SEC Proposes Enhanced Disclosures by Investment Advisers and Investment Companies About ESG Investment Practices

Client Alert
June 6, 2022

On May 25, 2022, the Securities and Exchange Commission (“SEC”) proposed amendments to rules and forms under both the Investment Advisers Act of 1940 (“Advisers Act”) and the Investment Company Act of 1940, as amended (“1940 Act”), to require registered investment advisers, certain investment advisers that are exempt from registration, registered investment companies (including open-end funds, ETFs and closed-end funds), and business development companies (“BDCs” and together with “registered investment companies, “funds”) to provide additional information regarding their environmental, social, and governance (“ESG”) investment practices[1]

While the proposed amendments do not define “ESG”, they do provide definitions of three categories of ESG funds depending on the extent to which ESG is incorporated into the investment process. The category in which such ESG fund falls will determine the amount of enhanced disclosures. The proposed enhanced disclosures will apply to fund prospectuses, annual report and adviser brochures. The proposed amendments are intended to provide a “layered approach” that will allow investors to more easily compare ESG funds. Additionally, the proposed amendments would require certain environmentally focused funds to disclose the greenhouse gas (“GHG”) emissions associated with their portfolio investments. 

Importantly, the required disclosure discussed below would apply regardless of the name of the fund or the applicable investment strategy. The Proposing Release also include an amendment to Form N-CEN that is applicable to all Index Funds, to provide identifying information about the index.

The various aspects of the Proposing Release are discussed in more detail below.

Categories of ESG Funds

The proposed amendments include three categories of ESG funds. The category of ESG fund will dictate the extent of the additional disclosures required by funds and advisers. 

Integration Fund” – a fund that considers one or more ESG factors alongside other, non-ESG factors in its investment decisions, but those 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.

ESG-Focused Fund” – this category would include:

  1. a fund that focuses on one or more ESG factors (such as, for example, carbon emissions, board or workforce diversity or industry specific issues) by using them as a significant or main consideration:

    (i) in selecting investments or

    (ii) in its engagement strategy with the companies in which it invests.
  2. a fund that tracks an ESG-focused index or that applies a screen to include or exclude investments in particular industries based on ESG factors.
  3. a fund that has a policy of voting proxies and engaging with the management of its portfolio companies to encourage ESG practices or outcomes.
  4. a fund that has a name including terms indicating that the fund’s investment decisions incorporate one or more ESG factors.
  5. a fund whose advertisements or sales literature indicates that the fund’s investment decisions incorporate one or more ESG factors by using them as a significant or main consideration in selecting investments.

Impact Fund” – an ESG-Focused Fund that seeks to achieve a specific ESG impact or impacts.

Proposed Fund Disclosures to Investors

Proposed Prospectus ESG Disclosure Enhancements

The proposed amendments would require ESG funds to provide additional information about such fund’s implementation of ESG factors into the principal investment strategies.  The proposed amendments would require a layered disclosure approach since the enhanced disclosures may be lengthy; for example, open-end funds would provide an overview in the summary section of the prospectus and more details in the statutory prospectus[2]

Disclosure for Integration Funds

The proposed amendments would require an Integration Fund to summarize in a few sentences, within the summary section of the prospectus, how the fund incorporates ESG factors into its investment selection process, including what ESG factors it considers.  The Proposing Release gives as an example that an Integration Fund may say “that it considers ESG factors alongside financial, industry-related and macroeconomic factors and that its consideration of such factors would not necessarily result in a company being included or excluded from the evaluation process but rather would contribute to the overall evaluation of that company.” 

More detail on how the fund incorporates ESG factors into the investment process would be included in the statutory prospectus, including the extent to which the fund considers those ESG factors. Additionally, if an Integration Fund also considers GHG emissions, such fund must include more detailed information in the statutory prospectus on how it considers GHG emissions of its portfolio holdings. Such disclosure must include a description of the methodology that the fund uses as part of its consideration of portfolio company GHG emissions. The Proposing Release notes as an example that a fund may disclose it considers the GHG emissions of portfolio companies only within certain “high emitting” market sectors, such as the energy sector. The disclosure would also have to describe the methodology that the fund uses to determine what is a “high emitting” market sector. Additionally, the disclosure would have to state the sources of information that the fund is relying on to receive the GHG emissions data.   

An Integration Fund would be able to mention the role of ESG factors in its advertising or sales literature as long as it is clear that such factors are not a significant or the main consideration of the fund in carrying out its investment strategy.

