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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200, 230, 232, 239, 249, 274, and 279

[Release No. 33-11068; 34-94985; IA-6034; IC-34594; File No. S7-17-22]

RIN 3235-AM96

Enhanced Disclosures by Certain Investment Advisers and Investment Companies about

Environmental, Social, and Governance Investment Practices

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

SUMMARY: The Securities and Exchange Commission (“Commission”) is proposing to amend

rules and forms under both the Investment Advisers Act of 1940 (“Advisers Act”) and the

Investment Company Act of 1940 (“Investment Company Act”) to require registered investment

advisers, certain advisers that are exempt from registration, registered investment companies, and

business development companies, to provide additional information regarding their

environmental, social, and governance (“ESG”) investment practices. The proposed amendments

to these forms and associated rules seek to facilitate enhanced disclosure of ESG issues to clients

and shareholders. The proposed rules and form amendments are designed to create a consistent,

comparable, and decision-useful regulatory framework for ESG advisory services and

investment companies to inform and protect investors while facilitating further innovation in this

evolving area of the asset management industry. In addition, we are proposing an amendment to

Form N-CEN applicable to all Index Funds, as defined in Form N-CEN, to provide identifying

information about the index.

DATES: Comments should be received on or before August 16, 2022.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic comments:

•

Use the Commission’s internet comment form

(https://www.sec.gov/rules/submitcomments.htm); or

•

Send an email to rule-comments@sec.gov. Please include File Number S7-17-22 on the

subject line.

Paper comments:

•

Send paper comments to Vanessa A. Countryman, Secretary, Securities and Exchange

Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-17-22. This file number should be

included on the subject line if email is used. To help the Commission process and review your

comments more efficiently, please use only one method of submission. The Commission will

post all comments on the Commission’s website (https://www.sec.gov/rules/proposed.shtml).

Comments also are available for website viewing and printing in the Commission’s Public

Reference Room, 100 F Street NE, Washington, DC 20549, on official business days between

the hours of 10 a.m. and 3 p.m. Operating conditions may limit access to the Commission’s

Public Reference Room. All comments received will be posted without change. Persons

submitting comments are cautioned that we do not redact or edit personal identifying information

from comment submissions. You should submit only information that you wish to make

available publicly.

Studies, memoranda, or other substantive items may be added by the Commission or staff

to the comment file during this rulemaking. A notification of the inclusion in the comment file of

any such materials will be made available on the Commission’s website. To ensure direct

electronic receipt of such notifications, sign up through the “Stay Connected” option at

www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Robert Holowka, Emily Rowland, or Samuel

Thomas, Senior Counsels; or Christopher Staley, Branch Chief, at (202) 551-6787 or

IArules@sec.gov, Investment Adviser Regulation Office, Division of Investment Management;

or Zeena Abdul-Rahman, Pamela K. Ellis, Amy Miller, or Nathan R. Schuur, Senior Counsels;

Sara Cortes, Senior Special Counsel; or Brian McLaughlin Johnson, Assistant Director, at (202)

551-6792, Investment Company Regulation Office, Division of Investment Management

Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The Commission is proposing for public comment

amendments to the information displayed at 17 CFR 200.800; 17 CFR 230.497 (“rule 497”)

under the Securities Act of 1933 [15 U.S.C. 77a et seq.] (“Securities Act”); 17 CFR 232.11

(“rule 11 of Regulation S-T”) and 17 CFR 232.405 (“rule 405 of Regulation S-T”) under the

Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. 78a et seq.]; amendments to Form

N-1A [17 CFR 239.15A and 274.11A], Form N-2 [17 CFR 239.14 and 274.11a-1], Form S-6 [17

CFR 239.19], Form N-8B-2 [17 CFR 274.12], Form N-CEN [17 CFR 249.330 and 274.101], and

Form N-CSR [17 CFR 249.331 and 274.128] under the Investment Company Act of 1940 [15

U.S.C. 80a-1 et seq.] (“Investment Company Act”); and amendments to Form ADV [17 CFR

279.1] under the Advisers Act of 1940 [15 U.S.C. 80b-1 et seq.] (“Advisers Act”).

TABLE OF CONTENTS

INTRODUCTION .............................................................................................................. 7

II.

Development and Growth of ESG investing ............................................ 10

Characteristics of ESG-related investment products and services ......... 13

The Need for Specific ESG Disclosure Requirements ............................. 17

Overview of the Proposal ................................................................................... 20

DISCUSSION ....................................................................................................................... 23

III.

Background ......................................................................................................... 10

Proposed Fund Disclosures to Investors ........................................................... 23

Proposed Prospectus ESG Disclosure Enhancements ............................ 23

Unit Investment Trusts............................................................................. 67

Fund Annual Report ESG Disclosure ..................................................... 70

Inline XBRL Data Tagging .................................................................... 122

Adviser Brochure (Form ADV Part 2A) ......................................................... 127

Regulatory Reporting on Form N-CEN and ADV Part 1A .......................... 148

Form N-CEN ......................................................................................... 149

Form ADV Part 1A Reporting ............................................................... 154

Compliance Policies and Procedures and Marketing .................................... 165

Compliance Dates.............................................................................................. 168

ECONOMIC ANALYSIS ...................................................................................................... 170

Introduction ....................................................................................................... 170

Economic Baseline ............................................................................................ 172

Current Regulatory Framework ............................................................ 172

Affected Parties ..................................................................................... 174

Investor Interest in ESG Funds ............................................................. 181

Institutional Investor Engagement with Companies on ESG-Related

Issues ..................................................................................................... 186

Current Practices .................................................................................. 188

Benefits, Costs and Effects on Efficiency, Competition, and Capital

Formation of the Proposed Rule and Form Amendments ............................ 202

General Economic Benefits of ESG Disclosure .................................... 202

Investor and Client Facing Disclosures ................................................ 206

Regulatory Reporting ........................................................................... 242

Reasonable Alternatives ................................................................................... 249

IV.

Uniform Narrative Disclosure Requirements for ESG-Integration and

Focused Funds ..................................................................................... 249

More Standardized Disclosures ........................................................... 250

Alternative Approach to Layered Disclosure for Funds ..................... 251

More Granular Reporting for Advisers ............................................... 252

GHG Metrics Reporting Requirements ............................................... 253

Modified Inline XBRL Requirements .................................................. 262

General Request for Comment ........................................................................ 262

PAPERWORK REDUCTION ACT ANALYSIS ........................................................................ 264

Introduction ....................................................................................................... 264

Form N-1A ......................................................................................................... 265

Form N-2 ............................................................................................................ 267

Forms N-8B-2 and S-6 ...................................................................................... 269

Proposed Inline XBRL Data Tagging Requirements .................................... 271

Proposed New Annual Reporting Requirements under Rule 30e-1 and

Exchange Act Periodic Reporting Requirements for BDCs ......................... 273

Form N-CEN ..................................................................................................... 276

Form N-CSR ...................................................................................................... 277

Form ADV ......................................................................................................... 279

Request for Comments ..................................................................................... 285

INITIAL REGULATORY FLEXIBILITY ANALYSIS ................................................................ 286

Reason for and Objectives of the Proposed Action........................................ 286

Proposed Amendments to Forms N-1A and N-2 and Fund Annual Reports

............................................................................................................... 288

Proposed Amendments to Form N-8B-2 and Form S-6 ........................ 289

Proposed Amendments to Form N-CEN ............................................... 290

Proposed Amendments to Form N-CSR ................................................ 290

Proposed Amendments to Form ADV (Parts 1 and 2) .......................... 291

Legal Basis ......................................................................................................... 292

Small Entities Subject to the Rule and Rule Amendments ........................... 292

Proposed Amendments to Forms N-1A, N-2, N-8B-2, N-CEN, N-CSR, and

S-6 and Fund Annual Reports ............................................................... 292

Proposed Amendments to Form ADV ................................................... 293

Projected Reporting, Recordkeeping and Other Compliance Requirements

294

Proposed Amendments to Forms N-1A, N-2, and N-CSR and Fund

Annual Reports ...................................................................................... 294

Proposed Amendments to Forms N-8B-2 and S-6................................. 296

Proposed Amendments to Form N-CEN ............................................... 296

Proposed Amendments to Form ADV ................................................... 297

Duplicative, Overlapping, or Conflicting Federal Rules ............................... 298

Significant Alternatives .................................................................................... 298

VI.

Proposed Amendments to Forms N-1A, N-2, N-8B-2, N-CEN, N-CSR, and

S-6 and Fund Annual Reports ............................................................... 299

Proposed Amendments to Form ADV ................................................... 300

Solicitation of Comments ................................................................................. 301

CONSIDERATION OF IMPACT ON THE ECONOMY .............................................. 302

STATUTORY AUTHORITY ..................................................................................................... 302

INTRODUCTION

Many registered funds and investment advisers to institutional and retail clients consider

environmental, social, and governance (“ESG”) factors in their investment strategies. 1 Investor

interest in ESG strategies has rapidly increased in recent years with significant inflows of capital

to ESG-related services and investment products. 2 Asset managers, as key conduits for these

investments, have responded to this increase in investor demand by creating and marketing funds

and strategies that consider ESG factors in their selection process. 3

Investors looking to participate in ESG investing face a lack of consistent, comparable,

and reliable information among investment products and advisers that claim to consider one or

more ESG factors. This lack of consistent, comparable, and reliable information can create a risk

See Carlson, Debbie, “ESG Investing Now Accounts for One-Third of Total U.S. Assets Under

Management”, Market Watch (Nov. 17, 2020), available at https://www.marketwatch.com/story/esginvesting-now-accounts-for-one-third-of-total-u-s-assets-under-management-11605626611. See also Letter

from Morningstar to Chair Gensler (June 9, 2021) attaching Sustainable Funds U.S. Landscape Report –

More funds, more flows, and impressive returns in 2020, Morningstar Manager Research (Feb. 19, 2021),

available at https://www.sec.gov/comments/climate-disclosure/cll12-8899329-241650.pdf.

U.S. sustainable investments increased from $639 billion in assets under management (“AUM”) in 1995 to

$17.1 trillion by 2020. The end of the last decade in particular saw extensive growth as the total U.S.domiciled assets integrating ESG strategies grew from $12.0 trillion in 2018 to $17.1 trillion by 2020. This

represented a 42% increase that brought the total amount of assets considering ESG strategies to 33%, or 1

in 3 dollars of total U.S. assets that are professionally managed. See, US Sustainable Investing Forum, The

Report on U.S. Sustainable and Impact Investing Trends (Nov. 16, 2020), available at:

https://www.ussif.org/files/Trends/2020_Trends_Highlights_OnePager.pdf. For purposes of this Release,

when discussing investors in funds and clients of investment advisers, we generally use the term

“investors” unless otherwise required by the context.

See U.S. Government Accountability Office (“GAO”), GAO-20-530, Public Companies: Disclosure of

Environmental, Social, and Governance Factors and Options to Enhance Them (July 2020), available at

https://www.gao.gov/assets/gao-20-530.pdf (stating that institutional investors seek ESG information to

understand risks that could affect company performance, to inform proxy voting, or to enhance decisionmaking in portfolio management). See also, Boffo, Riccardo and Patalano, Robert, “ESG Investing:

Practices, Progress and Challenges”, Organization for Economic Co-operation and Development

(“OECD”), (2020), available at https://www.oecd.org/finance/ESG-Investing-Practices-ProgressChallenges.pdf (noting that ESG investing has evolved in recent years to meet the demands of institutional

and retail investors, as well as certain public sector authorities, that wish to better incorporate long-term

financial risks and opportunities into their investment decision-making processes to generate long-term

value).

that a fund or adviser’s actual consideration of ESG does not match investor expectations,

particularly given that funds and advisers implement ESG strategies in a variety of ways. 4 The

lack of specific disclosure requirements tailored to ESG investing creates the risk that funds and

advisers marketing such strategies may exaggerate their ESG practices or the extent to which

their investment products or services take into account ESG factors. With respect to

environmental and sustainability factors, this practice often is referred to as “greenwashing.” The

absence of a common disclosure framework also makes it difficult for investors to find the

disclosures and to determine whether a fund’s or adviser’s ESG marketing statements translate

into concrete and specific measures taken to address ESG goals and portfolio allocation. It also

makes it difficult for investors to understand how effectively the strategy is implemented over

time, and can frustrate investors’ attempts to compare different ESG strategies across funds or

advisers.

The Commission’s commitment to improving the information provided to investors in

disclosures is longstanding. For example, the Commission has long required funds to provide

key information about a fund’s fundamental characteristics, while requiring advisers to provide

clear information about their advisory businesses and the investment strategies they utilize or

recommend to clients. 5 Consistent with this goal, standardized disclosure of a fund’s principal

When referring to a “fund” in this release, we variously mean management investment companies

registered on Form N-1A [17 CFR 274.11A] or Form N-2 [17 CFR 274 11a-1], unit investment trusts

registered on Form S-6 [17 CFR 239.16], and BDCs, but not private funds as defined under the Advisers

Act.

See Investment Company Act Release No. 23064 (Mar. 13, 1998) [63 FR 13916 (Mar. 23, 1998)]

(amending Form N-1A to focus prospectus disclosure on key information to assist in investment decisions)

and Investment Company Act Release No. 13436 (Aug. 12, 1983) [48 FR 37928 (Aug. 22, 1983)]

(adopting Form N-1A and its two-part disclosure format permitting funds to provide investors with a

simplified prospectus containing essential information along with a companion document called the

“Statement of Additional Information” (“SAI”) with more detailed information). See also Investment

investment strategies and other key attributes, along with information about advisory practices, is

integral to investors’ understanding the specific types of investments or investment policies

underlying certain strategies when making informed decisions about funds and advisers. As

discussed below, the range of matters that different funds and advisers consider in implementing

ESG strategies, in addition to the increased investor demand for investments in these strategies,

requires strategy-specific disclosures. That will improve information available to investors by

providing investors with an interest in ESG investing with key information that is material to

their investment decisions.

