investors have flocked to ESG funds over the past several years with ESG investment funds attracting nearly $70 billion in new money during 2021. ESG is a focus for large portions of the investor community. Investor stakeholders care about the impact of ESG initiatives on the world. Investor sentiment is also indicating that companies who have thought through these challenges and derived a plan to make improvements internally and externally are overall better companies, which in turn, generate a higher valuation.
Currently there is not consistent reporting required from asset managers over ESG fund offerings. If approved, the SEC’s proposed regulations would provide potential investors with more consistent information by requiring additional reporting requirements for ESG strategies in fund prospectuses, annual reports, and advisor brochures. The SEC believes that requiring objective metrics in these documents will provide users with necessary information to guide their investment decisions. The requirements also build a standardized reporting framework to enhance comparability of ESG funds.
The SEC’s proposal defines three types of ESG funds:
Integration Funds: Funds that integrate ESG factors alongside non-ESG factors in investment decisions would be required to describe how ESG factors are incorporated into their investment process.
ESG-Focused Funds: Funds for which ESG factors are a significant or main consideration would be required to provide detailed disclosure, including a standardized ESG strategy overview table.
Impact Funds: A subset of ESG-Focused Funds that seek to achieve a particular ESG impact would be required to disclose how it measures progress on its objective.
The proposal anticipates streamlining the disclosure of advisor considerations for ESG funds as standardized discussion over ESG factors within their investment strategies would be required. ESG-Focused Funds that consider environmental sustainability would also need to disclose greenhouse gas (GHG) emissions associated with their portfolio holdings. Information on their portfolio’s carbon footprint would be designed to meet the requirements of environmentally focused investors. Funds which disclose they do not consider GHG emissions would be exempt from this requirement. The SEC is looking for input on this proposed regulation from both funds and investors. The public has until August 16th to provide comment.
With our industry expertise and extensive knowledge of the risk advisory landscape, the Schneider Downs team can help your organization develop an ESG program, comply with ESG regulatory requirements and evaluate ESG risks and opportunities within the context of your ESG strategy.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.