Statement by Commissioner Lee on ESG Disclosures Proposal

I am pleased to support today’s proposal to bring greater transparency and accountability to sustainable investing. There has been explosive growth in investor interest and demand around such investments, both domestically and internationally. [1] With that increasing demand comes increasing need for consistent, comparable, and reliable information—information to help protect investors from “greenwashing,” or exaggerated or false claims about ESG practices. Greenwashing can mislead investors as to the true risks, rewards, and pricing of investment assets. [2]

This goes to the heart of our mission at the SEC, which is to protect investors by promoting transparency and accountability around investment decision-making. Those offering investments must fully and fairly disclose what they are selling, and act consistently with those disclosures. In others words: say what you mean and mean what you say. That is what today’s proposal is designed to promote for sustainable investments.

I want to highlight briefly three key areas of the proposal, including those areas where public feedback will be critical. [3] These include how to categorize the various types of funds engaged in ESG investing; whether we have calibrated disclosures sensibly for each category; and finally, the significant question of when and how to require disclosure of greenhouse gas (GHG) emissions.

First, the proposal would categorize funds engaging in ESG investing into two buckets: Integration Funds and ESG-Focused Funds, with a third category that is a subset of ESG-Focused funds to be known as Impact Funds. An Integration Fund would be defined as one that considers one or more ESG factors alongside other non-ESG factors, but generally gives ESG factors no greater prominence than non-ESG factors in its investment selection process. [4] An ESG-Focused Fund, by contrast, would focus on one or more ESG factors as a significant consideration in its investment selection process or as part of its engagement with portfolio companies. Finally, Impact Funds (a subset of ESG-Focused Funds) would be comprised of those with a goal of achieving a specific ESG impact. [5]

Do we have this categorization right? Given that this is the premise upon which we have calibrated disclosure requirements, it’s important to get input on whether we have appropriately captured the various iterations of ESG investing.

Second, are the proposed disclosures for each category tailored appropriately to the risks each poses? For instance, an Integration Fund would be required to disclose, in a few sentences, what ESG factors it incorporates and how it incorporates those factors in its decision-making process. By contrast, ESG-Focused and Impact Funds would be required to provide top-line disclosures (in a standardized tabular format) about the fund’s ESG strategies, such as whether they track an index, seek to achieve a particular impact, or apply inclusionary or exclusionary screens, and then provide more granular information in the prospectus. [6] And for each ESG strategy a fund pursues, it would provide information on how it incorporates ESG factors into the investment decision process by, for example, explaining how it applies an inclusionary or exclusionary screen, or how an index the fund uses factors in ESG in determining its constituents. And finally, an Impact Fund would disclose even more detailed information, such as how it measures progress towards its stated impact goals.

I welcome input on whether the information required of Integration Funds sufficiently enhances transparency around how ESG is truly being considered in these funds’ investment selection processes. I also welcome input as to whether the granularity and types of information provided in the summary table and in the prospectus will facilitate sufficient transparency and comparability.

Third, the proposal would require an ESG-Focused Fund that considers environmental factors to provide aggregated, quantitative GHG emissions data, unless the fund does not in fact consider emissions data in its investment strategy and it specifically discloses that fact to investors. [7] The same quantitative GHG emissions data, however, would not be required for an Integration Fund—even when such fund purports to consider environmental factors (among other non-ESG factors). In that case, an Integration Fund would simply need to describe, in narrative form, if and how it considers the GHG emissions of its portfolio holdings.

Thus, under today’s proposal, even if an Integration Fund considers GHG emissions data, it need not disclose that data to its investors. While it may make sense not to require disclosure of emissions data from an Integration Fund that doesn’t consider it, it’s more difficult to justify permitting funds that do consider GHG emissions data to nevertheless not disclose that data.

I look forward to public comment on this, as well as all other aspects of today’s proposal, which represents a significant step forward in bringing transparency and accountability to this rapidly growing space. I’d like to thank the staff in the Division of Investment Management, the Division of Economic and Risk Analysis, and the Office of the General Counsel for your commitment to improving the quality and accuracy of fund and adviser-related disclosures.

Endnotes

1Estimates of size of this market vary widely, but by all accounts the size is quite large and the growth, tremendous. See, e.g., SustainFi, 30 ESG and Sustainable Investing Statistics, available at https://sustainfi.com/articles/investing/esg-statistics/#:~:text=In%20the%20U.S.%2C%20ESG%20fund,from%20the%20end%20of%202020 (estimating that “[g]lobal ESG fund assets hit roughly $2.7 trillion at the end of last year, with US ESG fund assets accounting for roughly $357 billion of that amount.”). Compare U.S. Securities & Exchange Commission, Asset Management Advisory Committee, Recommendations for ESG (July 7, 2021), available at https://www.sec.gov/files/spotlight/amac/recommendations-esg.pdf (noting that “ESG investing has grown significantly in recent years; according to the ICI, ‘socially conscious’ registered investment products grew from 376 products/$254 billion in assets under management (‘AUM’) at the end of 2017 to 1,102 products/$1.682 trillion in AUM by the end of June, 2020.”); US SIF Comment Letter (June 14, 2021), available at https://www.sec.gov/comments/climate-disclosure/cll12-8916213-245007.pdf (noting that “[s]ince 1995, when the US SIF Foundation first measured the size of the US sustainable investment universe—the pool of assets whose managers consider ESG criteria as part of investment analysis and engagement—at $639 billion, these assets have increased more than 25-fold to $17.1 trillion in 2020, a compound annual growth rate of 14 percent.”).(go back)

2See, e.g., IOSCO, Recommendations on Sustainability-Related Practices, Policies, Procedures and Disclosure in Asset Management (Nov. 2021), available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD688.pdf (discussing global developments and investor protection concerns with respect to greenwashing).(go back)

3The proposal also includes enhanced disclosure requirements for certain investment advisers that consider ESG factors as part of their advisory business, such as a requirement to describe the ESG factor(s) an investment adviser considers for each significant investment strategy. See Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices, Investment Advisers Act No. 6034 (May 25, 2022) (“Proposing Release”), at Section II.B.(go back)

4See id., at Section II.A.1.(go back)

5See id.(go back)

6See id.(go back)

7Proposing Release, supra note 4, at Section II.A.3(d).(go back)