Accordingly, we are proposing various disclosure and reporting requirements to provide

shareholders and clients improved information from funds and advisers that consider one or

more ESG factors. These enhancements are designed to help investors, and those who provide

advice to investors, make more informed choices regarding ESG investing and better compare

funds and investment strategies. The proposed amendments create a framework for disclosures

about a fund or adviser’s ESG-related strategies. We are also proposing to enhance the

quantitative data for environmentally focused fund strategies, where methodologies for reporting

emissions metrics are becoming more standardized. In addition to these investor- and clientfacing disclosures, we are also proposing that funds and advisers report census type information

on their ESG investment practices in regulatory reporting to the Commission, which would

Company Act Release No. 28584 (Jan. 13, 2009) [74 FR 4546 (Jan. 26, 2009)] (adopting enhanced

disclosure and new prospectus delivery option for registered open-end management investment companies

including a plain English requirement and providing the statutory prospectus on an internet web site) and

Investment Adviser Act Release No. 3060 (July 29, 2010) [75 FR 49233 (Aug. 12, 2010)] (amending the

Form ADV Part 2 “brochure” to require advisers to provide meaningful information in a clearer format,

noting “[t]o allow clients and prospective clients to evaluate the risks associated with a particular

investment adviser, its business practices, and its investment strategies, it is essential that clients and

prospective clients have clear disclosure that they are likely to read and understand”).

inform our regulatory, enforcement, examination, disclosure review, and policymaking roles, and

help us track trends in this evolving area of asset management. In addition to the ESG-specific

disclosure, the Commission is proposing an amendment to Form N-CEN that would require all

index funds, regardless of whether the fund tracks an ESG-related index, to report identifying

information about the index. Finally, we are proposing to require funds to submit the ESGrelated disclosures in a structured data language to make it easier for investors and others to

analyze this data.

Background

Development and Growth of ESG investing

“ESG” is a term commonly used to incorporate three broad categories of interest for

investors: Environmental, Social, and Governance. 6 Investor demand for ESG funds and

advisory services has increased over the last decade, but consideration of ESG issues in

investment decision making has deep roots. In the 1970s and 1980s, some asset managers began

to integrate ESG factors into funds with social and environmental investment objectives, while

the early 1990s saw the launch of the first “socially responsible” indexes. 7 Since the mid-2000s,

many financial institutions have signed on to climate and sustainability-related investment

For the purposes of this release and the proposed rules, the Commission uses the term “ESG” to encompass

terms such as “socially responsible investing,” “sustainable,” “green,” “ethical,” “impact,” or “good

governance” to the extent they describe environmental, social, and/or governance factors that may be

considered when making an investment decision. These terms, however, are not defined in the Advisers

Act, the Investment Company Act, or the rules or forms adopted thereunder.

See Liu, Jess, “ESG Investing Comes of Age, Morningstar” (Feb 11, 2021) available at:

https://www.morningstar.com/features/esg-investing-history (noting that the first sustainable mutual fund,

“Pax World,” was launched in 1971 and the Domini 400 Social Index was launched in 1990).

frameworks. 8 In addition, a number of organizations have formed to promulgate disclosure

reporting frameworks that incorporate environmental measures including: the Climate Disclosure

Standards Board, Global Reporting Initiative, Sustainability Accounting Standards Board, and

International Sustainability Standards Board. 9 These trends have accelerated in recent years as

the asset management industry has increasingly focused on issues such as financing the transition

from fossil fuels and mitigating risks associated with climate change, and additional voluntary 10

and regulatory 11 frameworks have developed.

The United Nations Principles for Responsible Investment (“UN PRI”) launched in 2006 and called upon

institutional investors to commit to six principles to integrate ESG issues into investment analysis and

decision-making. See About the PRI, Principles for Responsible Investment,

https://www.unpri.org/pri/about-the-pri (last visited Dec. 8 2021). The Forum for Sustainable and

Responsible Investment and Ceres are two other notable institutional and investor-led initiatives.

See Murray, Sarah, “Measuring What Matters: the Scramble to Set Standards for Sustainable Business”

(May 13, 2021) available at: https://www.ft.com/content/92915630-c110-4364-86ee-0f6f018cba90. See

also IFRS Foundation Announces International Sustainability Standards Board, IFRS (Nov. 3, 2021),

available at: https://www.ifrs.org/news-and-events/news/2021/11/ifrs-foundation-announces-issbconsolidation-with-cdsb-vrf-publication-of-prototypes/.

Several of these frameworks have relied on the Greenhouse Gas Protocol: A Corporate Accounting and

Reporting Standard (“GHG Protocol”) that established measurable standards around reporting Scopes 1 and

2 GHG emissions that allow investors to more readily compare the emissions impacts of companies in their

portfolios and conduct scenario analyses. See The Greenhouse Gas Protocol, A Corporate Accounting and

Reporting Standard, Revised Edition, available at: https://ghgprotocol.org/sites/default/files/standards/ghgprotocol-revised.pdf. In addition, the Financial Stability Board (“FSB”) established the Task Force on

Climate–Related Financial Disclosures (“TCFD”) in 2015 to develop a framework to foster consistent

climate-related financial disclosures that could be utilized by organizations across sectors and industries,

including advisers and funds. See Task Force on Climate-related Financial Disclosures, 2021 Status Report

(Oct. 14, 2021) available at https://www.fsb.org/wp-content/uploads/P141021-1.pdf. In 2020, an

international group of asset managers launched the Net Zero Asset Managers Initiative committing

hundreds of signatories to the goal of achieving net zero gas emissions by 2050 or sooner. See Net Zero

Asset Managers Initiative Progress Report (Nov. 1, 2021) available at

https://www.netzeroassetmanagers.org/media/2021/12/NZAM-Progress-Report.pdf.

In 2019, the European Commission adopted the Sustainable Finance Disclosure Regulation (“SFDR”), a

sustainability disclosure framework for providers of certain financial products and financial market

participants including asset managers. See Regulation (EU) 2019/2088 of the European Parliament and of

the Council of 27 Nov. 2019 on sustainability‐related disclosures in the financial services sector and

Regulation (EU) 2020/852 of the European Parliament and of the Council of 18 June 2020 on the

establishment of a framework to facilitate sustainable investment, and amending Regulation (EU)

2019/2088 PE/20/2020/INIT (“Taxonomy Regulation”) (implementing a classification framework to help

Statistics measuring fund flows and assets under management reflect the increasing

prevalence of ESG investing in recent years. The size and scope of the asset management

industry’s ESG investing landscape varies significantly depending, for example, on the focus of

the analysis, the assumptions made, and how much of this evolving area is measured. For

example, the U.S. Forum for Sustainable and Responsible Investment (“US SIF”) states that

since 1995, the “U.S. sustainable investment universe” has increased more than 25 times from

$639 billion to $17.1 trillion. 12 Morningstar found that at the close of 2020 the number of

“sustainable” open-end funds and exchange-traded funds (“ETFs”) available to U.S. investors

had experienced a nearly fourfold increase over the past decade with a significant acceleration

beginning in 2015. 13 In the same report, Morningstar states that sustainable funds have set

records for inflows in each of the past 5 years with more significant increases in 2019 and 2020.

Investors and other market participants increasingly demand access to ESG-related

investment services, products, and data, as, according to one survey, 42% of institutional

investors say they consider ESG factors when making an investment decision. 14 Another survey

determine to what extent economic activities are environmentally sustainable by reference to six

environmental objectives).

US SIF Comment Letter (June 14, 2021). Our proposal takes into account the comments we received in

response to Acting Chair Allison Herren Lee’s requested public input on climate change disclosure from

investors, registrants, and other market participants. See Acting Chair Allison Herren Lee Public Statement,

Public Input Welcomed on Climate Change Disclosures (Mar. 15, 2021), available at

https://www.sec.gov/news/public-statement/lee-climate-change-disclosures (“Climate RFI”). The comment

letters are available at https://www.sec.gov/comments/climate-disclosure/cll12.htm. Except as otherwise

noted, references to comments in this release pertain to these comments.

See Letter from Morningstar to Chair Gensler (June 9, 2021) attaching Sustainable Funds U.S. Landscape

Report: More Funds, More Flows, and Impressive Returns in 2020, Morningstar Manager Research (Feb.

10, 2021), available at https://www.sec.gov/comments/climate-disclosure/cll12-8899329-241650.pdf.

See Whyte, Amy, “More Institutions than Ever are Considering ESG. Will they Follow Through?”,

Institutional Investor (Oct. 6, 2020), available at

of professional fund selectors and institutional investors indicated that 75% and 77% respectively

believe that the consideration of ESG factors is integral to investment decision making. 15

Moreover, funds are increasingly selecting fund names to signal ESG considerations or

converting existing funds into ESG or “sustainable” funds. 16 An analysis of Form N-PORT data

indicates that 2.4 percent of all funds had names containing “Sustainable,” “Responsible,”

“ESG,” “Climate,” “Carbon,” or “Green” as of September 2021. 17 The Forum for Sustainable

and Responsible Investment has also documented continued growth in ESG funds, expanding

from 55 funds in 1995, to 1,002 in 2016, and to 1,741 in 2020. 18

Characteristics of ESG-related investment products and services

Approaches to ESG investing vary, which can pose challenges for investors choosing

among investment products and services. 19 First, ESG is an expansive term that incorporates

three broad categories of interest for investors and asset managers: environmental issues, social

issues, and governance issues. 20 Some funds and advisers will consider only one issue under the

ESG umbrella when making investment decisions, while others will apply the factors more

broadly and implement measures across each of the ESG categories. Even those focusing on all

https://www.institutionalinvestor.com/article/b1npm5yq50b024/More-Institutions-Than-Ever-AreConsidering-ESG-Will-They-Follow-Through.

See Goodsell, Dave, 2021 ESG Investor Insight Report ESG Investing: Everyone’s on the bandwagon,

Natixis Investment Managers (2021), available at https://www.im.natixis.com/us/research/esg-investingsurvey-insight-report.

See Ghoul, El-Sadouk and Karoui, Aymen. “What’s in a (green) name? The consequences of greening fund

names on fund flows, turnover, and performance.” Finance Research Letters 39: 101620 (2021).

See infra text accompanying note 249.

See US SIF, Report on U.S. Sustainable, Responsible and Impact Investing Trends (2016), available at

https://www.ussif.org/files/SIF_Trends_16_Executive_Summary(1).pdf and US SIF, Sustainable Investing

Basics (2020), available at https://www.ussif.org/sribasics.

See infra section III.B.3.

See Asset Management Advisory Committee Recommendations for ESG (July 7, 2021) p. 4 (“AMAC

Recommendations”), available at https://www.sec.gov/files/spotlight/amac/recommendations-esg.pdf.

three categories will have differing perspectives on what attributes of an issuer or investment fit

within ESG.

Second, investment products that incorporate one or more ESG factors vary in the extent

to which ESG factors are considered relative to other factors. This generally falls along a threepart spectrum: integration, ESG-Focused, and impact investing. We are incorporating these terms

into our proposed rules.

Generally, “ESG Integration” strategies consider one or more ESG factors alongside

other, non-ESG factors in investment decisions such as macroeconomic trends or companyspecific factors like a price-to-earnings ratio. 21 In such strategies, ESG factors may be considered

in the investment selection process but are generally not dispositive compared to other factors

when selecting or excluding a particular investment.

“ESG-Focused” strategies focus on one or more ESG factors by using them as a

significant or main consideration in selecting investments or in engaging with portfolio

companies. 22 For example, such ESG-Focused strategies might exclude or include certain

See Funds’ Use of ESG Integration and Sustainable Investing Strategies: An Introduction, Investment

Company Institute, p. 4 (July 2020), available at

https://www.ici.org/system/files/attachments/pdf/20_ppr_esg_integration.pdf. Some market participants

and commentators refer to funds that consider ESG factors as just one among many factors as “ESG

consideration” funds. See Jon Hale, A Taxonomy of Sustainable Funds, Morningstar, (Mar. 7, 2019)

available at: https://www.morningstar.com/articles/918263/a-taxonomy-of-sustainable-funds. See also

infra at section II.A.1.a. for the Commission’s proposed definition of ESG Integration.

Unlike the terms “integration” and “impact,” which are currently used within this market, “ESG-Focused”

is not currently a commonly used term and can encompass a number of ESG-related strategies and labels

used in the market. See infra at Section II. See also, e.g., Funds’ Use of ESG Integration and Sustainable

Investing Strategies: An Introduction, Investment Company Institute, p. 5 (July 2020), available at

https://www.ici.org/system/files/attachments/pdf/20_ppr_esg_integration.pdf. (discussing how sustainable

investing strategies are distinct from ESG integration in that they use ESG analysis as a significant part of

the fund’s investment thesis) [hereinafter ICI White Paper]; A Practical Guide to ESG Integration for

Equity Investing, Principles for Responsible Investment, available at: https://www.unpri.org/listedequity/esg-integration-techniques-for-equity-investing/11.article.

investments based on particular ESG criteria. These factors could include, for example, screens

for carbon emissions, board or workforce diversity and inclusion, or industry-specific issues.

ESG-Focused strategies could also include engagement with management of the issuers in which

the fund or adviser invests through proxy voting or direct engagement.

Finally, “ESG Impact” strategies have a stated goal that seeks to achieve a specific ESG

impact or impacts that generate specific ESG-related benefits. 23 Impact strategies generally seek

to target portfolio investments that drive specific and measurable environmental, social, or

governance outcomes. 24

Funds and advisers also vary in how they analyze, select, and manage investments to

achieve their ESG objectives. Third-party service providers and ESG consultants (hereafter

referred to as “ESG providers”) have emerged that provide data to evaluate ESG factors,

including issuer-specific ratings or scores. Some advisers and funds rely on these analyses and

ratings, while others use them in combination with internal analyses. Other funds and advisers

track indexes designed to select investments based on various ESG factors. Index providers are

playing a large role in driving the flow of assets towards issuers that meet the indexes’ ESG

methodology. 25

See Burton, M. Diane, Chadha, Gurveen, Cole, Shawn A., Dev, Abhishek, Jarymowycz, Christina, Jeng,

Leslie, Kelley, Laura, Lerner, Josh, Palacios, Jaime R. Diaz, Xu, Yue (Cynthia), and Zochowski, Robert.

“Studying the U.S.-Based Portfolio Companies of U.S. Impact Investors,” Harvard Business School

Working Paper, No. 21-130, (May 28, 2021), available at https://www.hbs.edu/ris/Publication%20Files/21130_1fd65a3f-c144-4338-b319-7aa205339968.pdf (stating that impact investing is characterized by

seeking both financial returns and a non-financial, social or environmental impact). For purposes of the

proposed rule, we define Impact Funds as a subset of ESG-Focused Funds. See infra at II.A.1.b.

ICI White Paper, at p. 8.

See Fourth Annual IIA Benchmark Survey Reveals Significant Growth in ESG, Continued Multi-Asset

Innovation & Heightened Competition (Oct. 28 2020), available at

Funds and advisers also take differing approaches regarding how they engage on ESG

issues with the issuers in which they invest, such as through proxy voting or manager

engagement. 26 ESG-Focused Funds and advisers often use proxy voting and other engagement

with issuers in their portfolios as a more deliberate piece of their strategy than other investment

products. 27 As institutional investors increasingly integrate ESG into their engagement with

portfolio companies and comply with their own internal ESG policies or investor mandates,

proxy voting advice businesses have sought to meet this demand by offering proxy voting

recommendations that consider ESG factors. 28 While funds are required to report information

about how they vote proxies, less is disclosed regarding other engagements they may have with

issuers in their capacity as a shareholder. 29

http://www.indexindustry.org/2020/10/28/fourth-annual-iia-benchmark-survey-reveals-significant-growthin-esg-amid-continued-multi-asset-innovation-heightened-competition/.

