The Investment Adviser Association “supports” the Securities and Exchange Commission’s proposal to require disclosures form registered investment advisors and others about their environmental, social and governance investment practices but wants them to be “more meaningful.”

“Investment advisers have long considered material ESG factors as an integral part of prudent investment and risk management processes and we believe that investment advisers and funds are already required to make these kinds of disclosures, whether related to ESG or otherwise,” IAA president and chief executive officer Karen Barr said in a statement.

The SEC proposal would require an RIA firm to provide a detailed description of its consideration of ESG factors for each significant investment strategy or method of analysis it uses.

“We strongly recommend that the Commission use a materiality standard for disclosure,” according to Barr.

“Otherwise, investment advisers would be required to disclose immaterial information to investors that would not be decision-useful, could obscure material non-ESG-related disclosures, and may mislead investors by overemphasizing ESG factors relative to other more important factors,” she noted.

The IAA made the following recommendations in its letter to the SEC in response to a request for comments:

  • Include a materiality standard in an advisor’s and funds’ ESG factor disclosure obligations and, to prevent greenwashing, focus on how advisors and funds market themselves to the public
  • Remove the proposed requirements relating to private fund advisors or, in the alternative, preserve the confidentiality of their proprietary information and allow them to provide aggregate, rather than private fund-specific, disclosures.
  • Don’t require the disclosure of proprietary or competitively sensitive ESG investment methods and strategies
  • Minimize duplicative disclosure, require reporting of third-party ESG frameworks at the advisor level rather than at the strategy level unless the framework is being used at the strategy level
  • Provide greater flexibility for advisors to provide ESG proxy voting information

Warning About Costs, Confusion, Complexity

Meanwhile, the American Securities Association, in its own comment letter to the SEC, has outlined the ramifications the proposed rule will have on long-term investors, including raising costs and increasing confusion and complexity around new disclosures.

“ASA is supportive of efforts to increase transparency and prohibit those engaging in ‘greenwashing’ or overstating their ESG-related portfolio, but current SEC regulations already prohibit this,” ASA CEO Chris Iacovella said in a statement.

“The SEC should utilize its existing authority rather than create a cumbersome reporting process that will increase disclosure volume, which may not be relevant, and needlessly impose costs on shareholders,” he added.

ASA also highlighted the proposed rule’s failure to define “E”, “S”, or “G” and how that causes ambiguity for advisors seeking to interpret and comply with the rule.

“It’s not lost on us that the lack of an ESG definition is more likely a feature than a bug associated with this new investment phenomenon. We recognize the desire for flexibility as the ESG sector matures, but these disclosures won’t address the rapid expansion of issues that find their way into the ESG bucket,” Iacovella said.