Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices
August 28, 2023
On May 25, 2022, the SEC proposed amendments requiring registered investment advisers, certain advisers exempt from registration, registered investment companies, and business development companies to provide additional disclosures regarding their environmental, social, and governance (“ESG”) practices. Amendments also proposed affect Form N-CEN, requiring Index Funds to provide identifying information about the index.
Affected Rules/Forms Include
- Form N-1A
- Form N-2
- Form N-CSR
- Form N-8B-2
- Form S-6
- Form N-CEN
- Form ADV
Proposed Amendments Include
- Specific disclosure requirements regarding ESG strategies to investors in:
- Management discussion of fund performance in fund annual reports
- Fund registration statements
- Adviser brochures
- Minimum disclosure requirements for any fund that markets itself as an ESG-Focused Fund
- Streamlined disclosure for Integration Funds that consider ESG factors in investment selections
- Disclosure regarding greenhouse gas emissions associated with portfolio investments
- Tabular disclosure for ESG funds
- Tagging ESG disclosures with iXBRL
Funds that aim to achieve a specific ESG impact. Required to disclose how progress is measured regarding objective.
Funds that integrate ESG factors alongside non-ESG factors in investment decisions. Required to describe how ESG factors are incorporated into investment process.
Funds which ESG factors are a significant or main consideration. Required to provide detailed disclosures including the ESG Strategy Overview Table.
Prospectus ESG Disclosure
Applies to open-end funds (including ETFs) and closed-end funds (including BDCs) that incorporate one or more ESG factors into their investment selection process.
Funds engaging in ESG investing to provide additional information about the application of ESG factors in the fund’s principal investment strategies:
- Open-end funds to provide ESG strategy overview in the summary section of the prospectus and additional information in the statutory prospectus.
- Closed-end funds to provide ESG factor information as part of the prospectus’ general description of the fund.
Integration Fund Disclosure
- Identify how the fund incorporates ESG factors into its investment selection process, including what ESG factors are considered.
- ESG factors included in a fund’s investment selection process or greenhouse gas emissions data should include more detailed information in the prospectus.
- The methodology for calculating certain greenhouse gas emissions metrics should be disclosed.
ESG-Focused Fund Disclosure
- ESG-Focused Funds, including ESG Impact Funds, should include specific disclosure about how ESG factors are taken into account during the investment process.
- Any fund that promotes itself through its name or marketing materials as having an ESG focus required to provide an ESG Strategy Overview Table (seen below):
[ESG] Strategy Overview
|Overview of the Fund’s [ESG] strategy
||The Fund engages in the following to implement its [ESG] Strategy:
- Tracks an index
- Applies an inclusionary screen
- Applies an exclusionary screen
- Seeks to achieve a specific impact
- Proxy voting
- Engagement with issuers
|How the Fund incorporates [ESG] factors in its investment decisions
|How the Fund votes proxies and/or engages with companies about [ESG] issues
- Open-end funds to provide the table at the beginning of the “risk/return summary” section, and closed-end funds to provide at the beginning of the discussion of the fund’s organization and operation.
In an electronic version of the prospectus (a prospectus posted on the fund’s website, electronically delivered to an investor, or filed on EDGAR with the Commission), funds would be required to provide hyperlinks within the table to the related, more thorough disclosure later on in the prospectus to assist investors with navigating.
Impact Fund Disclosure
- Identify in its investment objective, the ESG impact the fund seeks to generate with its investments.
- Information to be provided the same as for all ESG-Focused Funds, however, additional disclosure requirements, such as how the fund measures progress towards the stated impact, the time horizon used to measure that progress, and the relationship between the impact the fund is seeking to achieve and the fund’s financial returns.
Annual Report ESG Disclosure
For registered management investment companies, the proposed disclosure would be included in the management’s discussion of fund performance section of the annual shareholder report. While funds have flexibility in determining what information is addressed, factors that materially impact financial performance and operations are required to be disclosed.
