IAA Supports SEC Proposal to Enhance ESG Disclosures for Investment Advisers and Funds with Recommended Changes

August 16, 2022

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The IAA recently submitted a comment letter in response to the SEC’s proposed amendments to its regulations regarding disclosure and reporting requirements for investment advisers and funds that consider one or more ESG factors in their investment decisions.

The IAA strongly supports the view that advisers and funds should clearly articulate their investment strategies, including ESG and sustainable investment strategies, so that investors understand the adviser’s or fund’s philosophy and can make informed investment decisions. We believe that advisers and funds are already required to make these kinds of disclosures, whether related to ESG or otherwise. We nevertheless appreciate and are supportive of the SEC’s desire to move forward with specific disclosure requirements, including requirements designed to prevent greenwashing.

While we are generally supportive of the Proposal, we have concerns about its broad scope, which we believe could obscure rather than clarify salient information for investors, and that the overemphasis on ESG factors could actually be misleading. Given this, and that the detail and specificity of information required to be disclosed could result in technical mistakes, the proposed requirements could result in a reluctance to consider ESG factors when advisers and funds make investment and voting decisions.

Our letter offers several general and specific recommendations that we believe would further the SEC’s objectives, streamline and simplify the proposal, and result in decision-useful disclosures for investors.

General Recommendations

We recommend that any rule that the SEC adopts:

• Uses a materiality framework for disclosure;
• Avoids overemphasizing the role of ESG factors relative to other material factors;
• Balances the need for robust disclosures with the risk of information overload;
• Provides a safe harbor or makes clear that the rules will permit advisers and funds to make good faith determinations when disclosing ESG factors;
• Considers the purpose of the regulatory document when determining what information needs to be disclosed; and
• Follows finalization of the SEC’s proposal on corporate issuer disclosure of climate risk. Specifically, we ask that the adviser/fund disclosure rule not be implemented until the later of 18 months from its effective date or until the SEC has finalized and implemented the corporate issuer rule. The IAA commented on the issuer proposal as well.

Consideration of ESG Factors

We support the SEC’s adoption of a rule that would require advisers and funds to disclose their consideration of ESG factors, subject to several recommended modifications. Specifically, we recommend that the SEC:

• Include a materiality standard in investment advisers’ and funds’ ESG factor disclosure obligations and, to prevent greenwashing, focus on how advisers and funds market themselves to the public;
• Remove the proposed requirements relating to private fund advisers or, in the alternative, preserve the confidentiality of their ESG strategy disclosures and require that they provide aggregate, rather than private fund-specific, disclosures;
• Not require disclosure of proprietary ESG investment methods and strategies;
• Require reporting of third-party ESG frameworks at the investment-adviser level rather than at the strategy level unless the framework is being used at the strategy level; and
• Provide greater flexibility for investment advisers to provide ESG proxy voting information.

Impact Measurement Disclosures

The proposal would require that advisers and funds disclose how they measure the impacts they seek to achieve with their ESG Impact strategies. We support this requirement, subject to our recommendation that the SEC provide a safe harbor from liability or, in the alternative, at least allow flexibility for advisers and funds to provide impact measurements.

Greenhouse Gas Emissions Disclosure and Calculations

Our letter supports the SEC’s adoption of a rule that requires funds to disclose the carbon footprint and weighted-average carbon intensity (WACI) of the fund’s portfolio, subject to our recommendation that the SEC revise the disclosure and calculation requirements to exclude Scope 3 GHG emissions from the reporting and provide a safe harbor for advisers and funds when reporting in good faith.

Marketing and Compliance Policies and Procedures

Our letter also appreciates that the SEC is not proposing any new requirements related to marketing and compliance policies and instead reaffirming existing obligations under the compliance rules when advisers and funds consider ESG factors.