The Investment Layer€¦ · ESG mutual funds and exchange-traded funds, community and “green” bond funds, green money market funds, and opportunity zone funds, as well as ESG-oriented

The Investment LawyerCovering Legal and Regulatory Issues of Asset Management

VOL. 27, NO. 5 • MAY 2020

ESG Standards: A Look Abroad in the Absence of Clarity at HomeBy Gwendolyn A. Williamson

The demand for and growth of investment products pursuing environmental, social, and/or governance focused (ESG) strate-gies continues, with investors directing assets to ESG mutual funds and exchange-traded funds, community and “green” bond funds, green money market funds, and opportunity zone funds, as well as ESG-oriented private funds and separately managed accounts.1 In this environment, there has been a proliferation of ESG standards in the US asset management industry.2 Asset managers offer ESG indexes, rating/scoring systems, invest-ment policies, and other tools; many have adopted the United Nations’ Principles for Responsible Investing (UNPRI) and/or pledged to integrate ESG principles throughout their operations3 or use their proxy voting power to further ESG goals.4

The bulk of Securities and Exchange Commission (SEC) attention to ESG matters has been devoted to the disclosures required of pub-lic companies regarding climate-related risks, and the SEC recently has proposed disclosure enhance-ments and modernizations on the topic. But the SEC also is conducting an ESG sweep exam of investment advisers, has issued guidance on the proxy advisory firms relied on by many ESG asset managers, and has requested comment on the

mutual fund names rule. This article discusses the ambiguity and unique set of compliance and other issues that have arisen in this context, summarizes recent SEC activities that touch on these issues, and notes key global ESG initiatives that promise to play a role shaping the future of ESG investing in the United States.

ESG Complexities in the Standards Gap

The lack of regulatory and business standards that permeates the ESG investment space had yielded a complex set of concerns for asset managers. First, questions persist around “greenwashing” and ESG advertising and offering materials generally. The range of ESG strategies and products available to investors is expansive, and the language used by advisers to describe their strategies varies as much as does the meaning that investors give to the term “ESG.”5 This has caused investors and others to criti-cize, for example, the appearance of oil companies and other seemingly non-ESG securities in ESG funds6 and practices involving green bond funds and green corporate bonds. As one observer put it,

a lack of agreed standards, patchy report-ing and weak commitments raise significant questions for those seeking to invest for

THE INVESTMENT LAWYER2

more than just financial return…U.S. utili-ties have issued green bonds with the poten-tial to fund power purchase agreements. This would in effect subsidize renewable energy for consumers by purchasing such energy from other providers, rather than directly contribute to the generation of more renewable energy. Utilities in Europe, on the other hand, use green bond proceeds to build wind and solar farms: a more tan-gible result.7

Similarly, the proxy voting records of ESG strat-egies do not always align with their ESG branding. As Morningstar explains, ESG-specific proxy pro-posals that asset managers are posed with relate to not only climate change and environmental steward-ship, but also cybersecurity, diversity, human rights, politics, sexual harassment, and the reputational risks of products such as opioids and guns.8 Large asset managers have been chastised for the seeming mismatch between their ESG messaging and their proxy voting records.9

Second, the ESG indexes, ratings, policies, and other tools developed by some asset managers, and relied on by others, employ different ESG metrics and terms, investment theories, stock selection cri-teria, and other processes. This can severely com-plicate, and even cripple, efforts to compare public company ESG data or ESG funds managed by dif-ferent advisers.

Third, the debate about the performance impact of ESG strategies carries on in the wake of conflict-ing reports,10 with critics of “impact” funds in par-ticular citing a lack of standardized tools to measure achievement of impact goals. Still, actively managed ESG funds seem to be debunking historic views that ESG strategies limited exposure to a broad segment of investment opportunities and necessarily under-performed those without an ESG mandate. A fun-damental theory of many active ESG strategies is that companies with strong ESG factors are likely to outperform overall.

