Forging ahead at warp speed

SEC proposed rule changes to enhance disclosures about ESG investment practices and products

Reminding us that the US Securities and Exchange Commission regulates both reporting issuers and investors, it has proposed two different enhancements to regulations pertaining to investment advisors, companies, and products. The first amendment aims to enhance and modernize the Investment Company Act “Names Rule”, by specifying that (i) ESG-related fund names are subject to the 80% requirement, i.e. they must invest at least 80% of the value of their assets in those investments with the particular characteristics which their name suggests, and (ii) funds that consider ESG factors along with, but not more significantly than, other factors — those that adopt an ‘ESG integration’ investment strategy — cannot use ESG-related terms in their names. Take a moment to let that sink in. The other proposed amendment would add specific disclosure requirements regarding ESG strategies in fund registration statements, the management discussion of fund performance in fund annual reports, and adviser brochures – in other words, it would establish disclosure requirements for funds and advisers that market themselves as having an ESG focus. More specifically, the proposal identifies three types of ESG funds:

• Funds that integrate ESG factors alongside non-ESG factors in investment decisions (“integration funds”) would be required to describe how ESG factors are incorporated into their investment process
• Funds for which ESG factors are a significant or main consideration (“ESG-focused funds”) would be required to provide detailed disclosure, including a standardized ESG strategy overview table format
• A subset of ESG-focused funds that seek to achieve a particular ESG impact (“impact funds”) would be required to disclose how they measure progress on their objective, including how the fund measures progress towards the stated impact, the time horizon used to measure that progress, and the relationship between the impact the fund is seeking to achieve and the fund’s financial returns. Again, take a moment to let that sink in.

In addition, funds focused on climate change would need to disclose the carbon footprint and the weighted average carbon intensity of their portfolio. Finally, the proposal includes requiring funds to tag their ESG disclosures using Inline XBRL to provide machine-readable data to investors and other market participants. It’s probably no coincidence that last week the SEC charged BNY Mellon Investment Adviser for misstatements and omissions about ESG considerations in making investment decisions for certain mutual funds that it managed, for which BNY Mellon Investment Adviser paid a US$1.5 million penalty. These proposed new disclosure rules should not be underestimated, as they represent a significant development for institutional asset managers to demonstrate exactly how they practice responsible investment, bringing the US capital market in much closer alignment with Europe, where implementation of the Sustainable Finance Disclosure Regulation (SFDR) in ongoing. ?For a plain language explanation of these proposed rule changes, I recommend reading Chair Gensler’s statements.

Proposed changes to Names Rule

Chair Gensler statement on proposed changes to Names Rule

Amendment for enhanced ESG disclosures by investment advisors and companies

Chair Gensler statement on proposed enhanced ESG disclosures by investment advisors and companies?

OSFI Climate Risk Management

Canada’s Office of the Superintendent of Financial Institutions (OSFI) has issued a draft version of Guideline B-15: Climate Risk Management, which establishes its expectations related to how all federally regulated financial institutions, including all major banks and insurance companies, manage climate-related risks. Disclosure expectations are heavily based on the Task Force on Climate-Related Financial Disclosure (TCFD) Recommendations, as well as the International Sustainability Standards Board’s (ISSB) Exposure Draft on Climate Related Disclosures. These include the industry-specific climate disclosures prescribed by the SASB Standards for the financial sector, as intended by the ISSB. The draft guideline is open for consultation until 19 August 2022 and the final version is expected in early 2023. Implementation of the disclosures required by this Guideline would be effective for fiscal periods ending on or after October 1, 2023. It bears mentioning that when it comes to mandatory climate disclosures, the federal government has proven bolder and more forward-thinking than the Canadian Securities Administrators (aka provincial securities commissions) thus far.

Read the press release

Access the guidelines

Integrated Reporting—articulating a future path

In a notable joint statement, the IFRS Foundation’s International Accounting Standards Board (IASB) and International Sustainability Standards Board (ISSB) have announced plans for the two boards to work together on how to build on and integrate the Integrated Reporting Framework into their standard setting projects and requirements. The framework will become part of the materials of the IFRS Foundation and will initially be positioned as a voluntary resource for report preparers. This is indeed notable, because it signals the integration of financial and sustainability reporting – perhaps as the natural progression of ‘integrated thinking’ advocated by the International Integrated Reporting Council (IIRC). It represents yet another step towards to the intended connectivity between financial statements and sustainability-related financial disclosures. However, many companies have yet to adopt integrated thinking and true integration of sustainability to their business strategy and activities. This step will be a big one to climb, one that can only be reached if there is tone at the top, where the thinking happens.

Read the announcement

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ISSB request for feedback on the development of the IFRS Sustainability Disclosure Taxonomy for digital reporting

The IFRS Foundation’s International Sustainability Standards Board has issued, as promised, a request for feedback on the development of an IFRS Sustainability Disclosure Taxonomy, to enable the digital consumption – i.e., machine readability – of sustainability disclosures prepared using the IFRS Sustainability Disclosure Standards. This taxonomy would be the counterpart to the existing IFRS Accounting Taxonomy developed to enable digital consumption of information provided by companies applying IFRS Accounting Standards. To be clear, this is a request for comment on a draft taxonomy, which would lead to the publication of a proposed taxonomy around the time that the standards are issued (end of 2022), and this proposed taxonomy would be subject to a public consultation process. Of course, this is yet another foundational development in the push towards regulated, standardized, and digitized corporate sustainability disclosures – and perhaps the first time the ISSB has moved faster than its European standard-setting counterpart EFRAG, which also plans to have a taxonomy to enable machine-readable disclosures as mandated by the Corporate Sustainability Reporting Directive (CSRD).

Access the announcement and related documents

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Capitals Coalition Announces Plans to Develop Global Value Commission

During the World Economic Forum’s meeting in Davos, the Capitals Coalition has announced the creation of a global Value Commission, to set international rules for how ‘value factors’ are created and used by organizations around the world. More specifically, it will guide the consolidation of existing efforts into an open-access Value Database, providing factors that can be consistently applied by businesses, financial institutions, and governments and provide organizations with the tools they need to understand the value of their impacts and dependencies on nature. Value factors are developed based on scientific assessments and studies and used to identify and measure the value that organizations create, preserve, or erode through their activities, and to provide essential context for decision-making. In other words, they are the macro-level data and information needed to combine with company-level performance measures, in order to enable companies to measure their negative and positive impacts on environment and society. We find this a particularly noteworthy development in moving towards a global and standardized methodology to measure impact!

Read the announcement