SEC proposes enhanced disclosures related to ESG

By Kevin Brewer

The SEC proposed amendments to rules and reporting forms to promote consistent, comparable, and reliable information for investors concerning funds' and advisers' incorporation of environmental, social, and governance (ESG) factors.

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

"ESG encompasses a wide variety of investments and strategies," SEC Chair Gary Gensler said in a news release. "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."

The rules and form amendments, according to the SEC, would enhance disclosure by:

  • Requiring additional specific disclosure requirements regarding ESG strategies in fund prospectuses, annual reports, and adviser brochures;
  • Implementing a layered, tabular disclosure approach for ESG funds to allow investors to compare ESG funds at a glance; and
  • Generally requiring certain environmentally focused funds to disclose the greenhouse gas emissions associated with their portfolio investments.

To complement the proposed ESG disclosures in fund prospectuses, annual reports, and adviser brochures, the proposal would require certain ESG reporting on Forms N-CEN and ADV Part 1A, which are forms on which funds and advisers, respectively, report census-type data that inform the commission's regulatory, enforcement, examination, disclosure review, and policymaking roles.

The ways that different funds and advisers define ESG can vary widely, according to an SEC fact sheet, and there are significant differences in the data, criteria, and strategies used as part of ESG strategies.

"The lack of disclosure requirements and a common disclosure framework tailored to ESG investing make it harder for investors who seek to understand which investments or investment policies are associated with a particular ESG strategy," the fact sheet said. "In the absence of informative disclosures, a fund's or adviser's disclosure could exaggerate its actual consideration of ESG factors."

The proposing release will be published in the Federal Register. The comment period will remain open for 60 days after publication in the Federal Register.

— To comment on this article or to suggest an idea for another article, contact Kevin Brewer at Kevin.Brewer@aicpa-cima.com.

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