Last, but by no means exhaustively, there is no mandatory, standardized ESG data regarding the stocks and bonds trading in the United States. Which is to say, that the SEC has not required standard ESG reporting of public companies.11 There are a number of popular voluntary report-ing frameworks that companies use to guide their public reporting and that asset managers reference in managing ESG strategies. For example, since 2018, the Sustainability Accounting Standards Board (SASB) has provided 77 industry-specific sustainability reporting standards “designed to assist companies in disclosing financially material, decision-useful sustainability information to inves-tors,”12 and the NASDAQ ESG Reporting Guide 2.0 aims “to provide fair, transparent, and efficient markets for all stakeholders.”13 For its part, the New York Stock Exchange steers listed compa-nies to the standards and guidance developed by SASB, the Task Force on Climate-related Financial Disclosures (TCFD), and international initiatives including the Global Reporting Initiative (GRI), the Sustainable Stock Exchange Initiative and the World Federation of Exchanges Sustainability Working Group.14

Industry commenters and participants have repeatedly asked the SEC to require standardized ESG reporting,15 and institutional and retail inves-tors alike have indicated a desire for greater stan-dardization in the discourse around ESG investing. As SEC Commissioner Allison Herren Lee has said,

perhaps most importantly in terms of SEC attention, investors are overwhelmingly telling us, through comment letters and petitions for rulemaking, that they need consistent, reliable, and comparable disclo-sures of the risks and opportunities related to sustainability measures, particularly cli-mate risk. Investors have been clear that this information is material to their decision-making process, and a growing body of research confirms that.16

VOL. 27, NO. 5 • MAY 2020

Copyright © 2020 by CCH Incorporated. All Rights Reserved.

3

The SEC on ESG

Information Seeking and 2020 PrioritiesThe documentation requested of ESG advis-

ers in examinations being conducted by the SEC’s Office of Compliance Inspections and Examinations (OCIE) covers many of the concerns discussed above.17 Among other things, OCIE has asked advis-ers to provide:

■■ Information regarding ESG investment strate-gies and the factors used in selecting ESG port-folio investments;

■■ Policies and practices around ESG ratings/scores;

■■ The ESG factors materially influencing proxy vote decisions;

■■ Information on how ESG goals are achieved;■■ The firm’s definition of “ESG” and ESG-related

disclosure and marketing materials;■■ Information regarding adherence to the UNPRI

and/or other ESG standards;■■ The firm’s most and least successful ESG invest-

ments and general ESG performance record;■■ Documentation of any ESG awards or similar

recognition; and■■ The results of any ESG audit.

In addition, OCIE’s published priorities for 2020 include “a particular interest in the accuracy and adequacy of disclosures provided by [advisers] offering clients new types or emerging investment strategies, such as strategies focused on sustain-able and responsible investing, which incorporate environmental, social, and governance (ESG) cri-teria.”18 Chairman Clayton has emphasized that OCIE this year is “reviewing disclosures of invest-ment advisers and other issuers regarding funds and other products that pursue environmental or climate-related investment mandates to ensure that investors are receiving accurate and adequate information about the material aspects of those strategies.”19

It also should be noted that the antifraud provi-sions of and advertising rules under the Investment Adviser Act of 1940 (Advisers Act) apply to fund and adviser ESG activities,20 as do the fiduciary duties under that Advisers Act that require advisers to act in the best interests of their clients.21 It is outside the scope of this article, but fund and adviser compli-ance programs should be appropriately tailored to accommodate all ESG investment activities.22

Proxy VotingAsset managers have long relied on third-party

proxy advisory firms to assist them in voting proxies on behalf of their clients in an objective manner in compliance with Rule 206(4)-6 under the Advisers Act, which requires advisers to avoid conflicts of inter-est with clients when voting proxies. In a 2019 open meeting without advance notice, the SEC approved, along party lines, (1) guidance regarding the ability of an adviser and client to direct the adviser’s voting, including whether and when the adviser must vote (for example, on all ESG issues), the fiduciary duties of advisers with respect to proxy voting on clients’ behalf, and related proxy voting disclosures required under the Investment Company Act of 1940 (1940 Act); and (2) guidance that the furnishing of vot-ing recommendations by proxy advisory firms con-stitutes a proxy “solicitation” within the meaning of Rule 14a-1 under the Securities Exchange Act of 1934 (Exchange Act).23

The guidance focuses on fraud and conflicts of interest. For advisers it provides factors to consider in using proxy advisory firms, and underscores that an adviser may never vote a proxy on behalf of a cli-ent if the adviser believes it would be in the client’s best interest to do otherwise. While the guidance for proxy advisory firms subjects them to the anti-fraud and information and filing requirements under the Exchange Act, the SEC says that neither guidance reflects any change in existing law and proxy advi-sory firms will continue to be able to rely on the exemptions from solicitation requirements available under Rule 14a-2(b) of the Exchange Act.


