SEC Proposes New ESG Disclosure Requirements

Washington D.C. (June 17, 2022) - On June 17, 2022, the U.S. Securities and Exchange Commission (SEC) published two proposed rules targeted at environmental, social, and governance (ESG) investment disclosures. The proposed rules would require certain investment advisers and companies to provide specific disclosures regarding their ESG investment practices and, where applicable, information substantiating their use of ESG-related names. Among other items, the proposed rules call for enhanced greenhouse gas (GHG) emissions disclosures and updated investment policies that would require companies or funds with names implying a focus on ESG investments to invest the majority of their assets into investments of that type. The proposed rules will be open for public comment for the next 60 days, closing on August 16.

The first of the proposed rules, titled “Enhanced Disclosures by Certain Investment Advisers and Investment Companies: Environmental, Social, and Governance Investment Practices,” would amend both the Investment Advisers Act of 1940 and the Investment Company Act of 1940 to require more detailed ESG investment disclosure information. These proposed amendments would obligate ESG-focused funds to disclose their portfolio’s aggregated GHG emissions and impose additional requirements on ESG Impact Funds (defined as “ESG-Focused Funds that seek[] to achieve a specific ESG impact or impacts”). For example, ESG Impact Funds would also be required to submit detailed disclosures on their progress in making ESG-related impacts. Further, the proposed amendments would create disclosure requirements related to proxy voting, investment strategies, and the criteria used to calculate funds’ progress on ESG-related goals. In terms of organization, the proposed amendments would apply a “layered disclosure approach,” requiring concise disclosures at the beginning of the company’s prospectus or other disclosing document and additional, more detailed, information later in the document.

The second proposed rule, titled “Investment Company Names” would amend the “Names Rule” under the Investment Company Act of 1940 to cover ESG investment companies and funds. Under the Names Rule, a registered investment company or fund with a name suggesting a focus on a particular type of investment must adopt a policy to invest at least 80% of its assets into investments of that type, with some exceptions. The proposed rule would broaden the scope of the Names Rule to encompass investment company or fund names that include, among other items, ESG terms such as “sustainable,” “green,” “ethical,” “impact,” or “good governance.” Further, where an investment company or fund’s name indicates a focus on an investment that involves multiple elements, the proposed rule would require that company or fund’s 80% policy to address each element. For example, the 80% policy of a fund named “XYZ Solar and Hydro Power Fund” would need to provide either that each security included in its 80% basket is in both the solar and hydroelectric industries, or that 80% of the value of the fund’s assets will be invested in a mix of investments, with some solar investments and some hydroelectric investments. Additionally, a covered company or fund would be required to disclose the definition of each term used within its name in a manner consistent with the term’s plain English meaning or established industry use. According to the SEC, extension of the Names Rule in this manner would prevent “greenwashing” by ensuring that funds with names containing ESG-related terms consider ESG “a central part of their investment processes,” not merely an effective means of “attracting inflows.”

The implications of these proposed rules are significant and interested parties should review them closely prior to submitting comments. For more information relating to these proposed rules, please contact the authors of this alert, and visit our Sustainability and Environmental, Social, and Governance Practice page to see other alerts in this area.

Authors:

Karen C. Bennett, Partner

Thomas A. Brooks, Partner

George Leahy, Law Clerk

Jane C. Luxton, Managing Partner - Washington, D.C.