The next era in ESG investing, welcome

The next era in ESG investing, welcome

A new series focused on examining the next era of ESG investing based on new regulations from the SEC, EU, and beyond.

Jack Casady

Next Era Investing
May 31, 2022

The SEC has proposed new rules and disclosure regulations for ESG investing. The SEC believes that these new rules will increase in transparency for investors and create a more consistent baseline for ESG investing products. With these proposed changes come better-informed choices for end investors who want to align their investments with their beliefs. 

We at YourStake, also believe that these changes and standardizations give advisors more ways to get past greenwashing to give their clients the right investments for their needs. In this series we’re calling: The next era in ESG investing, we will be looking into each section of the SEC proposal, and talk with experts across the industry to give a diverse set of thoughts and expectations on what these rule changes can and will do to impact advisors and investors alike. 

You can expect two pieces of content each week: 1 post that digs into specific sections of the SEC proposal, and 1 interview in written or video form. 

We hope that you gain helpful insights from these discussions that help your practice or your clients in understanding the full landscape of these changes, and offer some insights on how you can prepare for these coming regulatory changes.

For our first post, we’re looking at the overall proposed changes to expect from the SEC, and what they are set out to do.

Overview of proposed amendments:

The SEC’s proposed amendments are to provide consistent, comparable, and reliable information for investors around the ESG funds they are often marketed and sold into. Often investors and advisors alike are faced with comparisons that many believe are apples to oranges and these rules would be instrumental in making fair and level comparisons across all ESG funds 

The rules and form amendments would aid in creating more transparent and truthful ESG investments by:

  • Requiring additional specific disclosure requirements regarding ESG strategies in fund prospectuses, annual reports, and adviser brochures;
  • Implementing a layered, tabular disclosure approach for ESG funds and allow investors to compare ESG funds at a glance; and
  • Generally requiring certain environmentally focused funds to disclose the greenhouse gas (GHG) emissions associated with their portfolio investments to calculate carbon footprints and average carbon intensity for each ESG-focused fund.

The SEC is applying these changes on a tiered basis for three levels of ESG funds as they describe:

  • Integration Funds: Funds that integrate ESG factors alongside non-ESG factors in investment decisions would be required to describe how ESG factors are incorporated into their investment progress.
  • ESG-Focused Funds: Funds for which ESG factors are a significant or main considerations would be required to provide detailed disclosure, including a standardized ESG strategy overview table.
  • Impact Funds: A subset of ESG-Focused Funds that seek to achieve a particular ESG Impact would be required to disclose how it measures progress on its objective

We’ve seen immense growth in demand for ESG investment products, but with little regulation, the growing issues of greenwashing, and misrepresentation are ever-growing issues for end investors. With no standard definition of ESG, the large variations in criteria, investment philosophy, and scoring methods create an investment landscape that is hard to be compared cleanly and transparently. Also for many, ESG can mean different things for investors, as well as tolerances for companies, like Tesla, who might create cleaner modes of transportation and energy storage but have many issues in workplace safety and discrimination of minority groups within their own company. While there is no standard for what ESG is, it’s helpful to find ways to disclose what it means for different companies and funds so an investor can have a full understanding on what they’re invested in. 

“The proposal’s framework for ESG-related strategy disclosure is designed to allow investors to determine whether a fund’s or adviser’s ESG marketing statements translate into concrete and specific measures taken to address ESG goals and portfolio allocation. The proposal also requires certain environmentally focused funds to disclose information regarding the GHG emissions associated with their portfolio.” (SEC factsheet, page 1)

Many end investors are given loud statements, similar to the BNY fine, that ESG is considered in every investment selection, or many larger firms say, ‘Sustainability is at the center of what we do’, without a rulebook in play, many are left wondering how do specific funds and firms actually assess impact. We believe that these proposed changes could help in providing better transparency to how firms actually consider ESG in their business and help level the playing field to break down marketing buzz with actual consideration and impact.

Overall, these changes can be impactful in creating a consistent base for ESG investments, but there could be some discrepancies in how to consider the 3 main layers of ESG investment products, but feel strongly that if these proposed rules are taken into effect, the outcome will be beneficial for investors and advisors. 

In our next chapter of the next era in ESG investing, we will be digging into the levels of ESG investment products that fall in line with these rules and how they are selected. 

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