SEC Commissioner Robert J. Jackson Jr. opposed the measures, noting that they could raise costs for proxy advisory firms and thereby restrict or degrade the quality of proxy voting information available to investors.24 Many ESG asset managers, particularly those whose ESG strategies are a rela-tively small component of their business, rely on proxy voting advice from third-party firms to vote on ESG matters. The UNPRI also has criticized the SEC proposals, saying they will “greatly undermine investors who rely on their advice to integrate…ESG considerations.”25

Asset managers should have proxy policies and voting guidelines in place to ensure that, whether or not they engage a third-party for proxy voting advice, there is a process for ensuring that individual proxy votes are in clients’ best interests and consis-tent with ESG messaging.

The Names RuleIn early 2020, the SEC requested public com-

ment on the effectiveness of Rule 35d-1 under the 1940 Act (Names Rule) in preventing misleading and deceptive fund names. In sum, the Names Rule requires mutual funds and business development companies with certain types of investments, indus-tries, countries, or geographic regions in their names to invest at least 80 percent of their assets in those investments, industries, countries, or geographic regions, and makes it fraudulent and misleading for a fund to do otherwise. In identifying current chal-lenges involving the Names Rule, the SEC noted that

the number of funds with investment man-dates that include criteria that require some degree of qualitative assessment or judgment of certain characteristics (such as funds that include…“ESG” investment mandates) is growing…The staff has observed that some funds appear to treat terms such as “ESG” as an investment strategy (to which the Names Rule does not apply) and accordingly do

not impose an 80 percent investment pol-icy, while others appear to treat “ESG” as a type of investment (which is subject to the Names Rule).26

In an effort to address these challenges, the SEC asked the following questions, as set forth in the March 2020 request for comment:

■■ Should the Names Rule apply to terms such as “ESG” or “sustainable” that reflect certain quali-tative characteristics of an investment?

■■ Are investors relying on these terms as indica-tions of the types of assets in which a fund invests or does not invest (for example, invest-ing only in companies that are carbon neutral, or not investing in oil and gas companies or companies that provide substantial services to oil and gas companies)? Or are investors rely-ing on these terms as indications of a strategy (for example, investing with the objective of bringing value-enhancing governance, asset allocation or other changes to the operations of the underlying companies)? Or are inves-tors relying on these terms as indications that the funds’ objectives include non-economic objectives? Or are investor perceptions mixed among these alternatives or otherwise inde-terminate? If investor perceptions are mixed or indeterminate, should the Names Rule impose specific requirements on when a par-ticular investment may be characterized as ESG or sustainable and, if so, what should those requirements be?

■■ Should there be other limits on a fund’s ability to characterize its investments as ESG or sustain-able? For example, ESG (environment, social, and governance) relates to three broad factors: must a fund select investments that satisfy all three factors to use the “ESG” term?

■■ For funds that currently treat “ESG” as a type of investment subject to the Names Rule, how do such funds determine whether a particular

VOL. 27, NO. 5 • MAY 2020


5

investment satisfies one or more “ESG” factors? Are these determinations reasonably consistent across funds that use similar names? Instead of tying terms such as “ESG” in a fund’s name to any particular investments or investment strate-gies, should we instead require funds using these terms to explain to investors what they mean by the use of these terms?

Asset management firms should be cautious in naming ESG investment vehicles and strategies, and with each new idea consider whether the firm is inadvertently “greenwashing” or otherwise being misleading. ESG product and strategy names should align with the related selection of portfolio invest-ments, measurement of performance of impact goals and use of third-party benchmarks, methodologies, and ratings.

Public Company ESG DataThe information that public companies are

required to report feeds the investment research, tools development, and decision making of asset managers. But the type and quality of ESG-related information disclosed in public company reports is far from standardized, varying to the same extent as the other aspects of ESG investing discussed above. The SEC has devoted significant attention in recent years to developing a framework for the disclosure of climate-change risks by public com-panies, but the matter remains unsettled and there is disagreement, along party lines, among the Commissioners.

SEC Commissioner Hester Peirce has defended the SEC’s existing materiality focused reporting stan-dards for public companies, and has characterized E, S, and G as “scarlet letters,” decrying what she sees as “labeling based on incomplete information, public shaming, and shunning wrapped in moral rhetoric preached with cold-hearted, self-righteous oblivion to the consequences.”27

