SEC Speaks on ESG Investing: “Say What You Do, Do What You Say”

The annual SEC Speaks conference is live for the first time since 2019 at the Ronald Reagan Building in Washington, DC. This event gives senior SEC leaders an opportunity to share with securities practitioners their perspectives on current SEC initiatives and priorities.

At yesterday’s morning session, representatives from the Division of Investment Management (IM) put significant emphasis on regulatory expectations for investment funds, companies and advisors related to Environmental, Social and Governance (ESG) factors. They focused on the SEC’s recent proposal to enhance ESG disclosures by certain investment advisers and investment companies and the ESG implications from the SEC’s proposed “Names Rule” amendment. Enforcement Edge was there and ready to blog.

Key takeaways from IM’s discussion include the following:

• "Say What You Do and Do What You Say”: IM repeated this thematic mantra several times. The fact that the SEC is focused on the truthfulness of disclosures that companies make—in the ESG context or otherwise—should come as no surprise.
• Funds, companies and advisors need to provide investors with sufficient information in prospectuses, annual reports and brochures to explain how ESG factors are being used so that investors can meaningfully compare among funds, companies and advisors.
  • How central ESG criteria is to the investment selection process for ESG funds will guide disclosure obligations. The IM representatives discussed three different types of ESG funds, namely:
    • ESG Integration funds: funds where ESG factors are one of many factors
    • ESG Focused funds: funds where ESG is the primary focus of the fund
    • ESG Impact funds: funds which seek to achieve specific ESG impact
  • The IM representatives laid out the need for ESG funds to disclose their focus within the world ESG. They advised:
    • That simply indicating an “ESG” focus is too broad.
    • Funds, companies and advisors need to specify if the focus is E, S or G.
    • Funds, companies and advisors will further need to unpack the stated E, S or G focus, and provide more detail about what underlies the stated E, S or G focus (e.g., “E” focuses on carbon, emissions, wind, etc.)
  • Funds, companies and advisors will need to ensure ESG disclosures adequately explain how ESG is used to make investment decisions and how effectively that ESG strategy has been implemented over time.
    • ESG disclosures may need to include increased disclosure of the data analytics that underlie or substantiate investment decision and performance disclosures.
  • The IM representatives highlighted some of the Form ADV disclosure requirements included in the ESG disclosure proposals.
• “The Importance of a Fund’s Name Cannot Be Understated”
  • The IM representatives emphasized that the Names Rule proposal is intended to ensure an ESG fund’s name aligns with what stands behind its ESG claim.
  • They explained that, if there are ESG-related terms in a fund’s name, 80% of the investment portfolio must match up with the fund’s stated ESG component.
    • For example, if a fund’s name includes “green” or “sustainable,” then 80% of the portfolio should be in “green” or “sustainable” investment opportunities.
  • The IM representatives explicitly noted that ESG integration funds would not be able to use the ESG term in the fund’s name because the ESG component is not a primary focus of the fund.

If you have any questions related to the SEC’s focus on ESG investing and disclosures, please reach out to the authors or your regular Arnold & Porter contact.

© Arnold & Porter Kaye Scholer LLP 2022 All Rights Reserved. This blog post is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.