In 2021, the Commission proposed amendments to Form N-PX to enhance the information mutual funds,

exchange-traded funds, and certain other funds report about their proxy votes including votes on ESG

issues. See Enhanced Reporting of Proxy Votes by Registered Management Investment Companies;

Reporting of Executive Compensation Votes by Institutional Investment Managers (Sept. 29, 2021) [86 FR

57478(Oct. 15, 2021)] available at: https://www.sec.gov/rules/proposed/2021/34-93169.pdf.

See AMAC Recommendations, supra footnote 20 at 9-10 (“experts consulted by the subcommittee . . .

noted that ESG investment products engage in share ownership activities as a more deliberate piece of their

strategy than many, but not all, other investment products. . . Investors in these ESG products, and other

investment products, would benefit from clear, consistent statement [sic] regarding how ownership

responsibilities are carried out by the product”).

Investors are increasingly interested in proxy voting practices that consider ESG factors to influence

company behavior. See, e.g., Peter Reali, Jennifer Grzech, and Anthony Garcia, ESG: Investors

Increasingly Seek Accountability and Outcomes, Harvard Law School Forum on Corporate Governance,

(Apr. 25, 2021), available at https://corpgov.law.harvard.edu/2021/04/25/esg-investors-increasingly-seekaccountability-and-outcomes/; see also Comment Letter of Gary Retelny, President and CEO, Institutional

Shareholder Services Inc., available at https://www.sec.gov/comments/climate-disclosure/cll12-8914286244666.pdf.

See AMAC Recommendations, supra footnote 20 at 10 (“while the AMAC believes that the reporting of

proxy voting is already well regulated, other ownership responsibilities, if significant to the product’s

strategy, should be noted”).

The Need for Specific ESG Disclosure Requirements

Currently, funds and registered advisers are subject to disclosure requirements

concerning their investment strategies. Funds must provide disclosures concerning material

information on investment objectives, strategies, risks, and governance, and management must

provide a discussion of fund performance in the fund’s shareholder report. Registered advisers

are required to provide information about their advisory services in narrative format on Form

ADV Part 2—often referred to as a brochure—describing their firm’s methods of analysis and

investment strategies, fees, conflicts, and personnel. General disclosures about ESG-related

investment strategies fall under these disclosure requirements, and failure to adhere to current

disclosure requirements violates Federal securities laws, but there are no specific requirements

about what a fund or adviser following an ESG strategy must include in its disclosures. 30

While the Commission has not generally prescribed specific disclosures for particular

investment strategies, ESG strategies differ in certain respects that we believe necessitate

specific requirements and mandatory content to assist investors in understanding the fundamental

characteristics of an ESG fund or an adviser’s ESG strategy in order to make a more informed

investment decision. First, the variation discussed above concerning ESG investing, combined

with the lack of a more specific disclosure framework, increases the risk of funds and advisers

marketing or labelling themselves as “ESG,” “green,” or “sustainable” in an effort to attract

investors or clients, when the ESG-related features of their investment strategies may be limited.

See, e.g., In the Matter of Pax World Management Corp., Investment Advisers Act Release No. 2761 (July

30, 2008) (settled action) (alleging that despite investment restrictions disclosed in its prospectus, statement

of additional information, and other published materials that it complied with certain socially responsible

investing restrictions the fund purchased securities contrary to those representations and failed to follow its

own policies and procedures requiring internal screening to ensure compliance with those restriction).

Such exaggerations can impede informed decision-making as the labels may cause investors to

believe they are investing in—and potentially are paying higher fees for—a “sustainable”

strategy that may actually vary little from ones without such a label. 31 Ultimately, this can

frustrate investor expectations in the market for ESG investing, with some investors and market

participants questioning whether and to what degree certain ESG funds are appreciably different

than other types of funds. 32 Requiring comparable, consistent, and reliable information from all

funds and advisers that use an ESG label would reduce the risk of exaggerated claims of the role

of ESG factors in investing, thereby increasing the efficiency and reliability with which investors

seeking an ESG strategy can find a fund or adviser that meets their investing preferences, better

protecting and serving investors in the market for ESG-related investing as a whole.

In addition to the risk of exaggerated labels or claims, funds and advisers incorporating or

focusing on ESG factors currently present inconsistent information concerning how they

consider ESG factors in their investment strategies to investors, other market participants, and

the Commission. We believe that a major reason for such inconsistency is the variety of

perspectives concerning what ESG investing means, the issues or objectives it encompasses, and

the ways to implement an ESG strategy. “ESG investing,” “sustainable investing,” or other terms

can reasonably connote different investing approaches to different investors. Even when

See Wursthorn, Michael, “Tidal Wave of ESG Funds Brings Profit to Wall Street”, The Wall Street Journal

(Mar. 16, 2021), available at https://www.wsj.com/articles/tidal-wave-of-esg-funds-brings-profit-to-wallstreet-11615887004 (noting that ETFs with strategies that focus on socially responsible investments have

higher fees than “standard ETFs”).

Mackintosh, James, “ESG Funds Mostly Track the Market”, The Wall Street Journal (Feb. 23, 2020),

available at https://www.wsj.com/articles/esg-funds-mostly-track-the-market-11582462980 (noting that an

analysis found that ESG funds have inconsistent approaches, but on average hold slightly more technology

stocks and fewer energy stocks than the S&P 500 index).

investors focus on the same ESG issue, such as climate change or labor practices, there are

debates about how to address such issues, resulting in different, and sometimes opposing,

assessments of whether a particular investment meets the investors’ goals in furthering that

issue. 33 We believe that requiring funds and advisers to disclose with specificity their ESG

investing approach can help investors and clients understand the investing approach the fund or

adviser uses. It can also help investors compare the variety of emerging approaches, such as

employment of an inclusionary or exclusionary screen, focus on a specific impact, or

engagement with issuers to achieve ESG goals. The proposed rules would help draw out these

distinctions and better inform investors by providing them with decision-useful information to

compare, for example, two funds that both refer to their strategy as “sustainable” but employ

different approaches and areas of focus to implement their sustainable strategy.

Further, ESG investment products can have risk/return objectives that reflect a longer

time horizon and have objectives that extend beyond risk/return goals. 34 Funds and advisers with

ESG-related investing objectives can consider factors and measures in addition to those often

used to measure financial return to manage the portfolio. They may also use additional key

Some have noted that the “fluidity of the ESG rubric” can lead to subjective application of ESG factors

when applied to certain assets. For example, a recent journal article notes that one provider of ESG data

and ratings found that about half of the ESG mutual funds it assessed scored as “average or worse” than

non-ESG funds using the provider’s own ESG scoring methodology, showing that managers often disagree

on the ESG attributes of particular investments. In another example, the article posits that an issuer that

investors may assess to be “environmentally sound” or “beneficial” could have what it perceives to be

weak corporate governance controls or mistreat its workforce leaving an investor with subjective judgments

in weighting E versus S versus G factors. Lastly, the article notes that there is substantial debate around

how to assess the climate impacts of issuers that rely on certain types of energy production and the relative

environmental impacts and risks of coal, oil, natural gas, and nuclear energy. See Schanzenbach, Max and

Sitkoff, Robert “Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG

Investing by a Trustee,” 72 STAN. L. REV. 381 (Feb. 2020), available at:

https://ssrn.com/abstract=3244665.

See AMAC Recommendations, supra footnote 20 at p. 6.

performance indicators specific to ESG objectives to assess the fund’s or adviser’s effectiveness

in meeting these goals. Additionally, for ESG investing, investors might be more likely to have

an interest in knowing more about the investment selection and engagement process to ensure

that the process aligns with the ESG-related values or priorities of the investor, rather than

simply as a means for gauging effectiveness of the end result of financial return. 35 Accordingly,

we believe that specific ESG-related disclosures would enable an investor to understand and

analyze funds’ and advisers’ ability to meet any ESG-related objectives and would complement

existing disclosures regarding objectives related to financial returns by helping the investor

understand the relationship between ESG-related objectives and financial return objectives. 36

Overview of the Proposal

In light of these observations, we are proposing to require additional specific disclosure

requirements regarding ESG strategies to investors in fund registration statements, the

management discussion of fund performance in fund annual reports, and adviser brochures. 37 We

believe that these disclosures would promote consistent, comparable, reliable—and therefore

decision-useful—information for investors. These changes also would allow investors to identify

funds more readily and advisers that do or do not consider ESG factors, differentiate how they

consider ESG factors, and help inform their analysis of whether they should invest. To address

exaggerated claims about ESG strategies, we are proposing minimum disclosure requirements

For example, investors often have differing priorities when it comes to ESG investment. Studies have

shown that certain investors in socially responsible investments may be less sensitive to financial

performance compared to other investors, perhaps because SRI investors derive utility from non-pecuniary

attributes as well. See infra at text accompanying note 288.

AMAC Recommendations, supra footnote 20, at 6-7.

More specifically, we propose to amend Forms N-1A, N-2, N-CSR, N-8B-2, S-6, N-CEN, and ADV Part

2A.

for any fund that markets itself as an ESG-Focused Fund, and requiring streamlined disclosure

for Integration Funds that consider ESG factors as one of many factors in investment selections.

We also propose that funds tag their ESG disclosures using the Inline eXtensible Business

Reporting Language (“Inline XBRL”) structured data language to provide machine-readable data

that investors and other market participants could use to more efficiently access and evaluate

ESG funds. We believe that these requirements would provide improved transparency and

decision-useful information to investors assisting them in making an informed choice based on

their preferences for ESG investing.

To complement the disclosure in the prospectus, we are proposing to require that certain

ESG-Focused Funds provide disclosures in their annual reports. Specifically, we are proposing

that an Impact Fund summarize its progress on achieving its specific impact(s) in both qualitative

and quantitative terms, and the key factors that materially affected the fund’s ability to achieve

the impact(s), on an annual basis. We also are proposing amendments to fund annual reports to

require a fund for which proxy voting or other engagement with issuers is a significant means of

implementing its strategy to disclose information regarding how it voted proxies relating to

portfolio securities on particular ESG-related voting matters and information regarding its ESG

engagement meetings.

Finally, the Commission is proposing a requirement for ESG-Focused Funds that

consider environmental factors. Specifically, we are proposing to require disclosure of two

greenhouse gas (“GHG”) emissions metrics for the portfolio in such funds’ annual reports. We

believe the proposed information would provide quantitative metrics related to climate for

investors focused on climate risk while also providing verifiable data from which to evaluate

environmental claims. This information also would benefit those investors that have made net

zero or similar commitments by helping them determine whether a particular investment is

consistent with the commitment they have made. 38 Disclosure of GHG metrics could better

prevent exaggerated claims in this space by providing consistent, comparable, and reliable data

that investors can use when reviewing funds that market themselves as focusing on climate

factors in their investment processes. With access to GHG metrics, fund investors and market

participants could review the relative carbon footprints and carbon intensity of ESG-Focused

Funds against comparable funds and determine whether a fund’s climate or sustainability

disclosures align with its actual GHG metrics.

To complement the proposed ESG disclosures in fund registration statements and annual

reports and adviser brochures, we are proposing to require certain ESG reporting on Forms NCEN and ADV Part 1A, which are XML-structured forms on which funds and advisers,

respectively, report census-type data. This reporting would provide the Commission, investors,

and other market participants with structured data that can be used to understand industry trends

in the market for ESG investment products and services.

See Net Zero Asset Managers Initiative, Net Zero Asset Managers initiative announces 41 new signatories,

with sector seeing ‘net zero tipping point’ (July 6, 2021) available at:

https://www.netzeroassetmanagers.org/net-zero-asset-managers-initiative-announces-41-new-signatorieswith-sector-seeing-net-zero-tipping-point. See also Glasgow Financial Alliance for Net Zero: “Our

Progress and Plan Towards a Net-Zero Global Economy” (Nov. 2021) available at:

https://www.gfanzero.com/progress-report/.

II.

Discussion

Proposed Fund Disclosures to Investors

Proposed Prospectus ESG Disclosure Enhancements

We are proposing to require a fund engaging in ESG investing to provide additional

information about the fund’s implementation of ESG factors in the fund’s principal investment

strategies. The proposed amendments are designed to provide investors clear and comparable

information about how a fund considers ESG factors. 39 They also address the significant

variability in the ways different funds approach the incorporation of ESG factors in their

investment decisions by contemplating a range of strategies that funds use. The level of detail

required by this enhanced disclosure would depend on the extent to which a fund considers ESG

factors in its investment process. Additionally, because the information necessary to understand

fully a fund’s ESG methodology could lead to a large amount of disclosure, our proposed

requirements contemplate layered disclosure. For example, open-end funds would provide an

overview of their ESG strategy in the summary section of the prospectus, and would provide

more details about the strategy in the statutory prospectus. 40 We designed this layered disclosure

approach to highlight key information for investors to help them make better informed

investment decisions as well as to promote disclosure that is inviting and usable to a broad

This approach would complement existing requirements that funds use plain English and disclose essential

information in a concise and straightforward manner to help investors make informed investment decisions

about the fund. See, e.g., General Instructions B.4.(c) and C.1-3(c) of Form N-1A [17 CFR 274.11A];

General Instruction for Part A and General Instructions for Parts A and B of Form N-2 [17 CFR 274.11a1].

While Closed-End Funds do not utilize a summary section in their prospectuses, our proposed requirements

for closed-end funds still utilize principles of layered disclosure by requiring certain items to appear earlier

in the prospectus.

spectrum of investors. This approach is designed so the additional information that may be

interest to some investors is available through layered disclosure. 41

Specifically, and as discussed further below, funds that meet the proposed definition of

“Integration Fund” would provide more limited disclosures. “ESG-Focused” Funds, which

would include, for example, funds that apply inclusionary or exclusionary screens, funds that

focus on ESG-related engagement with the issuers in which they invest, and funds that seek to

achieve a particular ESG impact, would be required to provide more detailed information in a

tabular format. 42 The proposed amendments would apply to open-end funds (including ETFs)

and closed-end funds (including business development companies (“BDCs”)) that incorporate

one or more ESG factors into their investment selection process. 43

We are not proposing to define “ESG” or similar terms and, instead, we are

proposing to require funds to disclose to investors (1) how they incorporate ESG

The Commission has taken multiple steps that recognize investors’ preferences for concise and engaging

disclosure of key information as well ensure that additional information that may be of interest to some

investors is available through layered disclosure. See, e.g., New Disclosure Option for Open-End

Management Investment Companies, Investment Company Act Release No. 23065 (Mar. 13, 1998) [63 FR

13968 (Mar. 23, 1998); Enhanced Disclosure and New Prospectus Delivery Option for Registered OpenEnd Management Investment Companies, Investment Company Act Release No. 28584 (Jan. 13, 2009) [74

FR 4546 (Jan. 26, 2009)]; Updated Disclosure Requirements and Summary Prospectus for Variable

Annuity and Variable Life Insurance Contracts, Investment Company Act Release No. 33814 (Mar. 11,

2020) [85 FR 25964 (May 1, 2020)]; see also Tailored Shareholder Reports, Treatment of Annual

Prospectus Updates for Existing Investors, and Improved Fee and Risk Disclosure for Mutual Funds and

Exchange-Traded Funds; Fee Information in Investment Company Advertisements, Investment Company

Act Rel. No. 33963 (Aug. 5, 2020) [85 FR 70716, 70720-21 (Nov. 5, 2020)] (stating that the “vast majority

of individual investors responding to questions in the Fund Investor Experience RFC about summary

disclosure expressed a preference for summary disclosure . . . . [and that] Commenters’ overall preference

for summary disclosure is generally consistent with other information the Commission has received—

through investor testing, surveys, and other information gathering—that similarly indicates that investors

strongly prefer concise, layered disclosure”).

