2022 brought a flurry of new rules, regulations, and frameworks aimed at sustainable investing and the consideration of environmental, social, and governance (ESG) factors. In Silver’s year-end summary, we provide an overview of the key developments in the ESG regulatory landscape in the U.S., EU, and UK. We also check in on efforts by key standard-setting bodies to harmonize disclosure standards on climate and other important social and environmental topics.
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U.S. Regulatory Updates
Silver Summary: Under the Biden Administration, the SEC has taken several big steps to address concerns related to greenwashing and to meet investor demands for the improved disclosure of climate risks. In 2022, the SEC proposed three regulatory changes related to ESG, which were informed, in part, by the enforcement efforts of the SEC’s Taskforce on Climate and ESG.
SEC proposal on corporate climate disclosures
On March 21, 2022, the U.S. Securities Exchange Commission (SEC) announced its climate-related disclosure proposal, which would require listed registrants to disclose climate-related risks and the actual or likely impacts on their business. Once finalized, this rule may require companies to disclose Scope 1, 2 and 3 greenhouse gas (GHG) emissions, as well as provide independent assurance on the reliability of those disclosures.
SEC proposal on enhanced ESG disclosures for investment advisers and companies
On May 25, 2022, the SEC proposed new rules for ESG disclosures for investment advisers and investment companies that would require specific disclosures according to a fund’s determined ESG strategy.
The proposed rule lays out a tiered disclosure approach distinguishing three ESG strategy types: (i) Integration Funds; (ii) ESG-Focused Funds; and (iii) Impact Funds. The proposed rules would add ESG line-items to the Form ADV Part 1A and 2A and additional disclosures would be required with respect to the fund’s determined ESG strategy in the fund’s general description, summary and statutory prospectuses, and annual reports.
Silver submitted a comment letter to the SEC’s proposed ESG disclosure rule, which can be read in full here.
On May 25, 2022, the SEC also proposed amendments to the fund “Names Rule,” which would expand the current requirement for registered investment companies or business development companies to adopt a policy that ensures at least 80% of their investments align with the investment focus the fund name suggests. The proposal explicitly indicates that a fund that considers ESG factors alongside but not more centrally than other, non-ESG factors in its investment decisions would not be permitted to use ESG or similar terminology in its name.
SEC Risk Alert on the new investment adviser marketing rule
On September 19, 2022, the SEC published a ‘Risk Alert’ regarding the amended ‘Marketing Rule’ for investment advisers, which had compliance date of November 4, 2022.
Among other obligations of the amendments to the ‘Marketing Rule,’ ESG practices that are disclosed in marketing materials by an investment adviser must meet the SEC’s substantiation requirement. As described in the rule, investment advisers must have a reasonable basis for believing they will be able to substantiate material statements of fact in advertisements.
DOL reverses ERISA rule to allow fiduciaries to consider ESG factors
On November 22, 2022, the Department of Labor (DOL) finalized a rule that would allow, but not require, retirement plan fiduciaries to consider ESG factors when selecting investment funds and exercising shareholder rights. This reverses a rule proposed under the previous administration, which was widely criticized by the investment community for creating an unnecessary barrier to making well-informed investment decisions.
SEC investigations of investment advisers
The SEC’s Climate and ESG Task Force made headlines in 2022 with several high-profile enforcement actions:
- On November 22, 2022, the SEC announced that Goldman Sachs Asset Management (“GSAM”) agreed to pay a $4 million penalty to settle charges related to policy and procedure failures involving two mutual funds and one separately managed account marketed as ESG investments. Sanjay Wadhwa, Deputy Director of the SEC’s Division of Enforcement and Head of the Climate and ESG Task Force, said that advisors like GSAM “must establish reasonable policies and procedures governing how the ESG factors will be evaluated as part of the investment process, and then follow those policies and procedures, to avoid providing investors with information about these products that differs from their practices.”
- On May 23, 2022, the SEC announced that it charged BNY Mellon Investment Adviser, Inc. (BNYMIA) for misstatements and omissions about ESG considerations in making investment decisions for certain mutual funds that it managed. BNYMIA agreed to pay a $1.5 million fine. According to the SEC, BNYMIA disclosed to investors that it undertook an ESG quality review for every investment made in certain funds prior to investment. In its investigation, the SEC identified numerous instances where BNYMIA failed to comply with this disclosure.
- On May 31, 2022, the Frankfurt offices of Deutsche Bank AG and its asset-management subsidiary DWS Group were raided by German police over alleged greenwashing, spurred, in part, by the SEC’s investigation of DWS’s ESG practices. SEC enforcement activity related to the DWS investigation has not been announced.
EU Regulatory Updates
Silver Summary: The EU continues to push its action plan for financing sustainable growth forward, with significant updates to the Sustainable Finance Disclosure Regulation (SFDR), Taxonomy Regulation, and the Corporate Sustainability Reporting Directive (CSRD). While the regulatory rollout has come in fits and starts, investment managers should prepare for a more complex regulatory regime starting as early as 2023.
Updates on the EU Taxonomy for sustainable activities
On January 1, 2022, the EU Taxonomy Regulation’s climate mitigation and climate adaption requirements came into force. Further, in February 2022, the European Commission approved new standards for specific nuclear and gas energy activities under the EU Taxonomy Regulation.