Disclosure for ESG-Focused Funds

ESG-Focused Funds, as well as Impact Funds, would have to include an ESG Strategy Overview table in the summary prospectus.  The proposed table would be as follows: 

Overview of the Fund’s [ESG] strategy

The Fund engages in the following to implement its [ESG] strategy:
□ Tracks an index
□ Applies an inclusionary screen
□ Applies an exclusionary screen
□ Seeks to achieve a specific impact
□ Proxy Voting
□ Engagement with Issuers
□ Other

How the Fund incorporates [ESG] factors in its investment decisions  
How the Fund votes proxies and/or engages with companies about [ESG] issues  


An ESG-Focused Fund would be allowed to replace “ESG” in each row in the table with another term that more accurately describes the applicable ESG factors the fund considers. Otherwise, an ESG-Focused Fund would only be allowed to provide the information required by the relevant form instruction and more detailed information on each section would have to be provided in the statutory prospectus.  If the ESG-Focused Fund’s prospectus is posted on a website, there would have to be hyperlinks from the table to the enhanced disclosure later in the prospectus. 

Overview of the Fund’s [ESG] strategy

In this section, an ESG-Focused Fund would have to describe the ESG factor or factors that are the focus of the Fund’s strategy in a few concise sentences. The ESG-Focused Fund would also have to check the box to indicate all ESG strategies that the Fund engages in. 

If an ESG-Focused Fund considers environmental factors as part of its investment strategy but does not consider GHG emissions of the issuers in which it invests, such Fund must affirmatively state that it does not consider issuers’ GHG emissions as part of its investment strategy and then it would not be required to provide other GHG emissions information that is part of the proposed amendments.

How the Fund incorporates [ESG] factors in its investment decisions

In this section, an ESG-Focused Fund would summarize how it incorporates ESG factors into its process for evaluating, selecting or excluding portfolio investments.  The ESG-Focused Fund would provide specific information about each of the  ESG strategies applicable to the Fund that it identified in the “check the box” disclosure. Each such ESG strategy would have to be discussed separately from any other strategy. For example, a fund would have to describe an inclusionary screen distinctly from an exclusionary screen.

If the ESG-Focused Fund applies an inclusionary or exclusionary screen to select or exclude investment’s, it must briefly explain the factors that the screen applies, such as particular industries or business activities it either seems to include or exclude, and if applicable, what exceptions would apply.  Such ESG-Focused Fund would also have to include the percentage of the Fund’s net assets to which the screen applies, if it is less than 100%, excluding cash and cash equivalents held for cash management purposes, and to briefly explain why the screen applies to less than 100% of the portfolio. More details about the screens, including the factors applied, any quantitative thresholds or qualitative factors used to determine a company’s industry classification, or whether a company is engaged in a particular activity, would be included in the statutory section of the prospectus. This more fulsome disclosure might include details such as how the fund analyzes whether an issuer derives significant revenue for a particular activity and what percentage of revenue is required to meet the definition of significant.

If the ESG-Focused Fund uses an internal methodology, a third-party data provider, or a combination of both, in order to evaluate, select or exclude investments, the Fund’s disclosure must describe how the Fund uses the methodology, third-party data provider or combination of both, as applicable. More details on the internal methodology used and how that methodology incorporates ESG factors or on the scoring or rating system used by a third-party data provider would be included in the statutory section of the prospectus.

If the ESG-Focused Fund tracks an index, the index must be identified and a brief description of the index and how it uses ESG factors to determine its constituents must be included.  A more detailed description of the index, including its methodology and any criteria or methodologies it uses to include or exclude components of the index, would be in the statutory section of the prospectus. 

Additionally, if the ESG-Focused Fund follows any third-party ESG framework, such as the United Nations Principles for Responsible Investing (“UN PRI”), the Fund would have to provide an overview of that framework with more details on the framework itself being provided in the statutory section of the prospectus.

How the Fund votes proxies and/or engages with companies about [ESG] issues

If engagement with issuers, either by voting proxies or otherwise, is a significant means of implementing the ESG strategy of an ESG-Focused Fund, then such Fund would provide a brief narrative overview of how the Fund engages with portfolio companies on ESG issues.  If an ESG-Focused Fund does not engage with issuers through proxy voting or engagement, such Fund would disclose that neither proxy voting nor engagement with issuers is a significant part of its investment strategy.  The Proposing Release notes that while determination of whether either proxy voting or engagement is significant depends on the facts and circumstances, but that the SEC generally believes a fund that regularly and proactively votes proxies or engages with issuers on ESG issues to advance one or more particular ESG goals the fund has identified in advance would be using voting and engagement as a significant means of implementing its strategy.

