Ceres has welcomed the SEC’s two ESG fund proposals but is asking it to consider changes that address, among other things, investors’ engagement practices.
The SEC in May proposed two sets of rule changes dealing with different aspects of ESG-related investing. One proposal involves changes to rules and reporting forms designed, the SEC says, ‘to promote consistent, comparable and reliable information for investors concerning funds’ and advisers’ incorporation of [ESG] factors.’
The planned changes would broadly categorize certain types of ESG strategies and require funds and advisers to provide more specific disclosures in prospectuses, annual reports and brochures based on the ESG strategies they pursue:
- Funds focused on environmental factors would have to disclose the greenhouse gas (GHG) emissions associated with their portfolio investments
- Funds claiming to have a specific ESG impact would have to describe the specific impact(s) they seek to achieve, and summarize their progress toward those goals
- Funds that use proxy voting or other engagement with companies as a significant means of implementing their ESG strategy would have to disclose information about those activities.
‘ESG encompasses a wide variety of investments and strategies,’ said SEC chair Gary Gensler in a statement announcing the proposal. ‘I think investors should be able to drill down to see what’s under the hood of these strategies.’
The other initiative proposes changes to the Investment Company Act ‘Names Rule’, with the agency citing concerns about fund names that are ‘likely to mislead investors about a fund’s investments and risks.’ The Names Rule already requires registered investment companies whose names suggest a focus on a particular type of investment to have a policy that they will invest at least 80 percent of the value of their assets in those investments.
The proposed changes would extend the requirement to adopt such a policy to any fund name with terms suggesting that the fund focuses on investments that have particular characteristics, such as indicating that the fund’s investment decisions incorporate one or more ESG factors.
Proposals welcome, but...
Ceres, in one of many comment letters filed by different groups and individuals on the proposals, expresses support for what it calls the ‘creation of a regulatory framework to provide standardized information about ESG investment products to aid investment decisions.’
The group states that while the changes may lead to a decrease in total assets invested in funds claiming to be sustainable, they would ultimately increase confidence in climate and other ESG investment products, as well as aid capital formation.
But Ceres CEO and president Mindy Lubber also suggests changes to the proposals, including with regard to engagement disclosure. Following another landmark proxy season, an area of potential interest to companies and investors involves the insights that would be generated by the SEC’s plans for disclosures around funds’ issuer engagement and proxy voting on ESG proposals.
Lubber notes that fund managers may use various means to engage with portfolio companies, such as bilateral meetings, multi-stakeholder collaborations, written communications, proxy voting and submitting shareholder proposals.
‘Ceres encourages the SEC to include questions referencing these various methods in the engagement disclosure requirements,’ she writes. ‘Funds should also be encouraged to provide structured reporting on what ESG topics they address in their engagements. We recognize that there is a wide range of engagement strategies and objectives across the industry, and that qualitative disclosures will play an important role in conveying the true nature of a fund’s engagement activities.’
She also encourages the SEC to work with market participants in developing more structured and standardized forms of engagement reporting in the hopes that those disclosures will become increasingly ‘decision useful’.
Aiming for greenwashing
Greenwashing has gained in prominence as a potential issue for both fund managers and companies seeking to embellish their sustainability credentials. Along with improving GHG emissions disclosures by funds, Ceres describes the fund names changes as an appropriate way to prevent such concerns and tackle investor confusion. ‘We believe that if a fund is marketed as a climate-aware fund, its portfolio should contain assets that are consistent with that marketing. For that reason, we generally support the 80 percent test for funds that use climate terms in their names,’ Lubber writes.
She notes, however, that there may be some climate-aware portfolios that do not comply with the 80 percent test but are consistent with a climate term when viewed as a whole. ‘We urge the SEC to allow funds to have terms, including climate terms, that apply based on their aggregate portfolios, without complying with the 80 percent test for individual securities,’ Lubber adds.
Among other points, she states: ‘Our chief concern, and one that is shared by many within the industry, is that the ESG proposal creates disclosure requirements for ESG funds and advisers but not others. We would encourage the commission to consider subsequent rulemaking to extend these disclosure requirements to all funds and advisers, as we would not want to see the finalization of these rules have a chilling effect on ESG investing.’