EU Commission adopts Regulatory Technical Standards (RTS) under the SFDR; ESAs announced delay on PAI reporting
On April 6, 2022, the European Commission published its final proposed Level 2 RTS under the SFDR and Taxonomy regulations. Clarifications on these RTS were released by the European Supervisory Authorities (ESAs) in June 2022. Also in April, the ESAs were requested to refine the RTS, with a specific focus on (i) disclosure of product exposures to gas and nuclear activities and (ii) a broad review of the PAI regime.
On October 26, 2022, the ESAs indicated that they would not be able to meet the deadline of April 28, 2023 for a review of the indicators for PAI and financial product disclosures in the SFDR. The ESAs said the delay, which they indicated could last at least six months, is due to the complexity of the work and the need to seek and respond to feedback from key actors.
Updates on European Securities and Markets Authority (ESMA)
ESMA’s Sustainable Finance Roadmap
On February 10, 2022, ESMA published its Sustainable Finance Roadmap for 2022-2024, which sets out priority areas and actions in sustainable finance. The three priority areas are: (i) tackling greenwashing and promoting transparency; (ii) National Competent Authorities and ESMA’s capacities; and (iii) monitoring, assessing, and analyzing ESG markets and risks.
ESMA’s targeted consultation on ESG ratings and sustainability factors
Following a targeted consultation on ESG ratings and data providers from April 4 to June 6, 2022, ESMA published the results of its call for evidence indicating their support in the European Commission’s efforts to assess the need for regulatory safeguards in the ESG ratings and data provider market.
In May 2022, ESMA published a supervisory briefing on guidance for investment funds and the integration of sustainability risks for National Competent Authorities.
ESMA calls for evidence of greenwashing
On November 15, 2022, ESMA issued a public call for evidence of greenwashing in the EU financial sector, which includes banking, insurance and financial markets. Comments may be submitted by January 10, 2023, and public input may help inform future rulemaking.
UK Regulatory Updates
Silver Summary: While the UK is no longer bound to most EU rulemaking post-Brexit, its financial regulator, the Financial Conduct Authority (FCA), is taking many of the same steps to promote a more “sustainable” way of doing business among both investors and companies. To what extent the UK rules converge (or diverge) with rules in the EU, U.S. and elsewhere is a key area of focus for investment managers with a global investor base.
FCA releases proposed Sustainable Disclosure Requirements (SDRs)
Following HM Treasury’s announcement of the UK Transition Plan Taskforce in April 2022, and the FCA’s published timeline for the UK regulatory landscape in June 2022, the FCA published its highly anticipated proposed Sustainable Disclosure Requirements (SDRs) in October 2022. The SDRs are designed as the UK equivalent to SFDR in the EU and the SEC’s fund labeling rules in the U.S, although with many important differences. The FCA’s aim is “to build transparency and trust by introducing labels to help consumers navigate the market for sustainable investment products, and ensure that sustainability-related terms in the naming and marketing products are proportionate to the sustainability profile of the product.” The proposal is open for public consultation until January 25, 2023.
Updates on Standard-Setting
Silver Summary: Along with financial regulators, influential standard-setting bodies have the potential to move and shape global markets. All eyes will be on the International Sustainability Standards Board (ISSB) as it prepares to introduce its first set of rules for climate disclosures and general sustainability disclosures in the next few weeks. Other organizations — such as ILPA, PRI, and AIMA— have made significant strides towards standardizing disclosures and practices for both traditional and alternative investment strategies.
ISSB makes progress towards a global baseline for sustainability disclosures
- On March 24, 2022, the IFRS Foundation and the Global Reporting Initiative (GRI) announced they would work together to create an interconnected approach for sustainability disclosures.
- On March 31, 2022, the International Sustainability Standards Board (ISSB) published two exposure drafts that set out general sustainability-related disclosure and specific climate-related disclosure requirements. The comment period for the exposure drafts on both the climate-related disclosures and the general sustainability-related disclosures closed on July 29, 2022.
Voluntary reporting requirements for investment advisers
- In April 2022, the ESG Data Convergence Initiative (EDCI, formerly the ESG Data Convergence Project) began its first data collection cycle with approximately 100 GPs providing data on as many as 1,900 portfolio companies. Also in April, the Investment Consultants Sustainability Working Group – United States (ICSWG-US) voted to support EDCI with the objective of improving data disclosure and reporting on standardized ESG metrics for private companies. As of July 2022, more than 200 investor organizations are involved with EDCI, including 134 GPs and 66 LPs, representing $22 trillion in combined AUM.
- In September 2022, the Principles for Responsible Investment (PRI) released Signatories’ 2021 public Transparency Reports and private Assessment Reports alongside an updated 2021 assessment methodology. The 2022 reporting cycle will open in mid-May 2023.
Alternative credit managers get their own ESG disclosure framework
- On November 8, 2022, a group of alternative asset managers and industry bodies (including the Alternative Credit Council, LSTA and PRI) announced the launch of the ESG Integrated Disclosure Project (IDP) template, which provides a standardized format for ESG-related disclosures for both private companies and credit investors. The IDP is supported by key stakeholders, including CDP, EDCI and the Loan Market Association.
Conclusion
The regulatory landscape for ESG and sustainable investing continues to evolve at a breakneck pace. While different jurisdictions and standard-setting bodies are taking a range of approaches to bringing more transparency, consistency and comparability into the investment management industry, the overall direction of travel is clear as investment managers face an ever-growing burden of reporting and compliance requirements.
The Silver ESG team will continue to track these developments and share regular updates with our clients and contacts across the industry. We welcome the opportunity to partner with you as you navigate these complex changes.