Because we are proposing requirements specific to funds that seek to achieve a particular ESG impact, we

are also proposing a distinct definition for this subset of ESG-Focused Funds. See infra at Section II.A.1.ii.

For a BDC, certain proposed disclosure would be included in the management discussion and analysis, in

the BDC’s annual report on Form 10-K [17 CFR 249.310]. Also, a unit investment trust (“UIT”) would

not be subject to the proposed annual report to shareholders requirements because a UIT is not required to

provide management’s discussion of fund performance (“MDFP”) disclosure in their annual reports.

factors into their investment selection processes and (2) how they incorporate

ESG factors in their investment strategies. Is this approach appropriate? Should

we seek to define “ESG” or any of its subparts in the forms? Should we provide a

non-exhaustive list of examples of ESG factors in the forms? Should we define

certain types of factors as being ESG but allow funds to add additional factors to

that concept if they choose? Are there any other approaches that we should take in

providing guidance to funds as to what constitutes ESG?

Should these disclosure requirements apply to registered open-end funds,

registered closed-end funds, and BDCs, as proposed? Are there other substantive

disclosure requirements that should differ based on the type of fund? Should our

proposed disclosure requirements apply to insurance company separate accounts

registered as management investment companies?

Proposed Integration Fund disclosure

We are proposing to require an Integration Fund to summarize in a few sentences how

the fund incorporates ESG factors into its investment selection process, including what ESG

factors the fund considers. For example, an Integration Fund might provide a brief narrative of

how it incorporates factors, or provide an example to illustrate how it considers ESG factors with

other factors. 44 This disclosure would be in addition to the information funds currently are

For example, an Integration Fund might disclose that it invests in companies consistent with its objective of

risk-adjusted return; that it considers ESG factors alongside financial, industry-related and macroeconomic

factors; that the specific ESG factors it evaluates are the impact and risk around climate change,

environmental performance, labor standards, and corporate governance; and that its consideration of these

factors would not necessarily result in a company being included or excluded from the evaluation process

but rather would contribute to the overall evaluation of that company. Proposed Item 4(a)(2)(ii)(A) of Form

N-1A [17 CFR 274.11A]; proposed Item 8.(2)(e)(2)(A) of Form N-2 [17 CFR 274.11a-1]. For purposes of

section II.A.1., the term “funds” includes all management investment companies, including BDCs, but not

required to provide in their prospectuses about their investments, risks, and performance. Openend funds would provide this information in the summary section of the fund’s prospectus, while

closed-end funds, which do not use summary prospectuses, would disclose the information as

part of the prospectus’s general description of the fund. 45

An Integration Fund, for this purpose, would be a fund that considers one or more ESG

factors along with other, non-ESG factors in its investment decisions, but those ESG factors are

generally no more significant than other factors in the investment selection process, such that

ESG factors may not be determinative in deciding to include or exclude any particular

investment in the portfolio. Such funds may select investments because those investments met

other criteria applied by the fund’s adviser (e.g., investments selected on the basis of

macroeconomic trends or company-specific factors like a price-to-earnings ratio).

We are proposing to require an Integration Fund to describe how it incorporates ESG

factors into its investment selection process because we believe this is important information for

investors that should be available for them to review in the same location in different funds’

prospectuses. 46 At the same time, we are not proposing more extensive disclosure requirements

in the summary prospectus. Requiring a more detailed discussion of ESG factors could cause an

unit investment trusts; see also General Instructions B.4.(c) and C.1.(a) of Form N-1A [17 CFR 274.11A];

General Instructions Part A: The Prospectus of Form N-2 [17 CFR 274.11a-1].

Id. See 17 CFR 230.498 [Rule 498 under the Securities Act of 1933]. We estimate that as of Dec. 31, 2020,

approximately 95% of mutual funds and ETFs use summary prospectuses. This estimate is based on data on

the number of mutual funds and ETFs that filed a summary prospectus in 2020 in the Commission’s

Electronic Data, Gathering, Analysis, and Retrieval system (“EDGAR”) (10,739) and the Investment

Company Institute’s estimated number of mutual funds and ETFs as of Dec. 31, 2020 (11,323). See

Investment Company Institute, 2021 Investment Company Fact Book, at 40, available at

https://www.ici.org/system/files/2021-05/2021_factbook.pdf.

For purposes of our proposed rule, investment selection encompasses the decision to invest in a particular

security as well as the size or weighting of the particular security investment.

Integration Fund to overemphasize the role ESG factors play in the fund’s investment selection

process by adding ESG disclosure requirements that could result in a more detailed description

of ESG factors than other factors. This overemphasis could impede informed investment

decisions because ESG factors discussed at length would not play a central role in the fund’s

strategy. 47 For these reasons, we are proposing a layered disclosure approach for Integration

Funds. Specifically, we are proposing to complement the concise description discussed above

with a more detailed description of how an Integration Fund incorporates ESG factors into its

investment selection process in an open-end fund’s statutory prospectus or later in a closed-end

fund’s prospectus. 48 This more detailed description would provide information about the fund’s

integration of ESG factors in its investment strategy to facilitate informed decision making by

providing investors more detail about the extent to which the fund considers those ESG factors

as compared to other factors in the fund’s investment selection process. 49

In addition to this general requirement, which would apply to all ESG factors that a fund

considers, we are proposing a specific requirement for Integration Funds that consider GHG

emissions to provide more detailed information in the fund’s statutory prospectus or later in a

Further, in a separate proposal, we are proposing to define the names of “integration funds” as materially

deceptive and misleading if the name includes terms indicating that the fund’s investment decisions

incorporate one or more ESG factors. 17 CFR 270.35d-1 [rule 35d-1 under the Investment Company Act]

(the “names rule”); Investment Company Names, Investment Company Act Release No. 34593 (May 25,

2022) (“Names Rule Proposing Release”), published elsewhere in this issue of the Federal Register.

See Proposed Instruction 1(a) to Item 9(b)(2) of Form N-1A [17 CFR 274.11A]; Proposed Instruction

9.a(1) to proposed Item 8.2.e(2)(B) of Form N-2 [17 CFR 274.11a-1].

See supra Section II.A.1.3. (“The Need for Specific ESG-Disclosure Requirements”) (discussing why

additional detail about the fund’s integration of ESG factors in its investment selection process is important

and necessary as the lack of a more specific ESG-disclosure framework may result in a fund marketing or

labelling itself as “ESG,” “green,” or “sustainable” to attract investors even though the fund’s consideration

of ESG-related features in its investment strategy is limited).

closed-end fund’s prospectus. Specifically, if an Integration Fund considers the GHG emissions

of portfolio holdings as one ESG factor in the fund’s investment selection process, we are

proposing to require such a fund to describe how the fund considers the GHG emissions of its

portfolio holdings. 50 This disclosure must include a description of the methodology that the fund

uses as part of its consideration of portfolio company GHG emissions. For example, an

Integration Fund that considers GHG emissions might disclose that it considers the GHG

emissions of portfolio companies within only certain “high emitting” market sectors, such as the

energy sector. The fund in this example would also be required to describe the methodology it

uses to determine which sectors would be considered “high emitting,” as well as the sources of

GHG emissions data the fund relied on as part of its investment selection process.

As discussed in more detail below, some investors have expressed particular demand for

information on the ways in which funds consider GHG emissions as a factor in the investment

selection process so that they can make better informed investment decisions, which can create

an incentive for funds to overstate the extent to which portfolio company emissions play a role in

the fund’s strategy and therefore warrants specific disclosure requirements regarding the process

for integrating this data. Moreover, as discussed below, there has been increasing acceptance and

convergence around particular methodologies for calculating certain GHG emissions metrics, 51

but Integration Funds might vary substantially in how they utilize GHG emissions metrics data

or otherwise consider portfolio company GHG emissions, which can impede informed decisionmaking if investors believe Integration Funds that consider GHG emissions do so in the same

See Proposed Instruction 1(b) to Item 9(b)(2) of Form N-1A [17 CFR 274.11A]; Proposed Instruction

9.a(2) to proposed Item 8.2.e(2)(B) of Form N-2 [17 CFR 274.11a-1].

See infra at text accompanying footnote 119.

way or by reference to the same framework. We believe requiring more specific disclosure for

Integration Funds that consider portfolio company GHG emissions, including the methodology

the fund used for this purpose, will assist investors in better understanding how the fund

integrates GHG emissions in its investment selection process and compare that process to that of

other Integration Funds.

We are proposing to require funds to place this information outside of an open-end fund’s

summary prospectus and later in a closed-end fund’s prospectus where more detailed information

is available on a range of topics to balance the need for investors to have access to this

information while mitigating the risk of overemphasis of ESG factors by an Integration Fund as

discussed above.

We request comment on all aspects of our proposed approach to Integration Fund

disclosure, including the following items:

Is the proposed definition of an Integration Fund appropriate and clear? Are there

other alternative definitions we should consider? For example, is the aspect of the

definition specifying that ESG factors “may not be determinative in deciding to

include or exclude any particular investment in the portfolio” sufficiently clear?

Would it be clearer to provide that ESG factors are “not necessarily”

determinative, or would that imply a greater role of ESG factors than may be the

case for many integration funds? Is the proposed definition over- or underinclusive? For example, are there funds that do not currently consider themselves

to integrate ESG factors but would fall under this definition and be required to

provide disclosures? Conversely, are there funds that do not meet the proposed

definition that do consider themselves to integrate ESG factors?

Will funds that engage in fundamental-oriented analysis, i.e., funds that analyze a

portfolio company’s value by examining related economic and financial factors

about their portfolio companies generally, consider themselves to be Integration

Funds? Should such funds be Integration Funds because of their long-standing

considerations of governance factors in their investment selection processes? For

ESG disclosure requirements, should there be an Integration Fund category, as

proposed, or should we limit disclosure requirements to ESG-Focused Funds?

Alternatively, should there be additional categories of funds other than Integration

Funds, ESG-Focused Funds, and Impact Funds, as proposed?

Should we, as proposed, require an Integration Fund to provide a brief description

of how the fund incorporates any ESG factors into its investment selection

process, including what ESG factors the fund incorporates? Should we require a

fund to include example(s)? Should we require a specific type of example? What

additional disclosure about an Integration Fund would be helpful for an investor?

Where should that additional disclosure be located?

Should we, as proposed, require an Integration Fund that considers the GHG

emissions of its portfolio holdings as an ESG factor in its investment selection

process, to disclose how it considers the GHG emissions of its portfolio holdings?

Should the description, as proposed, include a description of the methodology

such a fund uses for this purpose? Would investors find this narrative disclosure

useful to make better informed investment decisions? Should we require

Integration Funds to disclose quantitative information or other GHG metrics, in

addition to or in lieu of, the narrative disclosure? If so, what type of quantitative

information of GHG metrics should be disclosed? For instance, should we require

Integration Funds that consider GHG emissions as a part of their investment

selection process to disclose the same standardized GHG metrics we are requiring

of certain ESG-Focused Funds? Would such quantitative data be useful to

investors?

Should Integration Funds provide the tabular disclosure we are proposing for

ESG-Focused Funds, as discussed below? Would that disclosure overemphasize

the role ESG factors play in an Integration Fund’s portfolio or, conversely, would

investors find the disclosure informative?

Is the placement of the proposed disclosure appropriate for funds? If not, is there

a different place that would be more appropriate?

We are proposing to require an Integration Fund to provide a brief disclosure in

the summary section of an open-end fund’s prospectus and in the general

description of the fund for a closed-end fund. The brevity of this disclosure is

designed to avoid giving investors the impression that Integration Funds

incorporate ESG factors more than they actually do as a result of lengthy ESG

disclosure. Is it feasible for funds to meet the elements of the proposed disclosure

requirement with a brief description or example? If not, should we modify any

aspects of the disclosure requirements to promote brevity? Should we impose a

word limit or use another method to ensure brevity, beyond including the general

requirement that the disclosure be brief? Are there other ways to ensure balanced

disclosure that would not overemphasize the role of ESG factors while also

fostering meaningful disclosure about ESG factors? Conversely, should we delete

the requirement that the disclosures be brief?

10.

A fund is permitted to add a statement of its investment objectives, a brief

description of its operations, or any additional information on its front cover page.

That other information may include a text or design feature. Should we address a

fund’s use of a text or design feature on its front cover page? For example, should

we provide that it would be materially deceptive and misleading for an Integration

Fund to use a text or design feature on its front cover page that implies a focus on

one or more ESG factors? Should we place limitations on the ability of an

Integration Fund to use a text or design feature on its front cover page to indicate

that the fund’s investment decisions incorporate one or more ESG factors on the

basis that such features might be misleading? Conversely, are there other

formatting requirements that would help improve the salience and prominence,

such as font size and bolding, that we should address?

11.

Should we, as proposed, require an Integration Fund to provide a more detailed

description of how the fund incorporates ESG factors into its investment selection

process in an open-end fund’s statutory prospectus or later in a closed-end fund’s

statutory prospectus? Would investors find this information useful for

understanding the ESG integration process? Would this information

overemphasize the extent to which an Integration Fund considers ESG factors in

its investment selection process? Would the layered disclosure format that we are

proposing be appropriate for Integration Funds? Should all or more information

about the fund’s ESG integration process be in the summary section of the

prospectus? Conversely, should we require Integration Funds to put most or all of

the information about their ESG integration process in the statutory prospectus

(or, for closed-end funds, later in the prospectus), as proposed?

