August 11, 2022 - On August 9th the LSTA hosted George B. Raine, partner at Ropes & Gray, for a webcast titled “Don’t Think You Are an ESG Fund? Think Again!”. The explosion of ESG products and services has not gone unnoticed by the SEC. Their scrutiny of funds and advisers’ ESG claims has ramped up recently and in fact the SEC introduced a Climate and ESG Task Force to pursue enforcement actions against funds and advisers that are believed to engage in greenwashing, i.e., exaggerate the ESG-ness of their offerings. The first fruits of those efforts have already been seen with settlements being announced and continuing investigations reported. At the same time, investors have been increasing their focus on the importance of ESG considerations in their investments and their asset managers have broadly integrated ESG factors in their investment selection process. While the trend is clear, the inclusion of ESG considerations varies across fund, managers and strategies. It is against this back drop that the SEC has proposed new rules requiring ESG disclosures by registered funds, BDCs and registered investment advisers. The underlying principle of the proposal is that funds and advisers need to do what they say they do with respect to ESG. That principle has broad support, however, the approach taken by the proposal would create a set of marketing buckets that did not exist previously and each bucket would bring together a number of approaches in an artificial or at least unintuitive way. The three categories established in the proposal – Integration, Focused, Impact – inform tiered ESG disclosure requirements, with ESG Integration funds or strategies tasked with the lightest reporting requirements and ESG Focused funds or strategies, and the Impact subset of those, carrying greater requirements. While a tiered approach to disclosure commensurate to the level of a fund/strategy’s ESG focus makes sense, the low threshold set for the proposed categories may not. Nearly all RIAs and funds will be impacted to some degree by the new rules if adopted in their current form and all will need to analyze their offering under the lens of this rule going forward. Further detail on the SEC proposal can be found in the replay and here. Comments are due by August 16th. The LSTA is preparing a submission as are many others. It remains to be seen how much modification will be made when the final rule is adopted. It seems that this rulemaking will see US market participants needing to think about funds and strategies in terms of categories, much like European market participants now do under the EU’s Sustainable Finance Disclosure Regulation.
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