How Europe and the USA are approaching ESG disclosures.
In the third blog of our ESG series, we examine how the SEC’s proposed changes impact private funds and the differences between the SEC’s Proposed Amendments and other ESG regimes.
How do the SEC’s Proposed Amendments impact Private Funds?
The Proposed Amendments do not impose any direct disclosure obligations on private funds or their managers. Notwithstanding this, many investment advisers manage similar investment strategies for AIFs, UCITS, and other non-U.S. funds. The same investment strategy must be reported consistently across different product types and in Form ADV. Consequently, the specific requirements of the proposed ESG disclosure amendments will likely influence many private fund managers even in the absence of explicit regulatory change for private funds.
Differences in ESG reporting between the EU and the US.
There are similarities between the SEC Proposed Amendments and other ESG regimes, most prominently the European Union’s Sustainable Finance Disclosure Regulation (SFDR).
The SEC does not define ESG. It adopts a principles-based approach and leaves it to the individual funds to define what ESG means. The European Union is more rules-based. The European Union’s Sustainable Finance Disclosure Regulation (SFDR) defines a sustainability investment as “an investment in an economic activity that contributes to an environmental objective, as measured, for example, by key resource efficiency indicators on the use of energy, renewable energy, raw materials, water and land, on the production of waste, and greenhouse gas emissions, or on its impact on biodiversity and the circular economy, or an investment in an economic activity that contributes to a social objective, in particular an investment that contributes to tackling inequality or that fosters social cohesion, social integration and labour relations, or an investment in human capital or economically or socially disadvantaged communities, provided that such investments do not significantly harm any of those objectives and that the investee companies follow good governance practices, in particular with respect to sound management structures, employee relations, remuneration of staff and tax compliance.”
The SEC’s taxonomy of “Integration” and “ESG-Focused” Funds is somewhat comparable to the SFDR’s Article 8 and Article 9 categorization of funds. Like SFDR, the Proposed Amendments would impact the disclosure requirements of both funds and investment advisers.
SFDR focuses exclusively on sustainability, and sustainability risks in particular, whereas the SEC’s Proposed Amendments, cover all three ESG factors and focus on the description of the adviser’s incorporation of ESG factors in its investment decision-making process, rather than on risk factors.
In conclusion, it is clear that the similarities across the global regulators’ approaches to ESG disclosures are greater than the differences, and for this reason alone, a standardized approach to data management for multi-jurisdictional regulatory forms is the solution much needed by the industry.
