Statement on ESG Disclosures Proposal
May 25, 2022
Today, the Commission is considering a proposal to improve disclosures by certain investment advisers and funds that purport to take Environmental, Social, and Governance (ESG) factors into consideration when making investing decisions. I am pleased to support this proposal because, if adopted, it would establish disclosure requirements for funds and advisers that market themselves as having an ESG focus.
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.
When I think about this topic, I’m reminded of walking down the aisle of a grocery store and seeing a product like fat-free milk. What does “fat-free” mean? Well, in that case, you can see objective figures, like grams of fat, which are detailed on the nutrition label.
Funds often disclose objective metrics as well. When doing so, investors get a window into the criteria used by the asset managers for the fund and the data that underlies the claim.
When it comes to ESG investing, though, there’s currently a huge range of what asset managers might disclose or mean by their claims.
As investor interest in ESG investments has grown, so too have ESG investment products and services. For example, we’ve seen an increasing number of funds market themselves as “green,” “sustainable,” “low-carbon,” and so on. While the estimated size of this sector varies, one estimate says that the “U.S. sustainable investment universe” has grown to $17.1 trillion. Suffice it to say there are hundreds of funds and potentially trillions of dollars under management in this space.
“ESG” also encompasses a wide variety of investments and strategies. Some funds screen out certain industries. Others specifically include certain industries. Others may claim to have a particular impact on an issue. Some may track board votes or make assertions about the greenhouse gas emissions, labor practices, or water sustainability of their underlying assets. Some funds involve human judgments. Others might track an outside index.
Needless to say, there’s a wide range here.
When an investor reads current disclosures, though, it can be very difficult to understand what some funds mean when they say they’re an ESG fund. There also is a risk that funds and investment advisers mislead investors by overstating their ESG focus.
People are making investment decisions based upon these disclosures, so it’s important that they be presented in a meaningful way to investors.
What information stands behind funds’ claims?
Which data and criteria are funds using to ensure they’re meeting investors’ targets?
I think investors should be able to drill down to see what’s under the hood of these funds. This gets to the heart of the SEC’s mission to protect investors, allowing them to allocate their capital efficiently and meet their needs.
Thus, this proposal would do a number of broad things with respect to registered investment funds:
- First, it would require funds that say they consider ESG factors to provide investors with information in the prospectus about what ESG factors they consider, along with the strategies they use. This could include, for example, whether a fund tracks an index, excludes or includes certain types of assets, uses proxy voting or engagement to achieve certain objectives, or aims to have a specific impact.
- Second, a subset of those funds — ESG-focused funds, as defined in the proposal — also would need to disclose details about the criteria and data they use to achieve their investment goals, as well as more specific information about their strategies. These disclosures would enable investors to dig into the details of a fund’s strategy.
- Third, the proposal would require particular types of ESG-focused funds to disclose relevant metrics. For example, certain funds would be required to report the greenhouse gas emission metrics of their portfolios, and an impact fund would be required to disclose metrics about and annual progress toward its ESG goals.
In addition, under the proposal, certain investment advisers would be required to disclose similar types of information as registered investment companies regarding their ESG factors and strategies in their client brochures. These disclosures would be tailored to help clients make an informed decision about whether to engage an adviser and how to manage that relationship.
I’d like to extend my gratitude to the members of the SEC staff who worked on this rule, including:
- Sarah ten Siethoff, Brian Johnson, Thoreau Bartmann, Mike Spratt, Sara Cortes, Michelle Beck, Michael Kosoff, Frank Sensenbrenner, Chris Staley, Zeena Abdul-Rahman, Pamela Ellis, Robert Holowka, Amy Miller, Nathan Schuur, Sam Thomas, Elena Stojic, Matthew Williams, Asaf Barouk, and Emily Rowland in the Division of Investment Management;
- Alex Schiller, Ross Askanazi, Rooholah Hadadi, and PJ Hamidi in the Division of Economic Risk and Analysis;
- Ronnie Lasky, Dabney O’Riordan, and Adam Aderton in the Division of Enforcement;
- Mshyka Davis-Smith, Cindy Eson, Katherine Feld, Scott Follin, Ivan Griswold, Andy Sohrn, Norman von Holtzendorff, Ashish Ward, Lesley Ward, Brad Abel in the Division of Examinations;
- Shehzad Niazi, Anita Chan, Natalie Martin, and Erin Nelson in the Office of the Chief Accountant; and
- Meridith Mitchell, Malou Huth, Natalie Shioji, Cathy Ahn, and Amy Scully in the Office of the General Counsel.
 See US SIF Comment Letter (June 14, 2021). The proposal takes into account the comments received in response to Acting Chair Allison Herren Lee’s requested public input on climate change disclosure from investors, registrants, and other market participants. See Acting Chair Allison Herren Lee Public Statement, Public Input Welcomed on Climate Change Disclosures (Mar. 15, 2021), available at https://www.sec.gov/news/public-statement/lee-climate-change-disclosures (“Climate RFI”). The comment letters are available at https://www.sec.gov/comments/climate-disclosure/cll12.htm. Seealso: US SIF, “Sustainable Investing Basics,”available athttps://www.ussif.org/sribasics.