SEC Chairman Jay Clayton has spoken to ESG matters frequently, commenting that “in the areas

of ‘E’ and ‘S’ and ‘G,’ in particular, the approach to investment analysis appears to vary widely, in some cases incorporating objectives other than investment performance.”28 Clayton believes that:

we should recognize that “E,” “S” and “G” are very different categories from a disclo-sure regulation perspective” and require “decision-useful” disclosure regarding each. “For example, “G” is significantly rooted in and bounded by law, regulation and governance agreements, lending itself to a fair degree of precision. “G” also gen-erally is more historical than forward-look-ing and is substantially under the control of the registrant. “E” has some similarities to “G”—for example, “E” disclosure is often based on law and regulation or at least the effects of law and regulation. However, “E” disclosure can be significantly forward-looking, including estimating or otherwise discussing the effects of current law and regulation as well as pending or potential regulation. We have long recognized there can be a substantial difference between his-torical information and forward-looking information. As I have previously dis-cussed…due to this complexity, I have concerns that imposing a uniform, manda-tory disclosure framework for many areas “E,” “S” and “G” disclosures runs the risks of sacrificing what may be the more rel-evant, company-specific disclosure for the potential for greater comparability across companies.

In January 2020, the SEC announced proposals intended “to modernize, simplify, and enhance cer-tain financial disclosure requirements in Regulation S-K.”29 In a public statement regarding the rule pro-posals, Chairman Clayton indicated that the 2010 SEC interpretive release allowing flexibility for pub-lic companies in reporting on environmental and


climate-related matters continues to apply and that he believes the SEC’s approach “has been and should remain, disclosure-based and rooted in materiality, including providing investors with insight regarding the issuer’s assessment of, and plans for addressing, material risks to its business and operations,” includ-ing climate-change risks and other ESG topics as appropriate.30

Commissioner Allison Herren Lee, on the other hand, believes that

without a mandatory standardized frame-work, not all issuers will disclose, and dis-closure will continue to vary greatly by issuer, making it difficult if not impossible for investors to compare companies…the proliferation of voluntary standards and principles—and specific requests from numerous investors—put significant and sometimes competing demands on issuers, creating workstreams and costs that could be simplified and mitigated by uniform standards…and significant questions exist regarding the reliability of the information disclosed in these reports. Such disclosures may lack sufficient third-party verification, and also may leave investors with inad-equate remedies for inaccurate and incom-plete disclosures.31

She has raised concerns that without stan-dardized ESG reporting in the United States, “we risk falling behind international efforts and put-ting US companies at a competitive disadvantage globally.”32

The two Commissioners agree on looking abroad. Cautioning that “in our efforts to coordi-nate with other regulators, particularly those from outside the United States, we must recognize that our regulatory regime stands apart from an investor protection perspective, as well as a public and private liability and enforcement, perspective,” Chairman Clayton has highlighted the SEC’s participation

with international regulators and initiatives on cli-mate-related securities law disclosures.33 These activ-ities include:

■■ Participation as a member of the Sustainable Finance Network Steering Group of the International Organization of Securities Commissioners, which has undertaken “a sur-vey and a stocktake of national initiatives taken by securities regulators and other international organizations;”

■■ Participation as a member of the Financial Stability Board (FSB) along with the Federal Reserve and the Department of the Treasury, and as a convener of the TCFD,34 which reports to the FSB and “has developed recommendations for voluntary, consistent climate-related finan-cial disclosures that would be useful to lenders, insurers, investors and other market participants in understanding material risks in the financial sector;” and

■■ Engagement “on a bilateral basis with senior offi-cials from the Bank of England, the UK Financial Conduct Authority, the European Securities and Markets Authority, the European Commission, various representatives of the European Union and various other financial regulators on envi-ronmental and climate-related disclosures.” 35

Clayton says he believes that “continued, sub-stantive engagement with our international counter-parts” is important as is focusing on climate-related disclosure that is “material to investment decisions (or ‘decision useful’ information)” and avoiding “the disparate effect on asymmetric application and enforcement of facially analogous requirements.”36 He plans to move forward by seeking information from public companies regarding the extent of their experience with “environmental and climate-related models and metrics in their operations and plan-ning, including price, risk and capital allocation decisions” and from “asset managers that have been using environmental and climate-related models and

VOL. 27, NO. 5 • MAY 2020


7

metrics to allocate capital on an industry or issuer specific basis.”37

Global ESG Standardization Initiatives

In addition to the international working group that the SEC has participated with, the United Nations and other organizations have built a canon of ESG frameworks, including investment policies and reporting standards. Some of these initiatives that are key to the asset management industry are discussed below.