The narrative overview would identify the specific methods, both formal and informal, that the ESG-Focused Fund uses to influence issuers. First, an ESG-Focused Fund would have to identify whether it has specific or supplemental proxy voting policies and procedures that include one or more ESG considerations for companies in its investment portfolio, and, if so, state which ESG considerations those policies and procedures address. If an ESG-Focused Fund seeks to engage with issuers on ESG matters, other than through proxy voting, the Fund would have to disclose an overview of the objectives it seeks to achieve through such engagement. If an ESG-Focused Fund does not engage with issuers on ESG matters, the Fund would have to so state. More details on the ESG-Focused Fund’s proxy voting and engagement would be included in the statutory section of the prospectus, including Fund’s time horizon for progressing on objectives and any key performance indicators that it uses to analyze or measure the effectiveness of its engagement.

Disclosure for Impact Funds

In addition to the disclosure required by ESG-Focused Funds, Impact Funds would have additional disclosure requirements. An example of an Impact Fund in the Proposing Release include: a fund that invests with the goal of seeking current income while also furthering the fund’s disclosed goal of financing the construction of affordable housing units. 

In the “How the Fund incorporates [ESG] factors in its investment decisions” section of the ESG Strategy Overview table, an Impact Fund would also have to include an overview of the impact(s) the Fund is seeking to achieve, and how the Fund is seeking to achieve that impact. This description would have to include a brief description of: (1) how the fund measures progress towards the stated impact; (2) the time horizon used to measure that progress; and (3) the relationship between the impact the fund is seeking to achieve and the funds financial returns. More details on each of these items would be included in the statutory section of the prospectus.

The Proposed Amendments would also require that an Impact Fund disclose in its investment objective the ESG impact that the Fund seeks to generate with its investments. 

Fund Annual Report ESG Disclosures

The proposed amendments would also included additional disclosures for annual reports. Such additional information for registered management investment companies would be included in the management’s discussion of fund performance section of the annual report and for BDCs, this information would be included in the management discussion and analysis section of the annual report on Form 10-K. Such disclosure would include:

  1. For ESG-Focused Funds and Impact Funds for which proxy voting is a significant means of implementing its ESG strategy – certain information regarding how the Fund voted proxies relating to portfolio securities on ESG issues during the reporting period.
  2. For ESG-Focused Funds and Impact Funds for which engagement other than proxy voting is a significant means of implementing its ESG strategy – certain information about their engagement activities during the reporting period, such as the number or percentage of issuers with whom engagement meetings were held and the number of such meetings.
  3. For ESG-Focused Funds and Impact Funds that consider environmental factors – information on the aggregated GHG emissions of the portfolio unless such Fund has affirmatively stated in the ESG Strategy Overview table in the prospectus that it does not consider issuers’ GHG emissions.

    This information would specifically include the carbon footprint and the weighted average carbon intensity (“WACI”) of the fund’s portfolio.  The carbon footprint and WACI calculations would be based on portfolio companies' Scope 1 and 2 emissions, and funds would not be allowed to reduce the GHG emissions associated with a portfolio company based on the company's use of purchased or generated carbon offsets. In addition, these funds would be required to separately disclose by industry sector, in their annual reports, the Scope 3 emissions of their portfolio companies to the extent such data is reported by their portfolio companies.

    In an effort to promote reporting consistency among funds, the proposed amendments provide instructions for performing the GHG calculations, which are generally consistent with the GHG Protocol and Partnership for Carbon Accounting Financials (“PCAF”) standards. The Proposing Release also provides guidance on the information sources funds should rely on for GHG emissions and valuation information. If GHG emissions information is not available for certain portfolio companies, the Proposing Release states that funds could make a good faith estimate of those companies' Scope 1 and 2 emissions. While the Proposing Release does not recommend any particular methodology for the estimation, funds would be required to disclose details about the estimation procedure used, as well as the percentage of the aggregate portfolio GHG emissions that were estimated.
  4. For Impact Funds only – a discussion of the fund’s progress on achieving its impact in both qualitative and quantitative terms during the reporting period.
  5. For Impact Funds only – a discussion of the key factors that materially affected the Fund’s ability to achieve its impact.

Form ADV Part 2A Brochure Disclosures

Item 8: Methods of Analysis, Investment Strategies and Risk of Loss

The proposed amendments would add a new sub-Item 8.D to Form ADV Part 2A, requiring advisers to provide descriptions of any ESG factors considered for each applicable significant investment strategy or method of analysis for which such adviser considers any ESG factors. Similar to the proposed amendments for funds, the proposed amendments do not define “ESG” but include definitions for three categories: ESG integration, ESG focused and ESG impact. While these category definitions are similar to those for funds, there are some differences.