Impact Fund Disclosure
- Provide overview of progress on achieving specific impact(s) in both qualitative and quantitative terms, and key factors that materially affected ability to achieve the impact(s) on an annual basis.
Proxy Voting Disclosure
- Funds for which proxy voting is a significant means of implementing their ESG strategy would be required to identify information pertaining to how the fund voted proxies relating to portfolio securities on ESG issues during the reporting period.
- Percentage of ESG-related voting matters during the reporting period for which the fund voted in furtherance of the initiative to be disclosed.
- Direct investors to a fund’s voting record filed on Form N-PX by providing a cross reference, and for electronic versions of the annual report, including a hyperlink to the most recently filed Form N-PX submission.
ESG Engagement Disclosure
- Funds for which engagement with issuers on ESG issues through means other than proxy voting would also be required to offer certain information about their engagement practices.
- Number or percentage of issuers with whom the fund held ESG engagement meetings during the reporting period related to one or more ESG issues and total number of ESG engagement meetings should be disclosed.
Greenhouse Gas Emissions Metrics Disclosure
- ESG-Focused Funds taking into account environmental factors required to disclose the carbon footprint and weighted average carbon intensity of the fund’s portfolio.
- For BDCs, disclosure would be included in the management discussion and analysis section in the annual report on Form 10-K.
All ESG-related registration statement and fund annual report disclosure filed with SEC to be tagged with iXBRL.
Adviser Brochures (Form ADV Part 2A)
ESG-related disclosures from registered investment advisers that consider ESG factors as part of their advisory business to be included in the adviser brochure.
New Sub-item 8.D
- Requires an adviser to provide a description of the ESG factor(s) it considers for each significant investment strategy or method of analysis. If an adviser uses criteria or a methodology to evaluate, select, or exclude investments based on the consideration of ESG factors, it must describe those criteria and/or methodologies and how it is utilized.
Amended Item 10.C
- Requires an adviser to describe any relationship or arrangement, material to the adviser’s advisory business or its clients, that the adviser or any of its management persons have with any related person that is an ESG consultant or other ESG service provider.
Amended Item 17.A
- Requires advisers that have specific voting policies or procedures, including one or more ESG considerations when voting client securities, to incorporate in their brochures a description of which ESG factors they consider and how they are considered.
Wrap Fee Brochure
- Amended Item 4 to specify that advisers considering ESG factors in their wrap fee programs must provide a description of what ESG factors are considered, and how they incorporate the factors under each program.
- Amended Item 6 to require advisers considering ESG factors when selecting, reviewing, or recommending portfolio managers within the wrap fee programs they sponsor, to describe the ESG factors they consider and how they consider them. Advisers operating as a portfolio manager for a wrap fee program must respond to additional brochure item, Item 8.D.
- Three new disclosure items regarding (1) criteria or any methodology used to assess portfolio managers’ applications of relevant ESG factors in their portfolio management, (2) whether advisers or a third party reviews portfolio managers’ applications of relevant ESG factors, and (3) an explanation that neither the adviser nor third party assesses portfolio manager’s applications of the relevant ESG factors.
Form N-CEN and Form ADV Part 1A
- Includes new proposed Item C.3(j) that inquires about ESG funds’ strategies and processes. By responding to this new item, an ESG-Impact Fund would be required to report that it is both an ESG-Focused Fund and an ESG-Impact Fund.
- Index funds required to report the name and LEI of the index it records. Moreover, all funds would be required to identify the indexes they record.
ADV Part 1A
- Amendments to Item 5.K and corresponding sections of Schedule D. These amendments would require aggregated information for an adviser’s applicable separately managed account clients. Comparable amendments are proposed for private fund reporting in Section 7.B.(1) of Schedule D.
- Amendments to Items 6 and 7 of Part 1A and Sections 6.A. and 7.A. of Schedule D to require advisers to disclose whether they conduct other business activities as ESG providers or have related persons that are ESG providers.
- Advisers required to report whether they follow any third-party ESG framework(s) in connection with their advisory services.
Final action expected in October 2023.