At the December 1, 2020 SEC meeting the ESG subcommittee of the Asset Management Advisory Committee (AMAC) introduced a preliminary set of potential reporting and disclosure recommendations that would apply broadly to issuer ESG disclosures as well as to ESG investment product disclosures.  The purpose is to arrive at final recommendations for consideration by the SEC at the next subsequent AMAC meeting, the date for which has not yet been posted on the SEC’s website.  In the area of investment product disclosures that would cover mutual funds and ETFs, the subcommittee are proposing an alignment with the recently published ESG Roadmap taxonomy developed by the Investment Company Institute (ICI) ESG Working Group (refer to Table 1).

Table 1:  SEC ESG Subcommittee’s Alignment with Investment Company Institute (ICI) ESG Roadmap Taxonomy

ApproachICI ESG Roadmap Application
ESG Exclusionary InvestingMay exclude companies or sectors that do not meet certain sustainability criteria or do not align with investors’ objectives. For example, a fund may not invest in companies that have significant business related to weapons manufacturing or distribution, gambling, tobacco, alcohol, or nuclear energy.
ESG Inclusionary InvestingGenerally, seeks positive sustainability-related outcomes by pursuing and focusing on portfolios that fundamentally or systematically tilt a portfolio based on ESG factors alongside financial return. For example, a fund may invest in equity securities of companies that contribute to and benefit from clean energy generation, sustainable infrastructure, waste management, and other environmentally friendly approaches.
Impact InvestingSeeks to generate positive, measurable, and reportable social and environmental impact alongside a financial return. Measurement, management, and reporting of impact is a defining feature of impact investing. For example, a fund may invest the majority of its assets in securities whose use of proceeds, in the fund manager’s opinion, provide measurable positive social or environmental benefits.

The ICI’s ESG Roadmap, if it is to be taken up formally by the SEC, should be viewed as a good first step forward in a process that in our view will require additional consideration and further refinements to achieve greater clarity regarding terminology and practices across the growing universe of sustainable investment funds.  For example, the ICI’s ESG Roadmap does not address the adoption of standardized sustainable investing definitions, and related to this, the financial and non-financial expectations or outcomes associated with funds that pursue such strategies.  Also, the ICI’s investing approaches do not fully differentiate between various types of funds and their sustainable strategies, such as thematic or values-based funds.  Addressing these considerations would serve to further support financial intermediaries and investors in their efforts to more effectively align funds with sustainable goals, objectives or values.  While the ESG Roadmap does not offer any guidance regarding stepped up disclosure practices that help investors understand the relationship between the adoption of sustainable strategies, how such strategies may be impacting investment decisions as well as financial and, as relevant and appropriate, non-financial outcomes, this shortcoming seems to be addressed in the broader set of subcommittee’s recommendations.  

Sustainable Research & Analysis LLC provides a timely monthly snapshot of trends and developments affecting the sustainable investing market segment as seen through the lens of mutual funds and ETFs. The Monitor tracks total net assets, fund flows, fund re-brandings, new fund firms, new fund launches and fund closures.  CLICK HERE to request additional information.

Note of Explanation:  While definitions continue to evolve, sustainable investing refers to a range of five overarching investing approaches or strategies that encompass:  values-based investing, negative screening (exclusions), thematic and impact investing and ESG integration.  Shareholder/bondholder engagement and proxy voting may also be employed along with one of more of these strategies that are not mutually exclusive.  Prepared by:  Sustainable Research and Analysis LLC.

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