ESG integration strategies or methods of analysis - consider one or more ESG factors alongside other, non-ESG factors in your investment advice, but such ESG factors are generally no more significant than other factors in advising your clients with respect to investments, such that ESG factors may not be determinative in providing advice with respect to any particular investment.

ESG focused strategies or methods of analysis - focus on one or more ESG factors by using them as a significant or main consideration in advising your clients with respect to investments or in your engagement strategy with the companies in which your clients invest.

ESG impact strategies or methods of analysis - ESG-focused strategies or methods of analysis that seek to achieve a specific ESG impact or impacts.

The proposed amendments would specifically require an adviser to explain whether and how it incorporates a particular ESG factor and/or a combination of factors.  If the adviser considers different ESG factors for different strategies would include the disclosure for each strategy separately.  

  1. For integration strategies or methods of analysis, the disclosure would explain how the adviser incorporates certain ESG factors when making investment decisions and would include that the adviser also considers non-ESG factors alongside such consideration and that the ESG factors are not more significant than any other factor and therefore may not be determinative in making a final decision on whether to recommend an investment.
  2. For focused strategies or methods of analysis, the disclosure would explain the ESG factors used and how they are incorporated into investment decisions.
  3. For impact strategies or methods of analysis, the disclosure would also include an overview of the impact(s) the adviser is seeking to achieve and how the adviser is seeking to achieve the impact(s) (including how it measures progress toward the stated impact, disclosing the key performance indicators it analyzes, the time horizon it uses to analyze progress, and the relationship between the impact the adviser is seeking to achieve and financial return(s).

Additionally, advisers must disclose any criteria or methodology used to evaluate, select, or exclude investments based on ESG factors and how such are used. If different criteria or methodologies are used for different strategies each should be disclosed.  The proposed amendments include a non-exclusive list of criteria and methodologies to address, as applicable:

Item 10: Other Financial Industry Activities and Affiliations

The proposed amendments include changes to Item 10.C. that would require an adviser to describe any material relationship or arrangement to the adviser’s advisory business or clients that the adviser or any of its management persons have with any related person that is an ESG consultant or other ESG service provider.

Item 17: Voting Client Securities

The proposed amendments include changes to Item 17.A that would require advisers taking ESG considerations into account in voting policies or procedures to include a description of such in their brochures. Any differences in voting policies and procedures for ESG specific strategies, different clients, or multiple ESG-related strategies would have to be disclosed.

Wrap Fee Brochure (Form ADV Part 2A, Appendix 1)

The proposed amendments will require ESG disclosures for wrap fee program brochures. Specifically, Item 4 would be amended to specify that advisers considering ESG factors in their wrap fee programs must provide a description of such factors, and how they are incorporated in each program.  Advisers would be required to describe any ESG factors they use.

Additionally, the proposed amendments include changes to Item 6 requiring advisers that consider ESG factors in the selection, review, or recommendation of portfolio managers within the wrap fee programs they sponsor, to describe the ESG factors they consider. The description of these ESG factors should include the types of ESG information considered and how the adviser considers them.  The proposed amendments include three disclosure requirements for an adviser’s description of how they consider the ESG factors described above.

  1. A description of any criteria or methodology used to assess a portfolio manager’s application of the ESG factors, including any industry or other standards for presenting the achievement of ESG impacts and/or third party ESG frameworks, and any internal criteria or methodology.
  2. An explanation of whether they review, or a third-party reviews, portfolio managers’ application of these ESG factors, and, if so, to describe the nature of the review and the identity of any applicable third parties.
  3. An explanation, if applicable, that neither the adviser nor a third party assesses the portfolio manager’s application of the ESG factors, and/or that the portfolio managers’ applications of the ESG factors may not be calculated, compiled, assessed, or presented on a uniform and consistent basis.

Lastly, the proposed amendments include changes to Item 6.C. requiring advisers that act as a portfolio manager for a wrap fee program in its wrap fee program brochure (“sponsor-managers”), to respond to proposed Item 8.D. A sponsor-manager may deliver just a wrap fee program brochure to its wrap fee program clients if they receive no other advisory services from the adviser rather than both a wrap fee program brochure and a brochure to its wrap fee program clients. For a sponsor-manager that considers ESG factors for a significant strategy of its wrap fee program, the information required by proposed Item 8.D would complete the sponsor-manager’s disclosure requirements under brochure Item 8.A.

