Is the SEC Converging Towards SFDR?

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    Stockholm (NordSIP) – While the EU remains at the forefront of sustainable finance regulation, the Securities and Exchange Commission (SEC) continues to take its own steps towards ESG integration into US financial regulation. The day after disclosing it had fined BNY Mellon for misrepresentation of its sustainability efforts, the SEC proposed what appear to be EU-inspired amendments to ensure appropriate disclosures of ESG integration among fund and advice providers.

    The SEC is pursuing these demarches in parallel to other requirements that companies registering with the SEC should incorporate certain climate-related disclosures in their registration statements and periodic reports, including emissions information.

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    Inspired by SFDR

    The proposed ESG disclosures, while different, are nonetheless reminiscent of the European Union’s (EU) Sustainable Finance Disclosures Regulation (SFDR). Among other features, the EU’s SFDR requires fund managers to provide differentiated disclosures about their funds depending on how sustainable the funds are. The loftier the claims the higher the disclosure requirements. Since March 2021, it has become normal to speak of Article 6, 8 and 9 funds in the EU.

    Article 6 covers the transparency requirements of funds that “integrate sustainability risks”, sometimes called “white funds”. Article 8 covers the disclosures of funds that “promote environmental and social characteristics”, sometimes called “light green funds”. Article 9 covers the disclosures of funds that conduct “sustainable investments”, also known as “dark green funds”.

    Integrated, Focused and Impact

    In a similar move, the SEC’s proposes to classify funds as “Integration Funds”, “ESG-Focused Funds” and “Impact Funds”. The proposal explains that “Integration Funds consider one or more ESG factors together with traditional financial considerations in their investment process. These funds would face more limited disclosures relative to ESG-Focused Funds, and would only have to summarize in a few sentences how the fund incorporates ESG factors into its investment selection process. These sound similar to Article 6 SFDR funds.

    According to the proposal, “within ESG-Focused Funds, the framework tailors its requirements depending on how funds implement ESG strategies such as tracking a specific ESG index, applying an inclusionary or exclusionary screen, seeking to achieve a specific impact, voting proxies, and engaging with issuers on ESG matters.” These sound like Article 8 SFDR funds.

    The SEC also proposed the creation of “Impact Funds” as a subcategory of ESG-Focused Fund, with enhanced disclosure requirements. The extra disclosures would include “a description of what impact(s) the funds seek to achieve, how they will achieve the impact(s), how the funds measure progress, what key performance indicators are analyzed, what time horizon is used to analyze progress, and the relationship between the impact and financial returns.” These details are reminiscent of an article 9 SFDR fund, even if the classification is somewhat different.

    “I am pleased to support this proposal because, if adopted, it would establish disclosure requirements for funds and advisers that market themselves as having an ESG focus,” said SEC Chair Gary Gensler. “ESG encompasses a wide variety of investments and strategies. I think investors should be able to drill down to see what’s under the hood of these strategies. This gets to the heart of the SEC’s mission to protect investors, allowing them to allocate their capital efficiently and meet their needs.”

    Parallel Climate Discussions

    In parallel, the SEC also continued to push its climate disclosure proposals from March 21st. On June 9th, the SEC’s Investor Advisory Committee held a virtual public panel discussion regarding climate disclosure exploring the overall context for the proposal and how it compares to the requirements in other developed economies. It also provides an opportunity for accounting experts and investors to comment on the proposal and highlight aspects that they find particularly valuable or concerning.

    Remembering the SEC’s history of adding new considerations for financial investors, the SEC Chair noted that “this agency often has updated our disclosure regimes in kind. We did that in 1960s when we added disclosure about risk factors. We did that in the 1970s when we first added environmental-related disclosures, which the Commission has elaborated upon over the decades. Recently, in the latest stage of this long tradition of disclosures, we put out a proposal concerning climate-related disclosures.”

    “This is a conversation that investors and issuers are having right now. Today, hundreds of issuers are disclosing climate-related information, and investors representing tens of trillions of dollars are making decisions based on that information. Companies, however, are disclosing different information, in different places, and at different times. This proposal would help investors receive consistent, comparable, and decision-useful information, and would provide issuers with clear and consistent reporting obligations,” Gensler added in comments ahead of the Investors Advisory Committee meeting’s discussion.

    A Dissenting Voice

    Concerned that the proposals might go too far, Commissioner Hester M. Peirce begged panellists to “consider whether our proposed climate disclosure mandate would change fundamentally this agency’s role in the economy, and whether such a change would benefit investors. Are these disclosure rules designed to elicit disclosure or to change behaviour in a departure from the neutrality of our core disclosure rules?”

    When the March 21st proposals were announced, Peirce warned that “the proposal will not bring consistency, comparability, and reliability to company climate disclosures. The proposal, however, will undermine the existing regulatory framework that for many decades has undergirded consistent, comparable, and reliable company disclosures. We cannot make such fundamental changes to our disclosure regime without harming investors, the economy, and this agency. For that reason, I cannot support the proposal.”

    Image courtesy of SEC
    Filipe Albuquerque
    Filipe Albuquerque
    Filipe is an economist with 8 years of experience in macroeconomic and financial analysis for the Economist Intelligence Unit, the UN World Institute for Development Economic Research, the Stockholm School of Economics and the School of Oriental and African Studies. Filipe holds a MSc in European Political Economy from the LSE and a MSc in Economics from the University of London, where he currently is a PhD candidate.
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