US SEC proposes asset management ESG disclosure rules

The US Securities and Exchange Commission (SEC) this week issued a proposal to establish disclosure requirements for funds and asset managers that market themselves as having an ESG focus.

The regulator separately also proposed amendments to rules aimed at preventing misleading or deceptive fund names.

The ESG-related disclosures rules, which are subject to consultation, can be understood as the US equivalent of the sustainable finance disclosure regulation (SFDR) in the EU and the sustainability disclosure regime (SDR) requirements being worked on in the UK.

The SEC’s proposed rules would require additional specific disclosure requirements regarding ESG strategies in fund prospectuses, annual reports and adviser brochures. The regulator has so far proposed dividing ESG into three broad types: ‘Integration Funds’, ‘ESG-Focussed Funds’, and ‘Impact Funds’.

Funds focused on the consideration of environmental factors generally would be required to disclose the greenhouse gas emissions (GHG) associated with their portfolio investments, while funds targeting a specific ESG impact would be required to describe the specific impact(s) they seek to achieve and summarise their progress on achieving those impacts.

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

The SEC has also proposed a layered, tabular disclosure approach for ESG funds to allow investors to compare funds at a glance.

“There are many nuances and interpretations to the rules to digest and this will certainly be an iterative process to improving the provision and use of ESG information”

Sandy Peters, senior head of financial reporting policy at CFA Institute

Commenting on the proposal, SEC chair Gary Gensler said that when it came to ESG investing, “there’s currently a huge range of what asset managers might disclose or mean by their claims”.

“It is important that investors have consistent and comparable disclosures about asset managers’ ESG strategies so they can understand what data underlies funds’ claims and choose the right investments for them,” he said.

Only two days before the SEC announced the ESG disclosure rule proposal, it had fined BNY Mellon’s investment adviser division $1.5m for allegedly misstating and omitting information about ESG investment considerations for mutual funds that it managed.

As concerns the SEC’s “Names Rule”, this has been in place for around 20 years and requires certain investment companies whose names suggest a focus on a particular type of investment (among other areas) to adopt a policy to invest at least 80% of the value of their assets in those investments.

The proposed update to the rule would extend this requirement to any fund name with terms suggesting that the fund focuses in investments that have (or whose issuers have) particular characteristics.

According to the SEC, this would include fund names with terms such as “growth” or “value” or terms indicating that the fund’s investment decisions incorporate one or more ESG factors. The amendments also would limit temporary departures from the 80% investment requirement and clarify the rule’s treatment of derivative investments. The proposal is also said to bar the use of ESG terminology in a fund’s name if the fund only considers ESG as “one of many factors” in investment decisions.

Both proposals are open for comment for about 60 days. They follow the SEC in April proposing a corporate climate risk disclosure rule.

At the Investment Company Institute (ICI), Washington D.C.-based US investment management trade body, chief executive officer Eric Pan said the proposal for some funds to disclose emissions related to their holdings “seems to be unworkable” as some of the information may not even be publicly available.

“As it considers these proposals, the Commission must be attentive to the costs of any new requirements – which will be borne by investors – as well as the benefits,” he said.

“ICI looks forward to continuing our engagement with the Commission on these issues.”

Also in the US, Sandy Peters, senior head of financial reporting policy at CFA Institute, said the SEC’s rule proposals on fund names and ESG disclosures, following on from the company climate disclosure proposal, “are an important step in linking corporate registrant disclosures to how the disclosures are used by investors in constructing and naming funds”.

“There are many nuances and interpretations to the rules to digest and this will certainly be an iterative process to improving the provision and use of ESG information.”

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