Proposed ESG-Focused Fund Prospectus Disclosure

We are proposing to require an ESG-Focused Fund, which would include an ESG Impact

Fund, to provide specific disclosure about how the fund focuses on ESG factors in its investment

process. An “ESG-Focused Fund” would mean a fund that focuses on one or more ESG factors

by using them as a significant or main consideration (1) in selecting investments or (2) in its

engagement strategy with the companies in which it invests. 52 Thus, ESG-Focused Funds under

this proposed definition would include, for example, funds that track an ESG-focused index or

that apply a screen to include or exclude investments in particular industries based on ESG

factors. 53 The category would likewise include a fund that has a policy of voting its proxies and

engaging with the management of its portfolio companies to encourage ESG practices or

outcomes. 54

Additionally, to help ensure that any fund that markets itself as ESG provides sufficient

information to investors to support the claim, the proposed definition of an ESG-Focused Fund

explicitly includes (i) any fund that has a name including terms indicating that the fund’s

See Proposed Item 4(a)(2)(i)(B) of Form N-1A [17 CFR 274.11A]; Proposed Item 8.2.e.(1)(B) of Form N-2

[17 CFR 274.11a-1].

While we are not suggesting any ESG-related minimum characteristics that such index or screen would

have, an ESG-Focused Fund that uses the index or screen to focus on one or more ESG factors by using

them as a significant or main consideration in selecting investments would be required, as discussed below,

to provide disclosure about the index or screen under our proposed amendments.

See infra at section II.A.1.b.3 for the discussion of what we propose constitutes engagement for these

purposes.

investment decisions incorporate one or more ESG factors and (ii) any fund whose

advertisements or sales literature indicates that the fund’s investment decisions incorporate one

or more ESG factors by using them as a significant or main consideration in selecting

investments. 55 Accordingly, any fund that markets itself, whether through its name or marketing

materials as having an ESG focus, would be required to provide the proposed ESG Strategy

Overview Table discussed below. 56 We believe this aspect of the proposed definition can help

deter funds from making exaggerated claims by requiring funds that market themselves as, for

example, “ESG,” “green,” “sustainable,” or “socially conscious” to provide specific information

in their prospectuses to substantiate such claims.

A fund’s use of advertisements or sales literature that mention ESG factors, but not as a

“significant or main consideration” in the fund’s investment or engagement strategy, would not

alone cause the fund to be an ESG-Focused Fund. This aspect of the proposed definition of an

ESG-Focused Fund would permit Integration Funds to discuss the role of ESG factors in their

advertisements or sales literature—including the relationship between ESG factors and other

For purposes of the proposed definition of an ESG-Focused Fund, the term “advertisements” is defined

pursuant to 17 CFR 230.482 under the Securities Act of 1933, and the term “sales literature” is defined

pursuant to 17 CFR 270.34b-1 under the Investment Company Act of 1940.

For example, ABC Solar Energy ETF invests in the securities that comprise the XYZ solar index. Because

the fund has a name that indicates it considers ESG factors based on the industry in which the fund invests,

the fund would be required to provide the proposed ESG-Focused Fund disclosure. As another example,

DEF Growth Fund has sales materials that state it focuses on companies that “provide solutions to

sustainability challenges.” DEF Growth Fund would be required to provide the ESG-Focused Fund

disclosure because its marketing materials indicate that “sustainability” is a significant consideration in

selecting investments. Providing the proposed disclosure for ESG-Focused Funds would not provide

assurance or a safe harbor that such name or marketing materials are not materially deceptive or

misleading. Funds must continue to consider the application of the Federal securities laws including, but

not limited to, the general antifraud provisions and the names rule to their name or other marketing

materials. See Names Rule Proposing Release, supra footnote 47.

investment factors and that ESG factors might not be dispositive—while deterring marketing

materials that imply that ESG factors are a significant or the main consideration of a fund.

We also propose to define an “Impact Fund” as an ESG-Focused Fund that seeks to

achieve a specific ESG impact or impacts. 57 For example, a fund that invests with the goal of

seeking current income while also furthering the fund’s disclosed goal of financing the

construction of affordable housing units would be an Impact Fund under the proposal. A fund

that invests with the goal of seeking to advance the availability of clean water by investing in

industrial water treatment and conservation portfolio companies is another example of an Impact

Fund under the proposal. As these examples illustrate, an Impact Fund’s stated goal of pursuing

a specific impact is what would distinguish Impact Funds under the proposal from other ESGFocused Funds. An Impact Fund would be required to provide the disclosures proposed for all

ESG-Focused Funds. Additionally, and as discussed further below, an Impact Fund would have

additional disclosure requirements, including how the fund measures progress towards the stated

impact; the time horizon used to measure that progress; and the relationship between the impact

the fund is seeking to achieve and the fund’s financial returns. 58 We believe additional disclosure

requirements are appropriate for these funds to clarify the impact the fund is seeking to achieve

as well as to allow investors to evaluate the fund’s progress in achieving that impact.

ESG-Focused Funds would provide key information about their consideration of ESG

factors in a tabular format—an ESG Strategy Overview table—in the fund’s prospectus. An

open-end fund would be required to provide the disclosure at the beginning of its “risk/return

Proposed Item 4(a)(2)(i)(C) of Form N-1A [17 CFR 274.11A]; Proposed Item 8.2.e.(1)(C) of Form N-2 [17

CFR 274.11a-1].

See infra at Section II.A.1.b.(2).

summary,” the section of the prospectus that summarizes key information about the fund’s

investments, risk and performance, while a closed-end fund would provide the table at the

beginning of the discussion of the fund’s organization and operation. 59 The disclosure would be

in the following tabular format:

[ESG] Strategy Overview

Overview of the

Fund’s [ESG]

strategy

How the Fund

incorporates [ESG]

factors in its

investment decisions

The Fund engages in the following to implement its [ESG] Strategy:

□

Tracks an index

□

Applies an inclusionary screen

□

Applies an exclusionary screen

□

Seeks to achieve a specific impact

□

Proxy voting

□

Engagement with issuers

□

Other

How the Fund votes

proxies and/or

engages with

companies about

[ESG] issues

Proposed Item 4(a)(2)(ii)(B), Instruction 1 of Form N-1A [17 CFR 274.11A]; Proposed Item 8.2.e.(2)(B),

Instruction 1 of Form N-2 [17 CFR 274.11a-1] (providing that the ESG Strategy Overview table would

precede the risk/return summary (for open-end funds) or discussion of the fund’s organization and

operation (for closed-end funds), and disclosure in the table need not be repeated in the narrative disclosure

that will follow the table in the risk/return summary of discussion of the fund’s organization and operation).

Requiring all ESG-Focused Funds to provide concise disclosure, in the same format and

same location in the prospectus, is designed to provide investors a clear, comparable, and

succinct summary of the salient features of a fund’s implementation of ESG factors. This

information would help an investor determine if a given ESG-Focused Fund’s approach aligns

with the investor’s goals. We are proposing consistent titles in the rows of the table to help

investors to compare and analyze different ESG-Focused Funds more easily as they make

investment decisions. 60

To facilitate a layered disclosure approach, the amendments would require an ESGFocused Fund to complete each row with the brief disclosure required by that row—and only the

information required by the relevant form instructions—with lengthier disclosure or other

available information required elsewhere in the prospectus. 61 In an electronic version of the

prospectus, that is, a prospectus posted on the fund’s website, electronically delivered to an

investor, or filed on EDGAR with the Commission, the fund also would be required to provide

hyperlinks in the table to the related, more detailed disclosure later in the prospectus to help

investors easily access the information. 62 We discuss the disclosure that would be required by

each row of the table further below.

Proposed Item 4(a)(2)(ii)(B), Instruction 3 of Form N-1A [17 CFR 274.11A]; Proposed Item 8.2.e.(2)(B),

Instruction 3 of Form N-2 [17 CFR 274.11a-1]. A fund would be allowed to replace “ESG” in each row

with another term that more accurately describes the applicable ESG factors the fund considers. Similarly, a

fund would be permitted to replace the term “the Fund” in each row with an appropriate pronoun, such as

“we” or “our.” Id.

Proposed Item 9(b)(2), Instruction 2 of Form N-1A [17 CFR 274.11A]; Proposed Item 8.2.e.(2)(B).

Instruction 9.b of Form N-2 [17 CFR 274.11a-1].

Proposed Item 4(a)(2)(ii)(B), Instruction 3 of Form N-1A [17 CFR 274.11A]; Proposed Item 8.2.e.(2)(B),

Instruction 3 of Form N-2 [17 CFR 274.11a-1].

We request comment on all aspects on the proposed definitions of ESG-Focused Fund

and Impact Fund, the general approach to layered disclosure and the design of the ESG Strategy

Overview Table, including the following items:

12.

Are there additional distinctions that the disclosure rules should make besides the

proposed distinctions between Integration Funds and ESG-Focused Funds, as

proposed, for the level of detail required in prospectus disclosures?

13.

Should we, as proposed, define an ESG-Focused Fund as a fund that focuses on

one or more ESG factors by using them as a significant or main consideration in

selecting its investment or its engagement strategy with issuers of its investments?

14.

As discussed above, a fund that applies a screen to include or exclude investments

based on ESG factors would meet the proposed definition of an ESG-Focused

Fund. Should our definition of an ESG-Focused Fund specifically reference a

fund that follows an ESG-related index or a screen based on ESG factors to

include or exclude investments? Should our definition take into account whether a

fund’s use of an ESG-related index or screen is to promote ESG goals? Should the

reference to engagement be a means of identifying Impact Funds, rather than

ESG-Focused Funds generally?

15.

Should we include the proposed elements in the definition of ESG-Focused Fund

related to the use of ESG-related names or advertising or other materials? In

particular, does the proposed definition provide appropriate flexibility to allow an

Integration Fund to describe its integration process accurately in advertising or

other materials, while assuring that funds that market themselves as having an

ESG focus provide sufficient information to support such claim?

16.

An Integration Fund may be categorized by a third-party marketer or a third-party

rater as an ESG-Focused Fund. Are there circumstances where we should attribute

the third party characterization to the fund and require the fund to report as an

ESG-Focused Fund? For example, should we require such reporting if the fund’s

adviser has explicitly or implicitly endorsed or approved the information after its

publication (such as by including it in the fund’s marketing materials), or has

involved itself in the preparation of the information?

17.

Would the ESG Strategy Overview table’s layered disclosure approach provide a

concise presentation for investors who want a comprehensive summary of ESGrelated aspects of the fund in one place, with more detailed information available

later in the prospectus? Are there alternatives that would be more helpful to

investors?

18.

Should we, as proposed, limit the disclosure in the ESG Strategy Overview Table

to the information required by the instructions? Is there any information we

should permit but not require?

19.

Should we, as proposed, require that the ESG Strategy Overview table precede the

other disclosure required in the section of the prospectus to which we propose to

add the table (i.e., Item 4(a)(2)(ii)(B) of Form N-1A or proposed Item 8.2.e.(2)(B)

of Form N-2)?

20.

Since closed-end funds do not have a summary section of the prospectus, we have

proposed an alternative approach by requiring the ESG Strategy Overview Table

to precede other disclosures in that Item 8.2.e.(2) of the prospectus, while

permitting the more detailed ESG information to be disclosed later in the same

item. Is this approach appropriate for closed-end funds? Are there alternatives we

should consider?

21.

Should we require a fund to provide a cross-reference or hyperlink in the

prospectus to other parts of the registration statement, as proposed? Are there

other sections of the registration statement where we should permit an ESGFocused Fund to provide a cross-reference or hyperlink? If so, to what sections

should we permit an ESG-Focused Fund to provide that cross-reference or

hyperlink in the registration statement?

22.

Should we, as proposed, permit a fund to replace the term “ESG” in the ESG

Strategy Overview table with another term or phrase that more accurately

describes the ESG factors that the fund considers? Should a fund be required to

replace ESG with a different term in certain circumstances, such as when it

focuses on a particular issue or set of issues? Should we mandate that funds

choose from a list of alternative terms to improve comparability, and, if so, what

terms should those be?

23.

Should we allow flexibility in how funds label each row in the table beyond the

flexibility provided regarding the term ESG and the pronouns used?

24.

Should ESG-Focused Funds disclose information other than what we have

proposed about their ESG strategy? By contrast, is there any of the proposed

disclosures that an ESG-Focused Fund would make that should not be adopted by

the Commission?

Overview of the fund’s ESG strategy

First, in the row “Overview of [the Fund’s] [ESG] strategy,” we are proposing that an

ESG-Focused Fund provide a concise description in a few sentences of the factor or factors that

are the focus of the fund’s strategy. 63 For example, a fund might disclose that it focuses on

environmental factors, and in particular, on greenhouse gas emissions. Further, the fund would

be required to include a list of common ESG strategies as indicated in the ESG Strategy

Overview table and, in a “check the box” style, indicate all strategies in that list that apply. 64

These check boxes would identify common ESG strategies, namely, the tracking of an index, the

application of an exclusionary or inclusionary screen, impact investing, proxy voting, and

engagement with issuers. An ESG-Focused Fund would not be required to check any of the

boxes if none of the common ESG strategies applied to the fund, and instead, would check the

“other” box. This “check the box” presentation is designed to allow an investor immediately to

identify the ESG strategies a fund employs. Together, the disclosure in this row is designed to

help investors quickly compare different funds’ area of focus and approaches to ESG investing

and to provide context for the more specific disclosure in the rows that follow.

25.

Should we, as proposed, require an ESG-Focused Fund to provide a concise

description in a few sentences of the ESG factor or factors that are the focus of the

fund’s strategy? Is beginning the table with an overview helpful? Would it give

investors a way to quickly discern the particular ESG-focus of the fund?

Proposed Item 4(a)(2)(ii)(B), Instruction 4 of Form N-1A [17 CFR 274.11A]; proposed Item 8.2.e.(2)(B)

Instruction 4 of Form N-2 [17 CFR 274.11a-1].

Id.

26.

Should we, as proposed, require funds to include the types of common ESG

strategies in a “check box” format? Is this format useful to an investor so that the

investor can quickly and easily understand the fund’s ESG strategy and compare

it with the ESG strategies used by other funds? Alternatively, as opposed to listing

all the strategies and checking the ones that apply, should funds list only the ESG

strategies that apply to them?

27.

Should the instructions include definitions or descriptions for each common

strategy on the list, or are they sufficiently self-explanatory?

28.

Would there be instances where a fund might face ambiguity as to whether a

strategy on the list accurately describes a technique the fund utilizes? For

example, are there instances where it might be ambiguous whether a fund applies

an inclusionary or exclusionary screen? If so, is there alternative disclosure a fund

should provide?

29.

Are there any common ESG strategies that should be included on the list, or any

that we proposed that should be excluded? Would the “other” box, as proposed,

be helpful in allowing funds to identify that they pursue a strategy other than

those specified in the other check boxes or, conversely, would that result in funds

tending to select “other” and making the check-box disclosure less informative to

investors?

30.

