Executive Summary
In May 2022, the U.S. Securities and Exchange Commission published a proposed rule that, if adopted as proposed, will have significant impacts for registered investment advisers, registered investment companies and business development companies.
ESG Strategy Disclosure for Funds and Advisers
The proposal would require funds that consider ESG factors in their investment process to disclose additional information regarding their strategy. The amount of required disclosure depends on how central ESG factors are to a fund’s strategy and follows a “layered” framework, with a concise overview in the prospectus supplemented by more detailed information in other sections of the prospectus or in other disclosure documents, all of which would be reported in a structured data language. The proposal identifies the following three types of ESG funds:
- Integration Funds. Funds that integrate ESG factors alongside non-ESG factors in investment decisions would be required to describe how ESG factors are incorporated into their investment process.
- ESG-Focused Funds. Funds for which ESG factors are a significant or main consideration would be required to provide detailed disclosure, including a standardized ESG strategy overview table.
- Impact Funds. A subset of ESG-Focused Funds that seek to achieve a particular ESG impact would be required to disclose how it measures progress on its objective.
Advisers that consider ESG factors would be required to make generally similar disclosures in their brochures with respect to their consideration of ESG factors in the significant investment strategies or methods of analysis they pursue and report certain ESG information in their annual filings with the Commission.
Additional Disclosure Regarding Impacts and Proxy Voting or Engagements
Certain ESG-Focused Funds would be required to provide additional information about their strategies, including information about the impacts they seek to achieve and key metrics to assess their progress. The proposal would require funds that use proxy voting or engagement with issuers as a significant means of implementing their ESG strategy to provide additional information about their proxy voting or ESG engagements, as applicable.
GHG Emissions Reporting
The proposal generally would require ESG-Focused Funds that consider environmental factors in their investment strategies to disclose additional information regarding the GHG emissions associated with their investments. These funds would be required to disclose the carbon footprint and the weighted average carbon intensity of their portfolio. The requirements are designed to meet demand from investors seeking environmentally focused fund investments for consistent and comparable quantitative information regarding the GHG emissions associated with their portfolios and to allow investors to make decisions in line with their own ESG goals and expectations. Funds that disclose that they do not consider GHG emissions as part of their ESG strategy would not be required to report this information. Integration funds that consider GHG emissions would be required to disclose additional information about how the fund considers GHG emissions, including the methodology and data sources the fund may use as part of its consideration of GHG emissions.
Please contact Adam Jacobs-Dean or Daniel Austin with any questions regarding this proposal.
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Adam Jacobs-Dean
Managing Director, Global Head of Markets, Governance and Innovation, AIMA
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Daniel Austin
Head of U.S. Markets Policy and Regulation
Practical Implications
If these changes are adopted as proposed, they will present the following practical implications:
- A fund that considers ESG factors in its investment process - whether it is deemed, as defined, an "Integration Fund", "ESG-Focused Fund" or "Impact Fund" - will need to update its prospectus to disclose additional information regarding the fund's strategy.
- Advisers that consider ESG will need to make generally similar disclosures in their brochures and report certain ESG information in their annual filings with the SEC.
- Certain ESG-Focused Funds will need to provide additional information about their strategies, including information about the impacts they seek to achieve and key metrics to assess their progress.
- Funds that use proxy voting or engagement with issuers as a significant means of implementing their ESG strategy will need to provide additional information about their proxy voting or ESG engagements, as applicable.
- ESG-Focused Funds will be required to determine and report the fund's carbon footprint and the weighted average carbon intentsity of the portfolio.
Timeline
AIMA has categorized this proposal as Medium Priority/Medium Impact and it is therefore represented in mid-dark blue in the AIMA Regulatory Horizon Scan gantt chart.
Estimated Compliance Date for shareholder reports and Form N-CSR3 | March 5, 2026 | **New** |
Estimated Compliance Date for prospectuses, Form N-CEN and Form ADV3 | September 2, 2025 | **New** |
Estimated Effective Date2 | September 2, 2024 | **New** |
Estimated Publication Date1 | July 3, 2024 | **New** |
Comment deadline | August 16, 2022 | |
AIMA response to proposal filed | August 16, 2022 | |
Proposal published by SEC | May 25, 2022 |
1 Subject to change. We have estimated an adoption date based on the number of outstanding Division of Investment Management proposals scheduled for completion in the first half of 2024 according to the SEC's Fall 2023 Regulatory Flexibility Agenda. As the weeks pass, these dates will shift and become more compressed until either the first half of 2024 has passed or new information becomes available. Of course, this is only an estimate and may move forward or backward as actual matters develop and as the SEC's priorities change. The estimate has been provided solely to allow people to visualize the potential overlaps in compliance burdens for multiple pending rules at the same time.
2 Subject to change. The effective date has been estimated as 60 days following publication. Note that for this purpose we have assumed the SEC's publication date and the Federal Register publication date are identical for ease of calculation. This will not be the case, but the actual time between (i) the SEC approval and publication on the SEC website and (ii) the official Federal Register publication is an unknowable period ranging from a few days to several weeks depending on multiple non-transparent variables. This means that in the end the actual effective date and therefore the actual compliance date will always be later than the estimate even if the SEC approval date estimate is correct.
3 Subject to change. The estimated compliance dates are based on the proposal's 12 month and 18 month compliance windows that begin to toll following the effective date.