On May 25, 2022, the US Securities and Exchange Commission proposed form and rule amendments under both the Investment Advisers Act of 1940 and the Investment Company Act of 1940 (the “Proposal“) to require registered investment advisers, certain advisers that are exempt from registration (collectively, the “Advisers”), registered investment companies and business development companies (collectively, the “Registered Funds”), to provide additional information regarding their environmental, social, and governance (“ESG”) investment practices. 

Proposed ESG Disclosure Requirements for Registered Funds
The Proposal would implement disclosure requirements for Registered Funds based on the centrality of ESG to a Registered Fund’s investment strategy. The Proposal identifies a Registered Fund (except unit investment trusts) the following three types:

• Integration Funds, meaning Registered Funds that consider ESG factors in their investment selections but in which ESG factors are “generally no more significant than other factors in the investment selection process, such that ESG factors may not be determinative in deciding to include or exclude any particular investment in the portfolio.” Such funds would be required to describe how ESG factors are incorporated into their investment process. 

• ESG-Focused Funds, meaning Registered Funds for which ESG factors are a significant or main consideration in (i) investment selection or (ii) engagement with the Registered Fund’s portfolio companies. ESG-Focused Funds include funds (1) with a name including terms that indicate that the fund’s investment decisions incorporate one or more ESG factors, and (2) whose advertisements or sales literature indicate that the fund’s investment decisions incorporate one or more ESG factors by using them as a significant or main consideration in selecting investments. They also include funds that (a) track an ESG-focused index; (b) apply a screen to include or exclude investments or particular industries based on ESG factors; and (c) have a policy of voting their proxies and engaging with the management of their portfolio companies to encourage ESG practices or outcomes. Such funds would be required to provide detailed disclosure, including a standardized ESG strategy overview table, about how the fund focuses on ESG factors in its investment process.

• Impact Funds, which is a subset of ESG-Focused Funds that seek to achieve a particular ESG impact. For instance, (i) funds that invest with the goal of seeking current income while furthering the fund’s disclosed goal of financing the construction of affordable housing units, and (ii) funds that invest with the goal of seeking to advance the availability of clean water by investing in industrial water treatment and conservation portfolio companies. Such funds would be required to disclose how it measures progress on its objective.

Proposed Form ADV Disclosure Requirements for Investment Advisers
Investment advisers that consider ESG factors as part of their advisory business would be required to include specific disclosures regarding their ESG strategies (similar to those for Registered Funds discussed above) in their Form ADV. The Proposal requires investment advisers to disclose with specificity their ESG investing approach by strategy, as well as certain relationships with related persons, and any ESG-related impacts on proxy voting.

• ESG Strategy Disclosure. As proposed, new sub-Item 8.D would require advisers to describe the ESG factor(s) considered for each significant investment strategy or method of analysis, including whether and how the adviser incorporates a particular ESG factor and/or a combination of factors into its management of the strategy.

• ESG Criteria/Methodology. Proposed sub-Item 8.D would also require advisers to describe any criteria or methodology used to evaluate, select, or exclude investments based on the consideration of ESG factors.

• Relationships with Related Persons. Advisers would be required to describe in Item 10.C of the Brochure any material relationship or arrangement with any related person that is an ESG consultant or other service provider.

• Proxy Voting. If an adviser has specific proxy voting policies and procedures to include one or more ESG considerations when voting client securities, the adviser would be required to describe in Item 17 of the Brochure which ESG factors are considered and how they are considered.

​The Proposal is and will remain open for public comment for 60 days after its publication in the Federal Register.