The ESG Strategy Overview table provides a number of check boxes for common

ESG strategies. Does the number of those check boxes present the possibility that

a fund could overstate and/or present the appearance to an investor of overstating

the fund’s ESG strategy because of the number of those check boxes? Should

certain of those check boxes be combined? If so, which ones? Are there other

alternatives to the check boxes that would be consistent with the disclosure goals

of the check boxes?

(1)

Description of the fund’s incorporation of any ESG factors

in Investment Decisions

Second, in the row “How the Fund incorporates [ESG] factors in its investment

decisions,” we are proposing that an ESG-Focused Fund summarize how it incorporates ESG

factors into its process for evaluating, selecting, or excluding investments. 65 Funds would be

required to provide specific information in this row and supplement the overview in this row

with a more detailed description later in the prospectus. 66 The fund would provide specific

information, in a disaggregated manner, with respect to each of the common ESG strategies

applicable to the fund as identified by the “check the box” disclosure. 67 For example, a fund

would have to explain an inclusionary screen distinctly from an exclusionary screen. To help

ensure this information would be presented in a clear format, a fund would be permitted to use

multiple rows in the table or other text features to clearly identify the disclosure related to each

Proposed Item 4(a)(2)(ii)(B), Instruction 5 of Form N-1A [17 CFR 274.11A]; Proposed Item 8.2.e.(2)(B),

Instruction 5 of Form N-2 [17 CFR 274.11a-1].

Open-end funds would provide the additional information in response to Item 9 of Form N-1A, as we

propose to amend it, which covers a fund’s investment objectives, principal investment strategies, related

risks, and portfolio holdings. Closed-end funds would provide the additional information in response to

Item 8 of Form N-2, as we propose to amend it, which requires a general description of the fund, including

its investment objectives and policies and other matters. Proposed Item 9(b)(2), Instruction 2 of Form N-1A

[17 CFR 274.11A]; Proposed Item 8.2.e.(2)(B), Instruction 9 of Form N-2 [17 CFR 274.11a-1].

Proposed Item 4(a)(2)(ii)(B), Instruction 4 of Form N-1A [17 CFR 274.11A]; Proposed Item 8.2.e.(2)(B),

Instruction 4 of Form N-2 [17 CFR 274.11a-1].

applicable common ESG strategy. 68 We discuss below each of the disclosures that would be

required in this row, if applicable.

First, if the fund applies an inclusionary or exclusionary screen to select or exclude

investments, the fund’s summary must briefly explain the factors the screen applies, such as

particular industries or business activities it seeks to include or exclude, and if applicable, what

exceptions apply to inclusionary or exclusionary screen. 69 In addition, such fund would be

required to state the percentage of the portfolio, in terms of net asset value, to which the screen

applies, if less than 100%, excluding cash and cash equivalents held for cash management and to

explain briefly why the screen applies to less than 100% of the portfolio.

We understand that many ESG-Focused Funds commonly apply inclusionary or

exclusionary screens to select investments based on ESG criteria. A fund applying an

inclusionary screen would use the screen to select investments based on the fund’s ESG criteria.

This includes, for example, funds that select companies that perform well relative to their

industry peers based on ESG factors, such as greenhouse gas emissions or workforce diversity.

Conversely, a fund applying an exclusionary screen would start with a given universe of

investments and then exclude investments based on ESG criteria, such as by excluding

investments in companies that operate in certain industries or that engage in certain activities.

Requiring funds that apply inclusionary or exclusionary screens to explain briefly the

factors the screen applies, as well as the percentage of the portfolio covered by the screen if

applicable, is designed to help investors understand how ESG factors guide the fund’s

investment decisions. A fund applying an inclusionary screen to select investments based on a

Id.

company’s performance on certain ESG factors relative to peers in its sector might disclose an

overview of this process and the primary ESG factors it considers to select investments. A fund

applying an exclusionary screen might disclose, for example, that it invests in the securities of a

given index, excluding companies in the index that derive significant revenue from the extraction

or refinement of fossil fuels or sale of alcohol. This would allow an investor to understand the

kinds of investments a fund was focusing on or avoiding and determine if the fund’s approach

aligned with the investor’s own view of ESG investing. Finally, we are proposing to require a

fund to state the percentage of the portfolio, in terms of net asset value, to which the screen is

applied, if less than 100%, excluding cash and cash equivalents held for cash management, and

to explain briefly why the screen applies to less than 100% of the portfolio. We believe that

knowing that a portion of the portfolio is selected without regard to a particular screen would be

important to an investor so that the investor would understand the extent to which the fund

considers ESG factors. We propose to provide an exception for cash management to make clear

that funds that generally apply the screen to their entire portfolio do not have to include

disclosure in this row regarding small portions held for operational purposes, such as meeting

redemptions.

As with other items discussed in this row, the fund also would be required to provide a

more detailed description of any inclusionary or exclusionary screen later in the prospectus. That

disclosure would cover the factors applied by any inclusionary or exclusionary screen, including

any quantitative thresholds or qualitative factors used to determine a company’s industry

classification or whether a company is engaged in a particular activity. 70 This disclosure would

Proposed Item 9(b)(2)(d) of Form N-1A [17 CFR 274.11A]; Proposed Item 8.2.e.(2)(B), Instruction 9.b.(4)

of Form N-2 [17 CFR 274.11a-1].

allow an investor that is interested in the additional detail to understand how a fund applies the

inclusionary or exclusionary screen. To build on the examples above, the fund might disclose in

the prospectus how it analyzes whether a company derives significant revenue from the

extraction or refinement of fossil fuels or sale of alcohol, including how a fund defines

“significant” for this purpose, such as a specific percentage of a company’s revenue derived from

fossil fuels or alcohol.

Second, if the fund uses an internal methodology, a third-party data provider, or a

combination of both, in evaluating, selecting, or excluding investments, the fund’s disclosure in

this row must describe how the fund uses the methodology, third-party data provider, or

combination of both, as applicable. 71 We understand that some ESG-Focused Funds evaluate,

select, or exclude investments using internal methodologies, and/or base their investment

decisions, at least in part, on the data or analysis of a third-party data provider, such as scoring or

ratings provider, that evaluates or scores portfolio companies based on the provider’s ESG

criteria. This disclosure, if applicable, would help an investor understand how these

methodologies and/or providers guide the fund’s investment decisions. Specifically, we

understand that different advisers or third-party data providers conducting internal analyses can

disagree on how to analyze how companies fare on various ESG factors. 72 Accordingly, funds

that have a similar ESG strategy and focus could have different, sometimes even contradicting,

views on an investment depending on the analysis the funds conduct or the third-party data

provider they use. 73 The required disclosures protect investors by providing them detailed

Id.

See infra section II.A.1.b.

See supra footnote 33 and accompanying text.

information to help determine whether the fund’s process for analyzing investments aligns with

the ESG-related priorities of the investor.

In addition, because the description of an internal methodology or third-party data

provider’s methodology can be lengthy, the summary in the table would be complemented by a

more detailed description later in the prospectus. 74 There, the fund would provide, if applicable,

a more detailed description of any internal methodology used and how that methodology

incorporates ESG factors. If the fund used a third-party data provider, the fund would provide a

more detailed description of the scoring or ratings system used by the third-party data provider.

We believe the placement of information about additional third-party data providers later in the

prospectus balances the benefits of the information to investors regarding the use of third-party

data providers generally, while encouraging brevity in the ESG Strategy Overview Table and

limiting disclosure to those analyses most likely to directly influence investment selection. For

both scoring providers and other third-party data providers, the disclosure would be required to

include how the fund evaluates the quality of the data from such provider, which we believe

would help protect investors by allowing them to assess the reliability of the information and the

extent of the independent analysis performed by the fund’s adviser. 75

Third, if the fund tracks an index, the summary must identify the index and briefly

describe the index and how it utilizes ESG factors in determining its constituents. 76 For example,

a fund tracking the XYZ Sustainability Index would disclose that it tracks this index and provide

Proposed Item 9(b)(2), Instruction 2 of Form N-1A [17 CFR 274.11A]; Proposed Item 8.2.e.(2)(B),

Instruction 9.b of Form N-2 [17 CFR 274.11a-1].

Id.

Proposed Item 4(a)(2)(ii)(B), Instruction 5.(c) of Form N-1A [17 CFR 274.11A]; Proposed Item

8.2.e.(2)(B), Instruction 5.c. of Form N-2 [17 CFR 274.11a-1].

an overview of the kinds of companies included in the index. This would inform an investor that

the fund’s investments are driven by the composition of the index, as well as how that index is

constructed.

Because the description of an index’s methodology can be lengthy, the summary in the

table would be complemented by a more detailed description later in the prospectus. Specifically,

a fund tracking an index also would provide later in the prospectus the index’s methodology,

including any criteria or methodologies for selecting or excluding components of the index that

are based on ESG factors. 77 The disclosure in the ESG Strategy Overview table would give

investors an overview of the index’s construction—and thus the fund’s investments—with

additional information in the prospectus about the index methodology thereby protecting

investors by providing them sufficient information to determine whether an index’s methodology

aligns with the ESG-related priorities of the investor.

Finally, we are also proposing that an ESG-Focused Fund provide in this row an

overview of any third-party ESG frameworks that the fund follows as part of its investment

process. 78 Consistent with our approach to the other disclosure items required by the row, the

fund would provide an overview of those standards in the row, with the more detailed description

of any applicable ESG framework and how it applies to the fund later in the prospectus. We

recognize that many advisers to ESG-Focused Funds have expressed a commitment to follow

Proposed Item 4(a)(2)(ii)(B), Instruction 5(a) of Form N-1A [17 CFR 274.11A]; proposed amended Item

9(b)(2), Instruction 2(a) of Form N-1A [17 CFR 274.11A]; Proposed Item 8.2.e.(2)(B), Instruction 9.b.(1)

of Form N-2 [17 CFR 274.11a-1].

Proposed Item 4(a)(2)(ii)(B), Instruction 6 of Form N-1A [17 CFR 274.11A]; Proposed Item 8.2.e.(2)(B),

Instruction 6 of Form N-2 [17 CFR 274.11a-1].

frameworks, such as the United Nations Sustainable Development Goals (“UN SDG”) or the

United Nations Principles for Responsible Investing (“UN PRI”). 79 In these cases, requiring a

fund to disclose that the fund’s investments will follow such a framework would help an investor

understand how the fund considers such ESG frameworks in its investment strategy. For

example, under the proposed amendments, a fund might disclose in its ESG Strategy Overview

table that the fund’s investment objective is to seek long-term capital appreciation while also

contributing to positive societal impact aligned to the UN SDG by limiting the fund’s

investments to companies that contribute to at least one of those goals. The fund would then be

required to disclose later in its prospectus more information about any UN SDG goal on which

the fund focuses and how the fund determines that a portfolio company contributes to that goal. 80

We request comment on all aspects of our proposal with respect to disclosure by ESGFocused Funds regarding investment selection disclosure for ESG-Focused Funds, including the

following items:

31.

Is there additional information concerning the investment selection process in

addition to the proposed disclosures for ESG-Focused Funds that would be

helpful to investors? Should we require that additional information be included in

the table or in another disclosure item? Is there information in this proposed

requirement that should not be in the table and should be placed elsewhere

instead? Where should that information be placed, and how will the alternative

These standards are just examples included for illustrative purposes. More information about the UN SDG

is available at https://sdgs.un.org/goals. More information about the UN PRI is available at

https://www.unpri.org.

Proposed Item 9(b)(2), Instruction 2(e) of Form N-1A [17 CFR 274.11A]; Proposed Item 8.e.2.(2)(B),

Instruction 9.b.(5) of Form N-2 [17 CFR 274.11a-1].

locations(s) help ensure investors receive key information in a readily accessible

location?

32.

Should we, as proposed, require that information with respect to each investment

process be provided in a disaggregated manner if both apply? What manner of

presentation of the information would be helpful to investors?

33.

Is the proposed level of disclosure and the division of that disclosure between the

summary section of prospectus and statutory prospectus (i.e., Items 4 and 9 of

Form N-1A) appropriate? Similarly, is the proposed level and the division of that

disclosure between earlier and later in the prospectus (i.e., proposed Item

8.2.e.(2), Instruction 3 and Instruction 9 of Form N-2) appropriate? Is there

information that we are proposing to require in the table that we should consider

allowing to be disclosed later in the prospectus? Conversely, is there information

that we are proposing to require later in the prospectus that we should require

earlier in the prospectus?

34.

Is the information that we are proposing to require an ESG-Focused Fund to

disclose about how the fund incorporates ESG factors into its investment process

for evaluating, selecting, and excluding investments appropriate and sufficiently

clear?

35.

Should we specifically require, as proposed, an ESG-Focused Fund to disclose in

the ESG Overview Table whether it seeks to select or exclude issuers that engage

in certain activities, or whether the fund seeks to select or exclude issuers from

particular industries?

36.

Our proposed amendments include definitions of inclusionary and/or exclusionary

screens. Should those definitions be modified? Do definitions of the screens help

a fund determine if its investment process is considered a screen for purposes of

indicating the fund uses a screen as a strategy? Should we include examples of

inclusionary or exclusionary screens? If so, what examples should the instructions

include?

37.

As proposed, funds that apply an inclusionary or exclusionary screen would be

considered an ESG-Focused Fund regardless of how extensive or narrow the

screen is. For example, a fund that applies an exclusionary screen to just a few

industries would be an ESG-Focused Fund and provide the ESG Strategy

Overview Table. Should we prescribe how extensive an inclusionary or

exclusionary screen must be in order for a fund applying the screen to be an ESGFocused Fund under our proposed amendments? For example, if an exclusionary

screen would exclude companies on the basis of an ESG criterion that involved

such an unusual set of facts that no or few companies would be excluded, should

that fund instead be considered an Integration Fund, requiring the more

streamlined disclosure as opposed to a table? Do more limited screens raise

concerns that investors would be misled into believing the screen is more

comprehensive than it is? Conversely, would the required disclosures about the

screen and the fund’s ESG investing generally address any such concerns if the

fund were treated as an ESG-Focused Fund?

38.

Should we, as proposed, require funds to describe any exceptions to their

screening mechanism? How common is it for a fund that applies a screen to its

investments to except certain investments from its screening mechanism, that is,

to make investments that otherwise would be excluded by the screen? What

methodologies or factors do funds have for processing such exceptions? Should

that information be disclosed to investors, either in the ESG Strategy Table or

elsewhere in the prospectus?

39.

Should we require all funds to disclose the percentage of the portfolio to which

the screen applies, even if it is 100%? Are there funds that currently apply a

screen only to a portion of their portfolio? Should we include an explicit

requirement that the fund explain its approach to applying a screen to only part of

a portfolio, as proposed?

40.