Regulatory Reporting on Form N-CEN and ADV Part 1A

The proposed amendments will also include changes to Forms N-CEN and ADV Part 1A for registered funds and advisers (both registered investment advisers and exempt reporting advisers), respectively, to require census-type information about funds and advisers use of ESG factors, including use of ESG providers.

Form N-CEN

The proposed amendments to Form N-CEN would add proposed Item C.3(j) with questions tailored to ESG funds’ strategies and processes. Accordingly, funds would be required to report, among other things: (i) the type of ESG strategy it employs; (ii) the ESG factor(s) it considers; and (iii) the method it uses to implement its ESG strategy. An ESG-Impact Fund would be required to report that it is both an ESG-Focused Fund and an ESG-Impact Fund.

The proposed amendments to Form N-CEN would also require disclosure of fund considerations of ESG-related information or scores provided by ESG providers in the implementation of its investment strategy. For any such provider, the fund would be required to provide the legal name and legal entity identifier (“LEI”) or other identifying information of the provider and disclose if it is an affiliated person of the fund. Additionally, a fund would be required to report whether the fund follows any third-party ESG framework, and, if so, the full name of such framework.

Additionally, under the proposed amendments to Form N-CEN, all index funds would be required to report the name and LEI or provide and describe other identifying information of the index the fund tracks.

ADV Part 1A

The proposed amendments to Item 5 would only apply to investment advisers registered or required to be registered with the Commission and the proposed amendments to Items 6 and 7 would apply to those advisers and exempt reporting advisers.

ESG Data for Separately Managed Account Clients and Private Funds

The proposed amendments to Item 5.K. and corresponding sections of Schedule D will require the disclosure of information to collect information about the uses of ESG factors in managing separately managed accounts (“SMAs”) and/or reported private funds.

The proposed amendments would require an adviser to indicate whether it employs an integration or ESG-focused approach, and if ESG focused, whether it also employs an ESG-impact approach for SMA strategies and private funds. An adviser must select all approaches that it uses (all three if applicable). These advisers would also report whether they incorporate one or more of the ESG factors into their SMA strategies and private funds and would identify which such factors it considers.

Third-party ESG framework(s)

The proposed amendments would also require advisers to report any third-party ESG framework(s) they follow in their advisory services, and, if so, the adviser would be required to report the name of the framework(s).

Additional Information about Other Business Activities and Financial Industry Affiliations

The proposed amendments under Items 6 and 7 (and Sections 6.A. and 7.A. of Schedule D) would require advisers to disclose whether they or any related persons conduct other business activities as ESG providers. For each related person that is an ESG provider, the adviser would need to complete items in Section 7.A of Schedule D.

Compliance Policies and Procedures and Marketing

The proposed amendments do not contain any new requirements relating to compliance and marketing regulations. However, the Proposing Release notes that the SEC staff has observed a range of deficiencies relating to compliance and marketing practices relating to advisers’ incorporation of ESG factors and thus it includes a reaffirmation of existing obligations.

Specifically, the Proposing Release notes that advisers’ and funds’ compliance policies and procedures should address the accuracy of ESG-disclosures and portfolio management processes to help ensure consistency with the ESG-related investment objectives.  The Proposing Release states that different levels of ESG strategies (integration, focused or impact) will require different levels and types of compliance policies and procedures. In addition, the Proposing Release reiterates that advisers should prevent false or misleading advertisements by prohibiting material misstatements and fraud as required under Advisers Act Rule 206(4)-8 (the “Marketing Rule”) and that it would be materially misleading for an adviser to overstate in an advertisement the extent to which it uses ESG factors (“greenwashing”).

Compliance Dates

The compliance date of the proposed amendments for each item, except for the proposed amendments to shareholder reports and Form N-CSR, would be one year following the effective date. For the proposed amendments to shareholder reports and Form N-CSR there would be an 18-month transition period following the effective date.

Comment Period

Comments on the Proposing Release should be submitted on or before 60 days after the Proposing Release is published in the Federal Register.



[1] Release IC-34594 (May 25, 2022): Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social and Governance Investment Practices.  https://www.sec.gov/rules/proposed/2022/33-11068.pdf (the “Proposing Release”)

[2] With respect to closed-end funds, certain information would be required to appear earlier in the prospectus.  With respect to BDCs, certain information would be required to appear in the management discussion and analysis in the annual report on Form 10-K.  Throughout this client alert, references to “summary section” of the prospectus for open-end funds also refers to earlier sections in a closed-end fund prospectus and the management discussion and analysis section of the Form 10-K for BDCs.  References throughout this client alert to “statutory section” of the prospectus for open-end funds also refers to later sections in a closed-end fund prospectus.

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