On May 25, 2022, 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 factors. The proposed changes would apply to certain registered investment advisers, advisers exempt from registration, registered investment companies, and business development companies.
Even though ESG strategies have existed for decades, interest in these strategies has rapidly increased in recent years. The definition of ESG can vary amongst funds and advisers with significant differences in the data, criteria, and strategies used as part of their ESG policies. In addition, the lack of disclosure requirements and a common framework specific to ESG investing make it difficult for investors trying to understand such funds. The SEC believes that the proposed rule and form amendments would provide consistent standards for ESG disclosures, allowing investors to make more informed decisions.

Proposed Amendments

Required Disclosures for Funds and Advisers

The SEC’s proposal would require funds that consider ESG factors in their investment process to disclose additional information regarding their investment strategies. The amount of required disclosure depends on how central ESG factors are to a fund’s strategy, with a concise overview in the prospectus supplemented by more detailed information in other sections of the prospectus or in other disclosure documents.
The following classifications of ESG funds are identified in the proposal:

Integration Funds – funds that integrate one or more 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 one or more 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, such funds seek to achieve a particular ESG impact and would be required to disclose how they measure progress on their objective.

Under the proposed amendments, funds would be required to disclose on Form N-CEN their ESG classification, the ESG factors considered, the method used to implement their ESG strategy, information on any ESG providers used for investment strategy, and if the fund follows any third-party ESG frameworks. Although not related specifically to ESG investing, the proposal also would amend Form N-CEN to require index funds to provide certain identifying information about the index that they track.

Advisers that consider ESG factors would be required to make certain disclosures in their Form ADV brochures with respect to their consideration of ESG factors in the significant investment strategies or methods of analysis they pursue and report certain ESG information in their annual filings with the SEC.

Additional Disclosure Regarding Impacts and Proxy Voting or Engagements

Under the proposed amendments, certain ESG-Focused Funds would be required to provide additional information about their strategies, including information about the impacts they seek to achieve and key metrics to assess their progress. Funds that use proxy voting or engagement with issuers as a significant means of implementing their ESG strategy would be required to provide additional information about their proxy voting or ESG engagements.

Greenhouse Gas (“GHG”) Emissions Reporting

The proposal would require ESG-Focused Funds that consider environmental factors in their investment strategies to disclose additional information regarding the GHG emissions associated with their investments, such as carbon footprint and the weighted average carbon intensity of their portfolio. Funds that disclose that they do not consider GHG emissions as part of their ESG strategy would not be required to report such information. Integration funds that consider GHG emissions would be required to disclose how the fund considers GHG emissions, including the associated methodology and data sources.


The full text of this proposal is available here