The United NationsThe UNPRI38 is perhaps the ESG investment

policy most widely adopted by US asset managers. It establishes six principles that are intended to set the standard for responsible ESG investing. In what has been called a “greenwashing purge,” a not insignifi-cant number of signatories were recently notified that they had been put on a watchlist for failure to dem-onstrate minimum investment responsibility and had two years to remediate or have their signatory status terminated.39 Moreover, beginning in January 2020, in order to maintain their status as UNPRI signatories, asset management firms were required to respond to a questionnaire tied to the four pillars of the TCFD uniform reporting framework.40

Other StandardsPublic and private companies working to make

meaningful ESG disclosures have a variety of inter-national reporting standards to choose from.

■■ GRI, a Dutch nonprofit with a mission focused on sustainability issues such as climate change, human rights, governance and social well-being offers the GRI Standards, which provide a gen-eral ESG reporting framework for all com-panies, with industry-specific requirements. GRI’s current focus goals include improv-ing the quality of disclosures made using the GRI Standards.41 The GRI Standards are used

by reporting companies and asset managers around the world. As GRI reports, the man-ager of the massive Government Pension Fund of Norway has called for businesses to ensure they disclose “relevant, quantitative and com-parable information” on ESG issues using the GRI Standards.42

■■ Among many other ESG-related measures, the European Commission (EC) has adopted a law that requires asset managers, insurers, and pen-sion funds to disclose environmental risks in their investments. The finance regulations are designed to curb exaggerations of claims around the “greenness” of company practices and also requires disclosure of the social consequences of investment decisions.43 In addition, the EC’s Technical Expert Group on Sustainable Finance released a common voluntary sustainability taxonomy and “eco” labels and standards in late 2018, and the EC Directive on Disclosure of Non-Financial Information requires listed companies, banks, insurers, and other large institutions to disclose information regarding environmental protection, social responsibility and treatment of employees, respect for human rights, anti-corruption and bribery, diversity on company boards (in terms of age, gender, educational and professional background).44 Beginning in 2021, the EC Directive known as “MiFID II” will, among other things, require advisers making suitability recommendations to consider and respect clients’ ESG objectives and preferences and to disclose the firm’s ESG objec-tives and preferences.

■■ The G20 Task Force on Climate-Related Financial Disclosures established by the FSB offers a voluntary corporate disclosure guide for climate-related financial risks focused on gover-nance, strategy, risk management, and metrics/targets.45

■■ The Securities and Futures Commission of Hong Kong (SFC), working with Hong Kong Exchanges and Clearing Ltd., released


a Strategic Framework for Green Finance in 2018 that was intended to facilitate the devel-opment of green-related investments, including exchange-traded and OTC green products, and included “disclosure guidance and harmonized criteria and frameworks to facilitate disclosure and reporting.”46 In an April 2019 Circular to “Green or ESG Funds,” the SFC said it had found that while “most funds have named the green or ESG factors in their investment objec-tive or strategy, a majority of these funds do not specifically disclose how the management com-panies…incorporate such green or ESG factors in their investment selection process.” The SFC Circular provides a set of expectations and dis-closure guidelines intended to allow for greater transparency, enhance disclosure comparability between similar types of green and other ESG funds and “narrow the disclosure gap among these funds.”47

■■ The London Stock Exchange Group offers a Guide for ESG Reporters on the integra-tion of ESG into investor reporting and communication.48

■■ The Carbon Disclosure Program, a nonprofit organization, manages a “global disclosure system for investors, companies, cities, states and regions to manage their environmental impacts.”49

■■ A green bond recently issued in the Netherlands disclosed “a clear framework with ambitious commitments on renewable energy, energy effi-ciency and water management. It aims to use the proceeds to help cut the Netherlands’ net carbon emissions by almost half by 2030. It is transpar-ent on how the proceeds will be invested and measured.”50

■■ Climate Acton 100+ is an investor group rep-resenting approximately 400 signatories and almost $40 trillion in assets under management. It seeks disclosure enhancements from large greenhouse gas emitters.51

ConclusionA wealth of information has been generated in

recent years regarding the ESG impacts and risks of modern corporations and the ESG investment activities of asset managers. Much of the focus has been on environmental sustainability and climate-related reporting, but “S” and “G” are the emerging hot topics. ESG data and analysis are improving as public and private companies report on ESG matters following various voluntary standards and competi-tion in the asset management market drives quality and greater uniformity in ESG indexes, ratings, and methodologies. Still, the status of required public company ESG reporting and the use of proxy advi-sory firms for ESG voting hangs in an uncertain balance at the SEC, and there is no on-point compli-ance guidance from the SEC for ESG-focused funds and investment advisers. With the request for com-ment on the Names Rule proposal and OCIE’s ESG sweep and 2020 priorities, it is possible that the SEC Staff will, as it has in the past, publish compliance observations and/or other guidance. Such an articu-lation of standards would no doubt be welcome to the asset management industry.

