U.S.: SEC Proposed Rule Would Expand Disclosure Requirements for ESG Funds and Advisors

Last week, the U.S. Securities and Exchange Commission (SEC) proposed additional disclosure requirements for ESG-focused funds in order to “promote consistent, comparable, and reliable information for investors concerning funds’ and advisers’ incorporation of environmental, social, and governance (ESG) factors.” The new requirements would apply to funds and investment advisors that market themselves as having an ESG focus when selecting investments or including ESG as part of their overall investment strategy.

Generally, the proposal would require more specific disclosures in annual reports, fund prospectuses and advisor brochures, describing how the fund or advisor incorporates ESG factors into its investment portfolio or process. If a specific ESG target or goal is identified, disclosure regarding progress toward the target or goal would be required, as well as a description of how progress is or would be measured. For funds that make ESG factors a primary focus, standardized, tabular information would be required so that investors could better compare one fund against another. In a separate proposed greenwashing-related rule released the same day, the SEC seeks to extend the “names rule” to ESG funds, such that a fund using ESG terminology in its name (e.g., “sustainable,” “responsible,” “climate,” “low-carbon,” “green,” etc.) would be required to invest 80% of its investments in those kinds of assets. There remains some ambiguity as to the level of detail and disclosure required. As the proposal states, “[t]he level of detail required by this enhanced disclosure would depend on the extent to which a fund considers ESG factors in its investment process.”

In a statement on the climate proposal, SEC Chairman Gary Gensler described the proposed requirements as akin to nutrition labels on products at a grocery store and as an attempt to increase transparency: “When an investor reads current disclosures . . . it can be very difficult to understand what some funds mean when they say they’re an ESG fund. I think investors should be able to drill down to see what’s under the hood of these funds.”

The two proposed rules will be subject to a 60-day public comment period following their publication in the Federal Register. Debevoise will publish a detailed Client Update on the proposed rule in the coming days.

Links:
SEC Press Release
SEC Fact Sheet
Statement by Gary Gensler
Proposed Rule


U.S.: SEC Fines BNY Mellon $1.5 Million for ESG-related Misstatements

Also last week, the SEC charged BNY Mellon subsidiary BNY Mellon Investment Advisor, Inc. (BNYMIA) for misstatements and omissions concerning ESG considerations, fining BNYMIA $1.5 million for making “material misstatements and omissions . . . concerning the consideration of [ESG] principles to make investment decisions for certain mutual funds.”

Specifically, the SEC alleged that BNYMIA violated Section 206(4) of the Investment Advisers Act of 1940 and Section 34(b) of the Investment Company Act of 1940 when it made representations to investors that it conducted ESG quality reviews for all of the investments within a certain fund group. The SEC alleged that many of the underlying investments received no ESG review, citing as an example one fund in which nearly 25% of its investments had not undergone an ESG review as of the time of investment. Disclosures to the contrary were made in fund prospectuses, board meeting minutes and responses to other firms looking to invest in the fund.

The SEC also cited BNYMIA compliance personnel for failing to adopt reasonable policies and procedures to prevent the alleged inaccurate statements.

In announcing the charges and corresponding settlement, Adam Aderton, Co-Chief of the SEC Enforcement Division’s Asset Management Unit and a member of the SEC’s Climate and ESG Task Force, noted: “As this action illustrates, the Commission will hold investment advisers accountable when they do not accurately describe their incorporation of ESG factors into their investment selection process.”

On May 31, 2022, the Frankfurt offices of Deutsche Bank AG and its asset-management subsidiary, DWS Group, were raided by the Frankfurt public prosecutor’s office, BaFin and the federal criminal police office over allegations of greenwashing. The SEC is separately investigating DWS Group over its sustainability claims.

Links:
SEC Press Release
SEC Order


Global: TNFD Launches Six Consultation Groups and Four Piloting Programs to Enhance Engagement

On May 24, 2022, at the World Economic Forum in Davos, the Taskforce on Nature-related Financial Disclosures (TNFD) announced plans to increase engagement with nature-related risk and opportunity management by launching consultation groups, pilot-testing the beta version of the framework and engaging with Indigenous peoples and local communities.

The TNFD is an investor-backed initiative that aims to develop and deliver a risk-management and disclosure framework for organizations to report and act on evolving nature-related risks. The TNFD is the nature-related equivalent of the well-known Task Force on Climate-Related Financial Disclosures (TCFD).

The TNFD is launching consultation groups in six markets to expand outreach and engagement in markets where significant interest in the work of the TNFD is established. The consultation groups are intended to act as a forum for business, finance, public sector and civil society organizations to share ideas concerning nature- and biodiversity-related business and finance issues and how these should be incorporated in the TNFD framework. The six consultation groups are:

• Australia and New Zealand, convened by the Responsible Investment Association Australasia (RIAA);
• India, convened by the Confederation of Indian Industry (CII);
• Japan, convened by TNFD Taskforce member MS&AD Insurance Group Holdings;
• Netherlands, convened by TNFD Taskforce member Rabobank and the Dutch Banking Association;
• Switzerland, convened by TNFD Taskforce member UBS on an interim basis; and
• United Kingdom, convened by the Green Finance Institute (GFI).

Furthermore, the TNFD beta framework, released in March 2022, is to be tested initially by FSD Africa through the African Natural Capital Alliance (ANCA), Global Canopy, UNEP-FI and the World Business Council for Sustainable Development (WBCSD). Each piloting program partner will run pilot tests with companies and financial institutions over the next year. Following this testing, a further three releases of the beta framework, which will incorporate feedback from market participants and additional framework components, are planned for June 2022 (v0.2), October 2022 (v0.3) and February 2023 (v0.4). The TNFD beta framework (v0.1) is accessible here: https://framework.tnfd.global/.

Lastly, TNFD is partnering with the International Union for the Conservation of Nature to engage with indigenous people and local communities on nature-related issues. This will ensure that the perspectives of indigenous people and local communities are incorporated into the design and development phase of the TNFD framework.

Links:
TNFD Press Release
 

Global: Hamburg University Research Finds Only One Third of “Impact” Funds Fulfil the G7 Taskforce Recommendations

Researchers at Hamburg University have found that just one third of impact-labeled funds pursue impact objectives and report on progress in line with the guidance set out by the G7 taskforce.

The research team used data from Refinitiv to identify funds that claimed to be impact funds and analyzed their adherence to the definition of impact investments promoted by the G7 Impact Taskforce. This definition differentiates between two types of impact investments: (i) those that are impact-aligned, which refers to investments in companies contributing to the Sustainable Development Goals; and (ii) those that are impact-generating, wherein an investor can demonstrate that his or her activities enable or encourage companies to address environmental and social issues.

The researchers found that, although there were more public than private funds in the overall sample, a greater proportion of private market funds met the G7 taskforce criteria, with 69% complying. Further, of the funds with an SFDR classification, only 37% of Article 9 funds and 16% of Article 8 funds fulfilled either category of impact investments.

Overall, the researchers determined that 64% of the funds surveyed should be reclassified as ESG investments rather than impact investments.

Links:
The Report