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In this second blog of the ESG series, we examine the proposed ESG-related disclosure and reporting requirements for investment advisers through amendments to Form ADV, Part 2A (“the Brochure”). The Proposed Amendments require investment advisers to disclose their ESG investing approach by strategy, relationships with related persons, and any ESG-related impacts on proxy voting. These proposed changes will likely apply to wrap fee funds too.
An overview of the SEC’s disclosure requirements
The SEC set out the specific disclosure requirements which can be summarized as follows:
- The proposed new sub-Item 8.D requires advisers to describe the ESG factor(s) considered for each significant investment strategy or method of analysis. This includes details on whether and how the adviser incorporates ESG factors into its management of the strategy. The proposed disclosure must explain whether and how the adviser employs integration and/or ESG-focused strategies, and if ESG-focused, whether and how the adviser also employs ESG impact strategies. Under the proposed changes if an adviser considers different ESG factors for different strategies, separate disclosures are required for each strategy. The proposed sub-Item 8.D also requires advisers to describe any methodology used in considering ESG factors.
- Proposed Item 10.C of the Brochure requires that any material relationship or arrangement with any related person acting as an ESG consultant or other service provider.
- Item 17 proposed amendments cover the inclusion of specific proxy voting policies and procedures which consider ESG factors and how they are considered. Interestingly this means that cross-referencing and data validation become key requirements for items 8 and 17 in Form ADV.
Changes to an adviser’s ESG approach for a particular strategy may necessitate other-than-annual amendments to Form ADV’s brochure (and corresponding re-delivery of Form ADV’s brochure to existing clients).
New Requirements to Form ADV Part 1A
The proposed form amendments also add new reporting requirements to Form ADV Part 1A. Current reporting will be expanded with respect to advisory services provided to separately managed account (SMA) clients and private funds to include flags indicating whether ESG factors are considered when managing SMA client accounts. If yes, the type of strategy and the specific factors considered must be reported. If an advisor follows any third-party ESG frameworks in connection with their advisory services, they will have to list the frameworks by name.The proposed Form ADV Part 1A information is required only for an adviser’s annual update and would not require updates on an other-than-annual basis.In the first blog of the series, we took a deep dive into the SEC’s proposed amendments. In our next blog, we will take a look at the differences between Europe and US approaches to ESG disclosures. We conclude our third and final blog with an examination of why a standardized approach to data management for regulatory forms is the solution much needed by the industry.