SEC Proposes Significant ESG Disclosure Requirements

The SEC proposed amendments on rules and forms to improve disclosure on environmental, social and governance ("ESG") investment practices.

The SEC asserted that the amendments would create a "consistent, comparable and decision-useful" regulatory framework for ESG advisory services and investment companies. The SEC also proposed amending Form N-CEN and Form ADV to align annual reports with similar disclosure requirements. (See also, accompanying Fact Sheet.)

The proposal identified three types of ESG-focused investment companies and the disclosure requirements each would have to follow, including:

• funds that consider ESG factors would be required to describe the role ESG factors play in determining investment strategy;

• ESG-focused funds, which consider ESG factors to be crucial to their investment decisions, would be required to provide additional disclosure, including a standardized ESG strategy overview; and

• impact funds, a subset of ESG-focused funds that strive towards a specific ESG-related goal, would be required to disclose the progress that the funds are making towards their goal.

For investment companies that consider ESG factors in their investment strategy, the amendments would require disclosing information about the goals they are seeking to achieve and the metrics they use to measure progress. Certain investment companies would be required to report greenhouse gas emissions data, such as their carbon footprints and the weighted average carbon intensity of their portfolios.

The 60-day comment period will run after publication in the Federal Register.

SEC Chair Gary Gensler supported the proposal, stating that it will provide investors with "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." SEC Commissioners Caroline A. Crenshaw and Allison Herren Lee also supported the proposal, highlighting the need for specific disclosure regime and encouraging public comment.

SEC Commissioner Hester M. Peirce objected to the amendments, stating that ESG-related disclosure should not be a priority for the SEC, given its ability to enforce already existing rules and laws regarding material misstatements. Additionally, Ms. Peirce noted that the lack of an explicit definition of ESG could render enforcement of these requirements difficult and costly.