Should we, as proposed, require a fund that implements its ESG strategy by

applying an inclusionary or exclusionary screen to disclose the percentage of the

portfolio, in terms of net asset value, to which the screen is applied, if less than

100%, excluding cash and cash equivalents held for cash management? Should

the scope of exclusions to which the screen would be applied be expanded, such

as also excluding similar investments held for cash management and/or excluding

the amount of any borrowings held for investment purposes? Is “cash

management” sufficiently understood or would guidance about cash management

be helpful? Alternatively, should we specify a percentage of any non-ESG assets,

even if not for cash management, that would be considered de minimis and not

need to be disclosed?

41.

Should we, as proposed, require funds to provide disclosure later in the prospectus

about the factors applied by any inclusionary or exclusionary screen? Should such

disclosure, as proposed, include the quantitative thresholds or qualitative factors

used to determine a company’s industry classification or whether a company is

engaged in a particular activity? Should any part of this information be required to

be in the ESG Strategy Overview Table? Is there any other disclosure that we

should require funds to provide, either in the ESG Strategy Overview Table or

later in the prospectus relevant to a screen?

42.

Would the disclosure that we would be requiring in the fund’s statutory

prospectus (e.g., Item 9 of Form N-1A) about the index methodology used and

how that methodology incorporates ESG factors be difficult for retail investors to

understand? Are there ways in which we could tailor those requirements to make

that disclosure more useful at conveying information to help protect investors?

Would an example be helpful?

43.

Should we, as proposed, require funds to disclose in the ESG Strategy Overview

Table an overview of their use of third-party data providers, such as scoring or

ratings providers and/or internal methodologies? Are there specific aspects of this

disclosure that we should require in the table? Are there any competitive concerns

with disclosing internal methodologies? Are there alternatives that would mitigate

such concerns and still achieve the goal of helping investors understand the

process of how ESG factors are used in investment selection?

44.

To what extent do funds use multiple third-party data providers? Should we

permit or require funds to provide only the information about the fund’s primary

third-party data provider (“primary” in the sense that a fund utilizes that thirdparty data provider more than others when making investment decisions)? If so,

should we provide additional instructions for funds to determine which scoring

provider is the primary third-party data provider? Should we, as proposed, require

funds to disclose more detailed information later in the prospectus about a thirdparty data provider’s and/or the fund’s internal methodologies? Does this

requirement strike an appropriate balance for providing investors with complete

information while providing investors an overview toward the beginning of the

prospectus that is not overwhelming? Should we, as proposed, require funds to

provide a description of their evaluation of the data quality from such providers?

When a fund uses multiple third-party data providers, should the fund disclose

how it considers conflicting assessments of companies by such providers?

45.

Would the proposed requirements regarding third-party data providers and

internal methodologies produce disclosure that would be difficult for retail

investors to understand? If so, are there ways in which we could tailor those

requirements to make that disclosure more accessible for retail investors? Would

an example of how the fund evaluates the quality of the third-party data

provider’s ESG information/analysis be helpful? Are there other ways, such as

through the use of various features (such as a chart, check-the-box, or bullet

points) that might be useful in helping an investor to understand the disclosure?

46.

The disclosure, as proposed, about any index that an ESG-Focused Fund tracks to

implement its ESG strategy is more information than what we require about other

indexes that funds may track. Would this disclosure be useful to an investor?

Would more or less information about how the fund tracks such ESG-focused

index be useful to an investor? Are there alternatives to this proposed disclosure

that we should consider?

47.

Would the disclosure, as proposed, about any index that the fund may track and

how the index utilizes ESG factors in determining its constituents; any internal

methodology or third-party data provider or combination thereof that the fund

may use; or any inclusionary or exclusionary screen that the fund may apply be

helpful to investors? Should any part of this information be required to be in the

ESG Strategy Overview Table?

48.

Do third-party data providers and indexes currently provide funds with the

information that we would be requiring ESG-Focused Funds to disclose later in

their prospectuses? What are the costs to a fund to obtain and disclose this

information from third-party providers?

49.

We are proposing that a fund disclose any third-party ESG frameworks it follows.

Is the level of detail about that third-party ESG framework appropriate? Should

we limit the scope of what is reported about the third-party ESG framework? If

so, how? Is there other information about the third-party ESG framework that

should be disclosed? If so, what types of information should be disclosed? Is there

additional information about how the fund follows the third-party ESG framework

that would be helpful?

50.

Are there any licensing or other issues that a fund would have to address if we

were to require a fund to, as proposed, disclose information concerning a thirdparty data provider, index, or any third-party ESG framework? If so, what might

those issues entail and how could we mitigate any concerns or costs while still

providing investors with complete information about the ESG investment

selection process?

51.

Are there any particular asset classes that ESG-Focused Funds would invest in

that should have specific disclosure requirements? For example, are there any

particular attributes of green bonds, social bonds and/or sustainability-linked

bonds that warrant specific disclosures tailored to these investments?

(2)

Impact Fund disclosure

In addition to the proposed disclosures described above, an Impact Fund, i.e., a fund that

selects investments to seek to achieve a specific ESG impact or impacts, would be required to

provide in the row “How [the Fund] incorporates [ESG] factors in its investment decisions” an

overview of the impact(s) the fund is seeking to achieve, and how the fund is seeking to achieve

the impact(s). The overview must include (i) how the fund measures progress toward the specific

impact, including the key performance indicators the fund analyzes, (ii) the time horizon the fund

uses to analyze progress, and (iii) the relationship between the impact the fund is seeking to

achieve and financial return(s). 81 As with other proposed requirements, the fund would provide a

more detailed description later in the prospectus to complement the overview provided in the

ESG Strategy Overview Table. 82

This information is designed to protect investors by providing them with specific

information concerning the impact(s) the fund seeks to achieve. Requiring the fund to disclose

Proposed Item 4(a)(2)(ii)(B), Instruction 7 of Form N-1A [17 CFR 274.11A]; Proposed Item 8.2.e.(2)(B),

Instruction 7 of Form N-2 [17 CFR 274.11a-1]. In addition, an Impact Fund would have to state that it

reports annually on its progress in achieving the impact in the Fund’s annual report. Proposed Item

27(b)(7)(i)(B) of Form N-1A [17 CFR 274.11A].

Proposed Instruction 2(f), Item 9(b)(2) of Form N-1A [17 CFR 274.11A]; Proposed Item 8.2.e.(2)(B),

Instruction 9.b.(5) of Form N-2 [17 CFR 274.11a-1].

the desired impact(s), as well as how the fund measures its progress toward achieving that impact

and the related time horizon, is designed to help an investor to understand and evaluate what

strategies the fund uses to achieve the impact(s). It also would address the risk of investors being

misled through exaggerated ESG claims by distinguishing Impact Funds from other kinds of

funds that have more general aspirations or goals, or from other ESG-Focused Funds,

particularly funds that primarily use inclusionary or exclusionary screens but without seeking to

achieve any specific ESG impact. In addition, requiring the fund to disclose relationship between

the impact(s) the fund is seeking to achieve and financial returns is designed to require funds to

disclose, if true, that financial returns are secondary to achieving the fund’s stated impact—or

conversely, that achieving the fund’s stated impact is intended to enhance financial returns. 83 We

believe an investor needs to understand this relationship to make an informed investment

decision.

For example, an Impact Fund might disclose that it seeks total return while pursuing

investment opportunities that finance the construction of affordable housing units. The fund also

would include how it measures progress toward this goal, such as disclosing that it reviews as a

key performance indicator the number of affordable housing units it financed annually. Finally,

the fund would discuss the relationship between its goal of financing affordable housing units

and its goal of seeking total return over, for example, a ten-year period. We believe such

information would allow an investor to evaluate if a fund’s specific impact(s) align with the

Letter from Federated Hermes to Vanessa Countryman (May 5, 2020) (discussing the distinction between

collateral benefits ESG and risk-return ESG and how that distinction turns on the investor’s motive, and

attaching Max Schanzenbach and Robert Sitkoff “Reconciling Fiduciary Duty and Social Conscience: The

Law and Economics of ESG Investing by a Trustee,” 72 Stan. L. Rev. 381 (Feb. 2020)) submitted in

Request for Comments on Fund Names, SEC File No. S7-04-20, available at

https://www.sec.gov/comments/s7-04-20/s70420-216512.pdf.

investor’s own objectives and to understand how the fund assesses progress in achieving the

impact.

In addition to disclosure in the ESG Strategy Overview table, we also are proposing to

require an Impact Fund to disclose in its investment objective the ESG impact that the fund seeks

to generate with its investments. 84 Open-end funds disclose their investment objectives at the

beginning of the prospectus. Because closed-end funds are not required to disclose their

investment objectives until later in the prospectus, the proposed instruction for closed-end funds

would require an Impact Fund to disclose the ESG impact that the fund seeks to generate with its

investments where the fund first describes its objective in the filing. 85 For both open- and closedend funds, this requirement is designed to highlight for investors any ESG-related impact an

Impact Fund is seeking to achieve, given that such specific or measurable impacts differentiate

Impact Funds from other ESG-Focused Funds. We request comment on all aspects of our

proposal with respect to disclosure by Impact Funds in the prospectus, including the following

items:

52.

Are Impact Funds appropriately considered a subset of ESG-Focused Funds, or

are they sufficiently distinct that they need a separate set of disclosure

requirements in the prospectus beyond the specific proposed instruction for

Impact Funds? Should we require additional disclosures for Impact Funds beyond

what we have proposed? Is there any disclosure about an Impact Fund we have

proposed that the Commission should not adopt?

Proposed instruction to Item 2 of Form N-1A [17 CFR 274.11A]; Proposed Instruction 10 to Item

8.2.e.(2)(B) of Form N-2 [17 CFR 274.11a-1].

Proposed Instruction 10 to Item 8.2.e.(2)(B) of Form N-2 [17 CFR 274.11a-1].

53.

Should we, as proposed, require an Impact Fund disclose the relationship between

the impact the Fund is seeking to achieve and financial return(s)? Should we

require this disclosure of all ESG-Focused Funds?

54.

Should we, as proposed, require an Impact Fund to disclose how it is seeking to

achieve its impact, including how it measures progress towards impact? Should

we instead define an Impact Fund as an ESG-Focused Fund that seeks to achieve

“measurable” ESG impact or impacts rather than define an ESG-Focused Fund as

a fund that seeks to achieve a specific impact, as proposed?

55.

Should we require, as proposed, an Impact Fund to describe the fund’s time

horizon for progressing on its impact objectives and any key performance

indicators that the fund uses to analyze or measure the effectiveness of the its

engagement?

56.

Should we, as proposed, require the statement that the fund reports annually on its

progress in achieving its impact in the fund’s annual report to shareholders or

annual report on Form 10-K as applicable? Would that statement be helpful to an

investor to be aware of an obligation by the fund to report progress, which the

investor may want to review in making an initial investment decision?

57.

Should we, as proposed, require an Impact Fund to disclose the ESG impact it is

seeking to generate in the fund’s investment objective section of the prospectus?

Should we, as proposed, require a closed-end fund to provide this disclosure

where the Impact Fund first describes its objective in the filing?

(3)

Proxy voting or engagement with companies

A common way for advisers to funds to advance ESG goals is through using their power

as an investor. 86 In most cases, a fund’s adviser votes the proxies of the fund’s portfolio

companies voting securities on the fund’s behalf. 87 In these cases, a fund adviser’s stewardship

can include strategies for how the fund will vote proxies on ESG-related voting matters that

arise. Further, advisers may engage with the management of issuers through meetings or

statements of policy. As a result, funds have significant power that can be used to influence the

actions of portfolio companies, whether through formal actions such as proxy voting or through

other forms of engagement such as meetings with management or statements of policy. Investors

have an interest in how funds in which they invest exercise their influence with regard to ESG

issues. 88 We are proposing additional disclosure on these topics to help investors in ESG-

See Letter from Morningstar to Chair Gensler (June 9, 2021) attaching Sustainable Funds U.S. Landscape

Report – More funds, more flows, and impressive returns in 2020, Morningstar Manager Research (Feb.

19, 2021) available at https://www.sec.gov/comments/climate-disclosure/cll12-8899329-241650.pdf;

Climate Action 100+, available at https://www.climateaction100.org/ (an initiative of more than 370

institutional investors that uses proxy voting power to ensure action on climate change); see, e.g.,

Managers Wield Proxy Votes to Target Corporate Governance, Lisa Fu, Fund Fire (Mar. 18, 2020)

available at

https://www.fundfire.com/c/2686753/328173/managers_wield_proxy_votes_target_corporate_governance.

Staff has observed that funds that invest in other parts of the capital structure, for instance through holding

debt or investing in asset-backed securities, also engage on ESG issues; discussion herein of fund

engagement with issuers also includes fund engagement as a debt holder, asset-backed security investor, or

similar stakeholder due to investment in an issuer.

See Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment

Companies, Investment Company Act Release No. 25922 (Jan. 31, 2003) [68 FR 6563 (Feb. 7, 2003)] (“NPX Adopting Release”), available at https://www.sec.gov/rules/final/33-8188.htm (recognizing that while

the fund’s board of directors, acting on the fund’s behalf, has the right and the obligation to vote proxies

relating to the fund’s portfolio securities, this function is typically delegated to the fund’s investment

adviser); see also Proxy Voting: Proxy Voting Responsibilities of Investment Advisers and Availability of

Exemptions from Proxy Rules for Proxy Advisory Firms, Staff Legal Bulletin No. 20 (IM/CF) (June 30,

2014), available at https://www.sec.gov/investment/slb20-proxy-voting-responsibilities-investmentadvisers at text accompanying n.4.

See also Enhanced Reporting of Proxy Votes by Management Investment Companies; Reporting of

Executive Compensation Votes by Institutional Investment Managers, Investment Company Act Rel. No.

34389 (Sept. 29, 2021) [86 FR 57478 (Oct, 15, 2021)]; see also Commission Guidance Regarding Proxy

Focused Funds understand how the fund’s adviser engages with portfolio companies on ESG

issues.

Specifically, we are proposing that funds for which engagement with issuers, either by

voting proxies or otherwise, is a significant means of implementing their ESG strategy check the

appropriate box in the first row of the ESG Strategy Overview Table. 89 A fund that checks either

the proxy voting or engagement box in the first row of the ESG Strategy Overview Table

indicating that proxy voting or engagement with issuers is a significant means of implementing

its ESG strategy would be required to provide a brief narrative overview in the last row of the

ESG Strategy Overview table of how the fund engages with portfolio companies on ESG issues.

This could include, for example, an overview of the fund’s voting of proxies and meetings with

management. 90 As discussed further below, a fund that does not check the box in the first row

would still be required to include this item in the ESG Strategy Overview Table and would

disclose that neither proxy voting nor engagement with issuers is a significant part of its

investment strategy.

