SEC proposes changes to ESG investment practices

The US Securities and Exchange Commission (SEC) has proposed changes to rules and reporting around environmental, social, and governance (ESG) investment practices.

This proposal aims to promote consistent, comparable and reliable information for investors concerning funds’ and advisers’ incorporation of ESG factor.

The amendments would categorise certain types of ESG strategies broadly and require funds and advisers to offer specific disclosures in fund prospectuses, annual reports, and adviser brochures based on the ESG strategies.

Furthermore, funds focused on the consideration of environmental factors generally would be required to disclose greenhouse gas emissions associated with their portfolio investments. Funds that claim to achieve a specific ESG impact would need to describe the specific impact(s) they wish to achieve and summarise their progress.

Funds that use proxy voting or other engagement with issuers as a significant means of implementing their ESG strategy would need to disclose information regarding their voting of proxies on particular ESG-related matters and information concerning ESG engagement meetings.

Finally, the proposal suggests certain ESG reporting is made on Forms N-CEN and ADV Part 1A to report the census-type data that inform the Commission’s regulatory, enforcement, examination, disclosure review, and policymaking roles.

The changes would apply to certain registered advisers, advisers exempt from registration, registered investment companies, and business development companies.

SEC Chair Gary Gensler said, “I am pleased to support this proposal because, if adopted, it would establish disclosure requirements for funds and advisers that market themselves as having an ESG focus.

“ESG encompasses a wide variety of investments and strategies. I think investors should be able to drill down to see what’s under the hood of these strategies. This gets to the heart of the SEC’s mission to protect investors, allowing them to allocate their capital efficiently and meet their needs.”

Regulators around the world are starting to increase the regulations around ESG. The EBA recently issued a draft for implementing technical standards on Pillar 3 disclosures for ESG risks. The change aims to show how climate change could exacerbate other risks within institutions’ balance sheets.

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