The SEC has proposed more disclosure requirements for ESG funds, to give investors more information on environmental, social and corporate-governance vehicles. Here’s the latest on issues of increasing importance for financial services teams regarding Governance, Risk management and compliance, or GRC practices.
The Securities and Exchange Commission (SEC) voted, on May 25, to issue two proposals. One would expand the two-decade-old “names rule” to encompass ESG funds — such that a fund must invest at least 80% of its holdings in certain industries or investment types to give itself labels such as “ESG,” “sustainable” and “low-carbon.” As noted in a Banking Dive update published May 25, by Senior Editor Dan Ennis, the second would require funds that consider ESG in their investment processes to disclose how they measure progress toward that goal.
“What we’re trying to address is truth in advertising,” SEC Chair Gary Gensler said, according to the Wall Street Journal, Ennis noted.
SEC on ESG
In its summary news release, the agency’s statement, titled “SEC Proposes to Enhance Disclosures by Certain Investment Advisers and Investment Companies About ESG Investment Practices” read, in part, as follows:
The Securities and Exchange Commission today proposed amendments to rules and reporting forms to promote consistent, comparable, and reliable information for investors concerning funds’ and advisers’ incorporation of environmental, social, and governance (ESG) factors. The proposed changes would apply to certain registered investment advisers, advisers exempt from registration, registered investment companies, and business development companies.
“I am pleased to support this proposal because, if adopted, it would establish disclosure requirements for funds and advisers that market themselves as having an ESG focus,” said SEC Chair Gary Gensler. “ESG encompasses a wide variety of investments and strategies. I think investors should be able to drill down to see what’s under the hood of these strategies. This gets to the heart of the SEC’s mission to protect investors, allowing them to allocate their capital efficiently and meet their needs.”
The proposed amendments seek to categorize certain types of ESG strategies broadly and require funds and advisers to provide more specific disclosures in fund prospectuses, annual reports, and adviser brochures based on the ESG strategies they pursue. Funds focused on the consideration of environmental factors generally would be required to disclose the greenhouse gas emissions associated with their portfolio investments. Funds claiming to achieve a specific ESG impact would be required to describe the specific impact(s) they seek to achieve and summarize their progress on achieving those impacts. Funds that use proxy voting or other engagement with issuers as a significant means of implementing their ESG strategy would be required to disclose information regarding their voting of proxies on particular ESG-related voting matters and information concerning their ESG engagement meetings.
Industry Feedback
For myriad reasons, the issues of corporate governance, risk management and compliance are increasingly becoming a higher priority in the financial services industry. As covered in a recent article, ESG practices are of keen interest to investors seeking to support good corporate citizens.
In an article published the day of the SEC vote, Wall Street Journal’s Paul Kiernan wrote:
“The boon in what advocates call green, or sustainable, investing has posed a growing challenge to regulators in recent years. Assets and funds that claim to focus on sustainability or ESG factors reached $2.78 Trillion in the first quarter, up from less than $1T two years earlier, according to Morningstar. Though fees charged by such funds are typically much higher than what investors pay for low cost index funds, there are few consistent standards for what constitutes an ESG stock, bond or strategy.”
An analysis published in a June 6 Forbes article, “A First Look At The SEC’s New ESG Funds Disclosure Rule,” offered perspective from Shivaram Rajgopal, the Kester and Brynes Professor at Columbia Business School and a Chazen Senior Scholar at the Jerome A. Chazen Institute for Global Business.
“These requirements are a welcome first step in policing exaggerated marketing claims about ESG and in providing consistent, comparable disclosures that diligent investors can actually rely on,” noted Rajgopal, after reviewing the SEC’s new ESG fund disclosures supplemented by comparisons to the European SFDR, RTS and MIFID II requirements.
He added that an impact fund must also disclose how the fund measures progress towards the specific impact, including KPIs (key performance indicators), the time horizon the fund uses to check for progress, and most important, and the relationship between the impact the fund is seeking to achieve and financial return.
A recently-published Q&A report from Naehas highlighted this issue from a discussion between Naehas Global Partnership Director Brent Plow and Forrester Vice President and Principal Analyst, Craig Le Clair. Speaking to the issue of customers’ increasing interest in environmental, social and governance issues, LeClair offered these comments:
“Attitudes have shifted coming out of the pandemic. Trust was always an important attribute, but the pandemic’s focus on health and loss of life raised it to new heights. Customers and employees must believe that a company will be a safe one to deal with, be transparent, honest, and adhere to strong practices.”
Forrester’s LeClair added, “Outrage at companies that act in unethical ways is more common. Employees and customers now take a stand to vote with their wallets or decide not to work or buy from companies that have a compromised reputation. Compliance, i.e. Environmental, Social Governance compliance as a primary example, is one of several aspects of a company that employees and customers now see as more important.”
In a separate related article, Naehas’ Plow focused on another set of financial services institution regulations, detailing standards to prevent unfair, deceptive, or abusive acts or practices, or UDAAPs, and solutions for managing disclosures. The article recommended how financial service companies, and fintechs in particular, can best prepare a strong UDAAP strategy with innovative AI platforms that address regulatory compliance and customer protections.
Plow noted the four core ways AI platform technology benefits regulatory compliance efforts:
- REDUCES RISK by reviewing more content with greater accuracy
- INCREASES PRODUCTIVITY by reducing review cycle times and enabling more content and offers with confidence
- DRIVES CONSISTENCY by having a comprehensive rules-based assessment that guides the review and approval process
- IMPROVES AUDITABILITY by centrally managing all evidence in one source of truth thereby supporting credible challenges
By employing artificial intelligence, augmented with industry-specific compliance rules, Naehas Intelligent Reviews reduces tedious, error-prone manual review processes, and ensures consistency and accuracy across the entire marketing workflow. As a result, talented and valuable marketing, compliance, risk mitigation, and legal staff are freed up to advance more interesting, pressing, and valuable work.
Innovative SaaS leaders like Naehas have a strong history of working with companies operating in the financial service industry – including financial technology firms (neobanks, wealthtech, paytech and challenger banks, among others) – and provide a customer experience platform built specifically to address the needs of regulators, stakeholders, and customers. This includes a complete Marketing Compliance platform for Disclosure and Offer Management, Ad Content Reviews, and Document and Disclosure Compliance. The use cases also include marketing disclosures, omnichannel offer management outreach, customer agreements, new client welcome packets, as well as other ESG, GRC, CRA criteria.