As this article goes to press, the asset manage-ment industry is reacting to the COVID-19 virus along with the rest of the world. Morningstar reports that, at least initially, sustainable funds are outperforming.52

Ms. Williamson is a partner at Perkins Coie LLP in Washington, DC.

NOTES1 Morningstar, Inc. (Morningstar) reports that

over $20 billion flowed into sustainable mutual funds and ETFs in 2019. John Hale, Ph.D., CFA, “Sustainable Fund Flows in 2019 Smash Previous Records,” (Jan. 10, 2020), available at https://www.morningstar.com/articles/961765/sustainable-fund-flows-in-2019-smash-previous-records.

VOL. 27, NO. 5 • MAY 2020


9

2 For example, MSCI, Inc. sponsors multiple ESG indexes and offers a publicly accessible ESG ratings database of 7,500 companies and more than 650,000 equity and fixed income securities globally as of October 2019. https://www.msci.com/esg-ratings.

3 For example, Morgan Stanley & Co. LLC has pub-licized its resolution to reduce global plastic waste, including by underwriting bonds, financing recycling and disposal systems, and developing investment products and strategies that align with the United Nations Sustainable Development Goals in order to “prevent, reduce and remove 50 million metric tons of plastic waste from entering rivers, oceans, landscapes and landfills by 2030.” https://www.mor-ganstanley.com/Themes/plastic-pollution-resolution.

4 For example, BlackRock, Inc. President Larry Fink has said the firm will increasingly vote against management at companies not disclosing their climate risk in accordance with the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-Related Financial Disclosure (TCFD). Dawn Lim and Julie Steinberg, “BlackRock to Hold Companies and Itself to Higher Standards on Climate Risk,” Wall Street Journal (Jan. 14, 2020).

5 “The challenge of defining buzzwords leaves a lot of room for manipulations…[and] raises the ques-tion: what does ESG investing actually mean? It is an important -- if difficult -- question to answer.” Joe Rennison, “ESG investing is a term that is too often misused,” Financial Times (July 19, 2019).

6 In late 2019, the Wall Street Journal reported that “eight of the 10 biggest U.S. sustainable funds are invested in oil-and-gas companies, which are regu-larly slammed by environmental activities…although most of the top funds exclude gun makers, casino operators and tobacco companies, they have been slow to reduce their exposure to fossil fuels,” which some have called “hypocritical at its core.” Akane Otani, “ESG Funds Enjoy Record Inflows, Still Back Big Oil and Gas,” Wall Street Journal (Nov. 11, 2019).

7 Joshua Kendall, “Clearer metrics are needed to assess green bond authenticity,” Financial Times (July 30, 2019).

8 Jackie Cook, “How Fund Families Support ESG-Related Shareholder Proposals,” (Feb. 13, 2020), available at https://www.morningstar.com/insights/2020/02/12/proxy-votes.

9 Emily Chasan and Annie Massa, “BlackRock, Vanguard Face Shareholder Rebuke Over Climate Votes,” Bloomberg Green (Dec. 13, 2019), available at https://www.bloomberg.com/news/articles/2019-12-13/blackrock-vanguard-face-shareholder-rebuke-over-cli-mate-votes.

10 See e.g., James Mackintosh, “ESG Funds Mostly Track the Market,” Wall Street Journal (Feb 23, 2020).

11 Disclosure provided by public companies is sub-ject to the anti-fraud provisions of Section 10(b) of the Exchange Act, which makes it illegal to use or employ any manipulative or deceptive device, in connection with the purchase or sale of any secu-rity, and Rule 10b-5 under the Exchange Act, which makes it illegal to, in connection with the purchase or sale of any security, to make materially untrue statements, omit material facts, or otherwise operate as a fraud.

12 h t t p s : / / w w w. s a s b . o r g / s t a n d a rd s - o v e r v i e w /download-current-standards.

13 https://www.nasdaq.com/ESG-Guide.14 https://www.intercontinentalexchange.com/about/

corporate-responsibility/resources-listed-companies/esg-disclosure-guidance.

15 In 2018, for example, a group petitioned the SEC to adopt rules for standardized ESG reporting by public companies, pointing out a morass of “exist-ing rulemaking petitions, investor proposals, and stakeholder engagements on human capital manage-ment, climate, tax, human rights, gender pay ratios, and political spending, and highlight[ing] how these efforts suggest, in the aggregate, that it is time for the SEC to bring coherence in this area.” https://www.sec.gov/rules/petitions/2018/petn4-730.pdf.


