This article was updated August 8, 2022.
Imagine the implications when investors lack objective measures, such as earnings per share to measure a company’s profitability or return on assets to measure a company’s efficiency. Or consider the challenge of comparing financial statements in US dollars to ones in Japanese yen without knowing the exchange rate.
Investors in Environmental, Social, and Governance (ESG) funds currently face comparable challenges when making decisions about investments based on the available ESG factors that have been disclosed. Without concrete, specific, and reliable guidance, making significant investments could seem unsafe.
There’s no reliable way to measure strategies across various funds or ascertain how effective advisors are in implementing stated ESG objectives. As a result, the Securities and Exchange Commission (SEC) has proposed new guidance.
SEC Proposal for ESG Funds
The SEC has introduced a proposal to streamline ESG disclosures among investment advisors, with the following key considerations for investment advisors and ESG funds.
Investment advisors will be expected to disclose ESG factors and strategies in the prospectus, including specific desired impact of implementing stated strategies. Certain advisors will also need to disclose relevant information in client brochures.
Advisors of ESG-focused funds will be required to disclose criteria and data used to achieve ESG objectives within the prospectus as well as metrics used to evaluate progress on ESG objectives. It also requires these funds that consider environmental factors part of their investment strategy to disclose its carbon footprint.
ESG-related statements and annual reports will need to be conveyed in a structured, machine-readable data language (Inline XBRL).
Unit Investment Trusts (UITs) are to disclose the ESG strategy adopted to select their investment portfolios.
ESG disclosures on Forms N-CEN and ADV Part 1A, should report census-type data.
The comment period ends August 16, 2022; it will be open for 60 days after publication in the Federal Register. The full proposal and instructions for comments can be found on the SEC site.
We’re Here to Help
For Asset Management Services to inform your investment strategies or how to conduct an ESG Audit for your business, contact your Moss Adams professional.