On May 25, 2022, the U.S. Securities and Exchange Commission (SEC) proposed amendments to rules and reporting forms seeking to promote consistent, comparable and reliable information for investors concerning funds’ and advisers’ incorporation of environmental, social and governance (ESG) factors. The proposed amendments seek to categorize certain types of ESG investments broadly and require funds and advisers to provide more specific disclosures in fund prospectuses, annual reports and adviser brochures based on the particular ESG strategies that they utilize.

The proposed amendments 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.

The proposals characterize ESG funds into three different types, each of which has its own particular disclosure types: (i) “integration funds,” which integrate ESG factors alongside non-ESG factors in investment decisions, (ii) “ESG-focused funds,” for which ESG factors are a significant or main consideration of the investment process, and (iii) “impact funds,” which are a subset of ESG-focused funds that seek to achieve a particular ESG impact. Broadly, integration funds would be required to describe how ESG factors are incorporated into their investment process, ESG-focused funds would be required to provide more detailed disclosure that includes a standardized ESG strategy overview table, and impact funds would be required to disclose how they measure progress in their stated ESG objectives. Similar disclosures would need to be made by advisers in their brochures and annual filings with the SEC with respect to consideration of ESG factors in investment strategies utilized.

In addition to proposed amendments to fund prospectuses, impact funds would be required to disclose within the MDFP section of annual shareholder reports (or MD&A of BDC Forms 10-K) to discuss the fund’s progress on achieving its impact in both qualitative and quantitative terms during the reporting period, and discuss key factors that materially affected the fund’s ability to achieve its impact. The proposed amendments would require funds that use proxy voting or issuer engagement as a significant means of ESG strategy implementation to provide additional information about such applicable voting or engagement in the annual report.

Any ESG-focused funds considering environmental factors would also be required to disclose metrics indicating the carbon footprint and the weighted average carbon intensity of their portfolio, as part of their annual report’s MDFP section. Funds that explicitly disclose that they do not consider greenhouse gas emissions as part of their ESG strategy would not be required to report the foregoing information. Integration funds that consider greenhouse gas information would need to disclose additional information in their disclosure documents about how the fund considers such emissions in their process.

The proposing release further clarifies that, as with all disclosures, funds’ and advisers’ compliance policies and procedures should adequately address the accuracy of ESG-related disclosures made to clients, investors and regulators. It further notes that funds and advisers should address portfolio management processes to help ensure portfolios are managed consistently with the ESG-related investment objectives disclosed by the adviser and/or fund.

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The SEC has proposed that it will provide a transition period following any adoption of the proposed amendments of (i) one year following the effective date of any adopted amendments for proposed disclosure requirements in prospectuses on Forms N-1A and N-2, reporting on N-CEN, and reporting on Form ADV and (ii) 18 months following the effective date of any adopted amendments for proposed disclosures in shareholder reports and filings on Form N-CSR. The deadline for comments is 60 days after publication of the proposed amendments in the Federal Register.

For the full SEC release regarding the proposed amendments, see here.