16 Public Statement of SEC Commissioner Allison Herren Lee, “Modernizing” Regulation S-K: Ignoring the Elephant in the Living Room,” (Jan. 30, 2020), available at https://www.sec.gov/news/public-statement/lee-mda-2020-01-30.

17 Juliet Chung and Dave Michaels, “ESG Funds Draw SEC Scrutiny,” Wall Street Journal (Dec. 16, 2019).

18 https://www.sec.gov/about/offices/ocie/national-exami-nation-program-priorities-2020.pdf.

19 Public Statement of SEC Chairman Jay Clayton, “Proposed Amendments to Modernize and Enhance Financial Disclosures; Other Ongoing Disclosure Modernization Initiatives; Impact of the Coronavirus; Environmental and Climate-Related Disclosure,” (Jan. 30, 2020), available at https://www.sec.gov/news/public-statement/clayton-mda-2020-01-30.

20 Section 206(4) of the Advisers Act makes it unlaw-ful for an adviser “to engage in any act, practice, or course of business which is fraudulent, deceptive, or manipulative.” Rule 206(4)-1 under the Advisers Act identifies advertising practices that “constitute a fraudulent, deceptive, or manipulative act, practice, or course of business within the meaning of Section 206(4).”

21 See Commission Interpretation Regarding Standard of Conduct for Investment Advisers, Inv. Adv. Act Rel. No. 5248 (June 5, 2019).

22 Rule 38a-1 under the 1940 Act and Rule 206(4)-7 under the Advisers Act. See also Gwendolyn A. Williamson, “Investment Adviser ESG Polices and Compliance Measurement,” Wolters Kluwer Practical Compliance & Risk Management, Vo1. 11, No. 4 (July/August 2018), originally published in The Investment Lawyer, Vol. 25, No. 5 (May 2018).

23 See SEC Press Release, “SEC Clarifies Investment Advisers’ Proxy Voting Responsibilities and Application of Proxy Rules to Voting Advice,” (Aug. 21, 2019), available at https://www.sec.gov/news/press-release/2019-158.

24 Public Statement of SEC Commissioner Robert J. Jackson Jr., “Statement on Proxy-Advisor Guidance,” (Aug. 21, 2019), available at https://www.sec.gov/news/public-statement/statement-jackson-082119.

25 Patrick Temple-West, “US SEC increases scrutiny of proxy advisers,” Financial Times (Aug. 21, 2019).

26 Request for Comments on Fund Names, Inv. Co Act. Rel. No. 33809 (Mar. 2, 2020) (noting that “based on EDGAR data, approximately 65 funds…included the terms “ESG,” “Clean,” “Environmental,” “Impact,” “Responsible,” “Social,” or “Sustainable” in their names as of December 31, 2007. The number of funds increased to 291 as of December 31, 2019.”), available at https://www.sec.gov/rules/other/2020/ic-33809.pdf.

27 SEC Commissioner Hester M. Peirce, “Scarlet Letters: Remarks Before the American Enterprise Institute,” (June 18, 2019), available at https://www.sec.gov/news/speech/speech-peirce-061819.

28 SEC Chairman Jay Clayton, “Remarks to the SEC Investor Advisory Committee,” (Nov. 7, 2019), available at https://www.sec.gov/news/public-statement/clayton-remarks-investor-advisory-committee-110719.

29 SEC Press Release, “SEC Proposes Amendments to Modernize and Enhance Financial Disclosures,” (Jan. 30, 2020), available at https://www.sec.gov/news/press-release/2020-25. The SEC also adopted guidance, effective February 25, 2020, that under Regulation S-K, key performance indicators (KPIs) in the man-agement discussion and analysis (MD&A) of a com-pany’s financial condition may include ESG metrics, but that supplemental information must be included as necessary to make the ESG metrics not mislead-ing, including at a minimum: a clear definition of the ESG metric, what is measures, and how it is cal-culated; an explanation of why the metric provides useful information to shareholders; and an indica-tion of how management uses the metric in manag-ing or monitoring the performance of the business. Commission Guidance on Management’s Discussion and Analysis of Financial Condition and Results of Operations, Exch. Act Rel. No. 34-88094 (Jan. 30, 2020).

