The IAA Supports Policies that Facilitate Sustainable Investing
The IAA strongly supports policies that facilitate sustainable investing. An increasing number of investment advisers engage in sustainable, or ESG, investment strategies and consider ESG factors an integral part of a prudent investment process. This is driven, in no small part, by advisers’ prudent risk management and desire to maximize return for their clients over a long-term horizon, as well as by growing investor interest in sustainable investing.
It also reflects an expanding recognition by financial services leaders that ESG risks that will directly affect the financial markets are only likely to increase in coming years. Total U.S.-domiciled assets under management using sustainable investing strategies rose from $12 trillion at the start of 2018 to $17.1 trillion at the start of 2020, a 42 percent increase. And 42 percent of institutional investors incorporated ESG factors into investment decisions in 2020, compared to 22 percent in 2013.
As fiduciaries, advisers that engage in sustainable investing continually assess how their strategy integrates with investor goals. They typically take a long-term, future-focused approach in evaluating an investment’s risk and opportunity, and a holistic approach to assessing portfolio risk management. Advisers generally study the future potential of investments, rather than only evaluating past performance, and they develop a long-term commitment to stewardship, in terms of proxy voting and engagement.
The IAA strongly supports prudent portfolio and risk management by investment experts as well as informed investor choice, and therefore objects to actions by regulators that would limit the ability of investment advisers to consider sustainability factors or pursue sustainable investment strategies on behalf of their clients. A case in point is the Department of Labor’s December 2020 ESG rule, which had a potentially chilling effect on the use of sustainable investments for retirement investors. We are pleased that the DOL has announced it will not enforce the rule pending further review. We believe that rulemaking reflected a fundamental misunderstanding about how investment advisers and other investment professionals consider ESG factors as part of the investment process, and how sustainable investments are used for the benefit of retirement plan participants and other investors.
In order to preserve the ability of investment advisers to act in the best interest of their clients, in connection with sustainable investing or otherwise, policymakers should not require investment advisers to consider – or limit their ability to consider – a particular set of factors when making investment decisions. Investment advisers must have the flexibility to evaluate a wide range of factors in analyzing investments to achieve their clients’ goals, and to make decisions that they, in their expert judgment, reasonably believe advance the best interest of their clients.
The IAA supports development by the SEC of a dynamic framework that will set out baseline standards for consistent and comparable disclosures of material ESG information by corporate issuers. Such disclosures will foster more effective sustainable investing by advisers on behalf of their clients by providing greater transparency to investors and facilitating apples-to-apples analysis of issuers by advisers. Because of the complexity of the issues and the need for standards to evolve, we believe that the SEC should either establish or engage a third-party standard setter or an expert advisory group to assist it in developing and updating this framework. To build on work that’s already been done, we also encourage the SEC to leverage standards developed by the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-Related Financial Disclosures (TCFD).
Adviser Disclosure and Regulation
Investment advisers should clearly articulate their investment strategies, including sustainable investment strategies, so that investors understand an adviser’s philosophy and can make informed investment decisions. As fiduciaries, advisers must ensure that their disclosures match their investing strategies. Part 2 of Form ADV already provides a sufficient framework for advisers to provide fulsome disclosure regarding their sustainable investment strategies. Advisers also address portfolio management in their required compliance programs. The IAA does not believe that additional substantive requirements are needed for investment advisers in connection with sustainable investments.