The US SEC has proposed two ESG rules for asset managers. (1) Names Rule would require funds that use ESG terms in their names to follow ESG strategies. (2) ESG Strategy Disclosures would require funds that follow ESG strategies to make certain disclosures.
Names Rule
■ This would require a fund to invest 80% of its assets in ESG if it uses ESG terms in its name. The proposal would bar the use of ESG terminology in a funds name if the fund only considers ESG as "one of many factors" in investment decisions.
ESG Strategy Disclosures
■ This would require funds that have an ESG strategy to provide details in their prospectus of how they consider ESG factors when selecting investments. There are 3 “tiers/layers”. (1) “Integration” (2) “ESG-focused” (3) Impact.
There would be lesser requirements for “integration” funds than for “ESG-focused” funds. There also would be greenhouse gas emission disclosures for funds that have a climate change focus.
An “ESG-Focused Fund” would mean a fund that focuses on one or more ESG factors by using them as a significant or main consideration (1) in selecting investments or (2) in its engagement strategy with the companies in which it invests.
On Impact, the main disclosure will be “an overview of the impact(s) the fund is seeking to achieve, and how the fund is seeking to achieve the impact(s). The overview must include (i) how the fund measures progress toward the specific impact, including the key performance indicators the fund analyzes, (ii) the time horizon the fund uses to analyze progress, and (iii) the relationship between the impact the fund is seeking to achieve and financial return(s)” But also the “impact objectives” will need to be disclosed upfront along with return objectives.
Of note, there is one dissenting commissioner. SEC Commissioner Hester Pierce objected to the Names Rule proposal because she said the 80% investment requirement is too subjective given ambiguity about what constitutes an ESG investment. The better approach is to focus less on the name and more on the disclosures describing the investment strategies. She also objected to the ESG proposal as the SEC already has the power to police asset managers who mislead investors about their ESG efforts. She also complained that the SEC fails to define ESG, which means the proposal will not work because the terms are too broad and it will be nearly impossible to have consistent disclosures among funds.
Comments open for 60 days. Link to proposals below:
List page for SEC rules: https://www.sec.gov/rules/proposed.shtml
Direct links to pdfs of proposals:
Proposing Release: Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices (sec.gov)
https://www.sec.gov/rules/proposed/2022/33-11068.pdf
https://www.sec.gov/rules/proposed/2022/33-11067.pdf
Links to statements, including Hester Peirce's objections:
https://www.sec.gov/news/speeches-statements
https://www.sec.gov/news/statement/peirce-statement-esg-052522