30 Public Statement of SEC Chairman Jay Clayton, “Proposed Amendments to Modernize and Enhance Financial Disclosures; Other Ongoing Disclosure Modernization Initiatives; Impact of the Coronavirus;

VOL. 27, NO. 5 • MAY 2020


11

Environmental and Climate-Related Disclosure,” (Jan. 30, 2020) (citing the SEC’s Guidance Regarding Disclosure Related to Climate Change, Sec. Act Rel. No. 33-9106 (Feb. 8, 2010)), available at https://www.sec.gov/news/public-statement/clayton-mda-2020-01-30.

31 Herren Lee, supra n.16.32 Id. See also Joint Statement of SEC Commissioners

Robert J. Jackson, Jr. and Allison Herren Lee, “Proposed Changes to Regulation S-K,” (Aug. 27, 2019), available at https://www.sec.gov/news/public-statement/statement-jackson-lee-082719.

33 Public Statement of SEC Chairman Jay Clayton, “Proposed Amendments to Modernize and Enhance Financial Disclosures; Other Ongoing Disclosure Modernization Initiatives; Impact of the Coronavirus; Environmental and Climate-Related Disclosure,” (Jan. 30, 2020) available at https://www.sec.gov/news/public-statement/clayton-mda-2020-01-30.

34 Herren Lee, supra n.16 (at n.7, noting that the TCFD is supported by over 930 organizations representing a market capitalization of more than $11 trillion).

35 Clayton, supra n.33.36 Id.37 Id.38 Herren Lee, supra n.16 (at n.7, noting that the

UNPRI has more than 2,000 signatories from over 60 countries with more than $80 trillion in collective assets). See also https://www.unpri.org/.

39 Siobhan Riding, “Greenwashing purge sees sustain-able funds lose share in Europe,” Financial Times (Apr. 1, 2019).

40 See https://www.unpri.org/signatories/become-a-signatory.41 https://www.globalreporting.org/information/about-gri/

Pages/default.aspx.42 GRI, “Comprehensive ESG backed by world’s

largest sovereign wealth fund,” (Mar. 3, 2020), available at https://www.globalreport-ing.org/information/news-and-press-center/Pages/

Comprehensive-ESG-backed-by-world%E2%80%99s-largest-sovereign-wealth-fund.aspx.

43 “EU agrees on new rules to counter investment ‘greenwashing’,” Reuters (Mar. 7, 2019) (citing e.g., “investments in assets that could pollute water or damage bio-diversity”), available at https://www.reuters.com/article/us-eu-finance-regulation/eu-agrees-on-new-rules-to-counter-investment-greenwashing-idUSKCN1QO0RU.

44 https://ec.europa.eu/info/business-economy-euro/company-reporting-and-auditing/company-reporting/non-financial-reporting_en.

45 https://www.fsb-tcfd.org/publications/.46 SFC “Strategic Framework for Green Finance,” (Sept.

21, 2018), available at https://www.sfc.hk/web/EN/files/ER/PDF/SFCs%20Strategic%20Framework%20for%20Green%20Finance%20-%20Final%20Report%20(21%20Sept%202018....pdf.

47 SFC, “Circular to management companies of SFC-authorized unit trusts and mutual funds,” (Apr. 11, 2019), available at https://www.sfc.hk/edistribution Web/gateway/EN/circular/openFile?refNo=19EC18.

48 https://www.lseg.com/sites/default/files/content/images/Green_Finance/ESG/2018/February/LSEG_ESG_report_January_2018.pdf.

49 https://www.cdp.net/en.50 Kendall, supra n.751 http://www.climateaction100.org/.52 John Hale, Ph.D., CFA “U.S. Sustainable Funds

Weathering Coronavirus Correction Better Than Most Funds,” (Mar. 4, 2020), available at https://www.morningstar.com/articles/970108/us-sustain-able-funds-weathering-coronavirus-correction-better-than-most-funds. See also John Hale, Ph.D., CFA “Sustainable Equity Funds Are Outperforming in Bear Market,” (Mar. 12, 2020), available at https://www.morningstar.com/articles/972475/sustainable-equity-funds-are-outperforming-in-bear-market.

Copyright © 2020 CCH Incorporated. All Rights Reserved. Reprinted from The Investment Lawyer, May 2020, Volume 27, Number 5,

pages 13–23, with permission from Wolters Kluwer, New York, NY, 1-800-638-8437, www.WoltersKluwerLR.com

Documents

The Investment Layer€¦ · ESG mutual funds and exchange-traded funds, community and “green” bond funds, green money market funds, and opportunity zone funds, as well as ESG-oriented