Governance Briefing — May 25, 2022

Executive briefing: On 25 May 2022 the SEC proposed two rulemakings aimed at improving transparency and accountability in ESG-labelled investment products. The Enhanced Disclosures by Certain Investment Advisers and Investment Companies about ESG Investment Practices proposal would standardise ESG strategy disclosures, while the Investment Company Names proposal would expand the 80% investment policy requirement to funds using terms such as “ESG” or “sustainable”.

Key elements

Strategy categorisation. Funds must classify themselves as ESG integration, ESG-focused, or impact funds and disclose governance of ESG methodologies, data sources, and voting policies.
Form ADV and N-PORT updates. Advisers and funds would provide detailed ESG process descriptions, greenhouse gas metrics for certain funds, and proxy voting information.
Names Rule expansion. Funds using ESG terms must adopt an 80% investment policy consistent with those characteristics and implement board-approved policies for temporary departures.

Implications for boards

Fund boards. Trustees must oversee ESG methodology selection, data governance, and compliance with expanded Names Rule obligations.
Asset managers. Advisers need to document ESG integration processes, stewardship policies, and assurance over data inputs supporting disclosures.
Institutional investors. Asset owners should review fund line-ups for alignment with proposed ESG transparency and naming standards.

Action checklist

Inventory ESG-labelled funds and assess readiness to comply with categorisation, disclosure, and Names Rule requirements.
Enhance board reporting on ESG data sources, scoring models, and proxy voting to evidence oversight.
Develop compliance monitoring for the 80% investment test, including escalation triggers and documentation protocols.

Sources

Zeph Tech assists asset managers and fund boards in documenting ESG methodologies, Names Rule compliance, and stewardship reporting to meet the SEC’s proposed requirements.