Unlike other common strategies for which we are proposing check boxes in the first row

of the ESG Strategy Overview Table, where a fund would check the box as a result of any use of

the strategy described by the check box, we are proposing that a fund would only check the

boxes regarding proxy voting or engagement with issuers if either such strategy is a “significant”

Voting Responsibilities of Investment Advisers, Investment Company Act Rel. No. 33605 (Aug. 21, 2019)

[84 FR 47416 (Sept. 10, 2019)].

Proposed Item 4(a)(2)(ii)(B), Instructions 4 and 8 of Form N-1A [17 CFR 274.11A]; Proposed Item

8.e.(2)(B), Instructions 4 and 8 of Form N-2 [17 CFR 274.11a-1]. See also Section II.A.1.b.

Proposed Item 4(a)(2)(ii)(B), Instruction 8 of Form N-1A [17 CFR 274.11A]; Proposed Item 8.e.(2)(B),

Instruction 8 of Form N-2 [17 CFR 274.11a-1].

means of implementing the fund’s ESG strategy. 91 Funds that invest in voting securities

generally vote proxies they receive as a result, and without clarification, a fund may incorrectly

believe that simply voting on ESG proxy matters could be sufficient for the fund to check the

associated box in the ESG strategy overview row. Likewise, funds may hold meetings with

certain issuers on an infrequent or ad hoc basis rather than as a significant part of their strategy,

and may incorrectly believe that such infrequent or ad hoc engagement would be sufficient for

them to claim that engagement is a part of their strategy. We believe that the proposed additional

requirement for the fund to make proxy voting or other engagement a “significant” portion of its

strategy in order to check the associated box results in the strategy being appropriately limited to

funds that proactively use proxy voting or engagement with issuers as a means of implementing

of their ESG strategy. While a fund’s determination of whether either strategy is significant

would depend on the facts and circumstances, we generally believe a fund that regularly and

proactively votes proxies or engages with issuers on ESG issues to advance one or more

particular ESG goals the fund has identified in advance would be using voting and engagement

as a significant means to implement its strategy. 92

We are proposing that this overview identify the specific methods, both formal and

informal, that funds use to influence issuers. First, we are proposing that a fund would be

required to identify whether the fund has specific or supplemental proxy voting policies and

procedures that include one or more ESG considerations for companies in its investment

For example, a fund checking this box might pursue a strategy of purchasing securities of an issuer that is

performing poorly on ESG metrics, such as a company that has historically focused on fossil fuel

production that the fund believes does not have a strategy to allocate capital to other sectors of the energy

market, and run a proxy campaign to elect board members who it believes would promote a shift in its

capital allocation strategy.

Proposed Item 4(a)(2)(ii)(B), Instruction 4 of Form N-1A [17 CFR 274.11A]; Proposed Item 8.e.(2)(B),

Instruction 4 of Form N-2 [17 CFR 274.11a-1].

portfolio and, if so, state which ESG considerations those policies and procedures address. We

believe that investors will find it useful to be able to understand whether any such policies exist

in order to help them understand and evaluate the fund’s claims about its voting practices on

ESG voting matters.

Additionally, if an ESG-Focused Fund seeks to engage with issuers on ESG matters other

than through voting proxies, such as through meetings with or advocacy to management, the

fund would be required to disclose in this row an overview of the objectives it seeks to achieve

with its engagement strategy. We believe investors are interested in understanding a fund’s

engagement on ESG issues through means other than voting proxies when considering ESG

investments. 93 Finally, if the fund does not engage or expect to engage with issuers on ESG

issues, the Fund must provide that disclosure in the row. As is the case for funds’ voting policies,

we believe it is important for investors to understand if an ESG-Focused Fund does not engage

or expect to engage with issuers on ESG issues because investors may expect that an ESGFocused Fund that holds voting securities generally would engage with issuers on topics within

the fund’s ESG goals.

A fund that does not check the proxy voting box or the engagement box in the first row

would still be required to include this row in the ESG Strategy Overview Table and would

disclose that neither proxy voting nor engagement with issuers is a significant means of

implementing its investment strategy. Even though in many cases a fund may not use proxy

voting or engagement as a significant means of implementing its ESG engagement strategy, the

fund may still vote proxies if it holds voting securities, or it may engage with issuers on a limited

Funds have long discussed their practice of “behind the scenes” engagement. See, e.g., N-PX Adopting

Release, supra footnote 87, at Section II.B. The lack of consistent disclosure regarding this practice has

been highlighted by advisory groups. See, e.g., text accompanying note 27.

basis, and investors may wish to understand how it votes or engages on ESG issues. In addition,

we believe it is important for investors to understand if the fund does not vote proxies or engage

on ESG issues, as investors in an ESG-Focused Fund might otherwise be misled because they

reasonably expected the fund to engage in these practices. For example, we believe that investors

should understand when an ESG-Focused Fund holds voting securities but does not use proxy

voting or other engagement as a means of implementing their ESG strategy, as this may be

contrary to the investor’s expectations. For funds that invest only in non-voting securities, we

believe it would be helpful to state this fact for investors.

As with other ESG disclosures, we are proposing a layered disclosure approach for this

information. The concise disclosure provided by the fund would be in the ESG Strategy

Overview table and would be complemented by additional information in an open-end fund’s

statutory prospectus and later in a closed-end fund’s prospectus, which would provide investors

with complete information to evaluate a fund’s engagement while not overwhelming investors

with information at the front of the prospectus. Specifically, a fund that engages or expects to

engage with companies in its portfolio on ESG would be required to disclose specific

information on the objectives it seeks to achieve with its engagement strategy, including the

Fund’s time horizon for progressing on such objectives and any key performance indicators that

the Fund uses to analyze or measure of the effectiveness of such engagement. 94 Collectively,

these disclosures are designed to help an investor monitor how the fund engages on ESG issues,

for example by implementing the ESG strategies it advertises to investors, and to understand the

role of voting and engagement activity with respect to the fund’s ESG focus and strategy.

Proposed Instruction 2(f) to Item 9(b)(2) of Form N-1A [17 CFR 274.11A]; proposed Instruction 9.b.(6) to

Item 8.e.(2)(B) of Form N-2 [17 CFR 274.11a-1].

We request comment on all aspects of our proposal with respect to engagement

disclosure for ESG-Focused Funds, including the following items:

58.

Should we, as proposed, provide separate check boxes for proxy voting and

engagement? Should we, as proposed, include both proxy voting and engagement

in the row “How the Fund votes proxies and/or engages with companies about

[ESG] issues?” How commonly do funds voting proxies as a significant means of

implementing their ESG strategy also use engagement as a significant means of

implementing their ESG strategy, or vice versa? Do funds engage with issuers in

ways other than through voting proxies and meeting with management that we

should address in the disclosure rules? What are those other ways? Should we

require disclosure about those other ways of engaging with issuers? What would

that disclosure include?

59.

As proposed, any fund for which proxy voting or engagement with issuers is a

significant means of implementing the Fund’s ESG strategy would indicate it

pursues the applicable strategy by checking the box for proxy voting or

engagement (or both, as applicable). Should this be the case, even for a fund that

uses investment selection as the primary method for achieving its ESG goal? Is

the proposed requirement that proxy voting or engagement with issuers be a

“significant” means of implementing the fund’s ESG strategy clear? Should we

provide additional guidance on what constitutes a “significant” means of

implementing a fund’s ESG strategy? Should we provide that a fund’s proxy

voting would only be a “significant” means of implementing the fund’s ESG

strategy if the fund engages in activity beyond simply exercising its right to vote,

for example by developing or proposing initiatives directly? Should we provide

for additional requirements in order for a fund to check the applicable box

indicating that it uses proxy voting or engagement with issuers to implement its

ESG strategy?

60.

Should we, as proposed, require an ESG-Focused Fund that does not expect to

vote proxies or engage with issuers to provide such disclosure in the ESG

Strategy Overview table? If a fund does not expect to vote proxies or engage with

its issuers, should it be required to affirmatively state this fact, as proposed, or

would it instead be appropriate to require a different disclosure, such as a

statement that the row is “not applicable?” Would such disclosure help an investor

understand how a fund does or does not engage with issuers to implement its ESG

strategy? Are there circumstances in which an ESG-Focused Fund’s disclosure of

its proxy voting or engagement practices could result in the fund making

decisions that are not in the fund’s best interest? Should we provide an exception

from this disclosure for ESG-Focused Funds that do not expect to invest in voting

securities, or would describing such strategy provide investors with helpful

information? Should we require an ESG-Focused Fund that does not expect to

invest in voting securities to affirmatively disclose this fact to investors in the

ESG Strategy Overview table? Are there other ways in which funds that invest in

non-voting securities engage with issuers and, if so, should we modify the

proposed requirement to explicitly refer to such practices as being relevant

disclosure for purposes of this item?

61.

Is there additional information that should be disclosed in the statutory prospectus

about the ESG-Focused Fund’s specific or supplemental proxy voting policies

regarding how it votes on ESG issues? For example, should we require a fund to

provide a narrative description of its specific or supplemental proxy voting

policies regarding how it votes on ESG issues? Can those policies be described

briefly in a way that is understandable to investors? What other disclosure would

help an investor understand how the fund votes proxies on ESG issues?

Unit Investment Trusts

In addition to management investment companies, some UITs provide exposures to

portfolios selected based on ESG factors. 95 Accordingly, we are proposing to require these UITs

to provide investors with clear information about how portfolios are selected based on ESG

factors. The proposed amendment would require any UIT with portfolio securities selected based

on one or more ESG factors to explain how those factors were used to select the portfolio

securities. 96

A UIT, by statute, is an unmanaged investment company that invests the money that it

raises from investors in a generally fixed portfolio of stocks, bonds, or other securities. 97

According to public filings with the Commission, as of Oct. 26, 2021, there were 35 UITs registered on

Form S-6 that incorporated an ESG strategy.

See Proposed Instruction 2 to Item 11 of Form N-8B-2 under the Investment Company Act [17 CFR

274.12]. A UIT registers the trust on Form N-8B-2 under the Investment Company Act [17 CFR 274.12]

and each series of the trust on Form S-6 under the Securities Act of 1933 [17 CFR 239.16]. Form S-6

generally requires the registrant to provide in its prospectus the information required by the disclosure

items in Form N-8B-2. See Instruction 1. Information to be Contained in Prospectus of Form S-6 [17 CFR

239.16].

See 15 U.S.C. 80a-4(2) (defining a UIT, in part, to mean an investment company organized under a trust

indenture or similar instrument that issues redeemable securities, each of which represents an undivided

interest in a unit of specified securities).

Investors can review that portfolio before investing and, therefore, know the portfolio in which

they will be investing for the duration of their UIT investment. Unlike a management company, a

UIT does not trade its investment portfolio, and does not have a board of directors, officers, or an

investment adviser to render advice during the life of the UIT. In addition, UITs that do not serve

as variable insurance contract separate account vehicles or that are not ETFs typically have a

limited term of 12 to 18 months. 98

We designed our proposed amendment to provide UIT investors with the ability to

understand the role ESG factors played in the portfolio selection process. In contrast to the

amendments that we are proposing for other types of funds, the level of detail required by the

proposed amendment reflects the unmanaged nature of UITs. In particular, we are not proposing

to differentiate disclosure based on whether a UIT’s selection process was an integration model

or an “ESG-focused” model as the portfolio is fixed, and such model will not be used for

continued investment selection after the UIT shares are sold. UIT trustees generally engage in

“mirror voting” of shares, that is, vote the UITs’ shares in a portfolio company in the same

proportion as the vote of all other holders of the portfolio company’s shares. Accordingly, we are

not requiring disclosure of engagement with portfolio companies.

We request comment on all aspects of our proposed ESG disclosure for UITs, including

the following items:

Fund of Fund Arrangements, Investment Company Act Release No. 33329 (Dec. 19, 2018) [84 FR 1286

(Feb. 1, 2019)] at n. 169 (“Fund of Funds proposing release”). The proposed amendment does not require

insurance company separate accounts organized as UITs to provide additional ESG disclosure because

investors in those UITs allocate their investments to subaccounts invested in mutual funds that, in turn,

would provide any required disclosure under the proposal about their ESG investing. Further, the proposed

amendment does not have additional disclosure requirements for UITs operating as ETFs because, as of

Dec. 1, 2021, there were only five UITs that operated as ETFs and those ETFs do not pursue ESG

strategies, and because funds have not sought to create new ETF UITs for 19 years.

62.

Should the ESG disclosure requirement apply to UITs, as proposed? Should the

substantive disclosure requirement for UITs differ from that of other types of

funds, as proposed?

63.

A UIT invests the money that it raises from investors in a generally fixed portfolio

of stocks, bonds, or other securities. However, the focus of certain investments of

the UIT’s fixed portfolio might “drift” away from the ESG factors that formed the

basis for those investments’ inclusion in the portfolio during the UIT’s limited

term. Should the amendments address such situations?

64.

Are there elements of the proposed disclosure requirements for other types of

funds that we should require of UITs? For example, should we differentiate

disclosure requirements for UITs whose depositors integrate ESG factors and

those whose depositors used ESG factors as a more significant or main

consideration for portfolio selection? Are there currently any UITs for which the

depositor selected the securities for the UITs portfolio with the goal of achieving

one or more specific ESG impact and, if so, should we differentiate disclosure

requirements for such UITs?

65.

Should the Commission require ESG disclosure for all types of UITs, including

insurance company separate accounts organized as UITs and UITs operating as

ETFs?

66.

Should the ESG disclosure requirement for UITs address proxy voting? Are there

circumstances where the trustee would not “mirror” vote? If so, what are those

circumstances?

67.

Should the ESG disclosure requirements for UITs address ESG engagement? Are

there circumstances where the depositor, trustee, or principal underwriter engages

with issuers regarding ESG issues? If so, what are those circumstances, given the

unmanaged nature of UITs?

Fund Annual Report ESG Disclosure

In addition to the proposed amendments to fund prospectuses, we are proposing several

amendments to fund annual reports to provide additional ESG-related information. For registered

management investment companies, the proposed disclosure would be included in the

management’s discussion of fund performance (“MDFP”) section of the fund’s annual

shareholder report. Currently, the MDFP provides, among other things, a narrative discussion of

the factors that materially impacted the fund’s performance during the most recently completed

fiscal year, a line graph providing the account values for each of the most recently completed 10

fiscal years based on an initial $10,000 investment in the fund compared to the returns of an

appropriate broad based index for the same period, and a table showing the fund’s average

annual total returns for the past 1-, 5-, and 10-year periods. 99 Although funds have flexibility in

deciding what information they include in the MDFP, funds are required to disclose factors that

materially impacted the fund’s financial performance and operations. For BDCs, the proposed

In Aug. 2020, the Commission proposed a layered approach to the shareholder report disclosure framework

that would streamline the shareholder report delivered to shareholders, with additional information

available online upon request. As part of this proposal, the Commission proposed targeted amendments to

the MDFP requirements to make the disclosure more concise, but generally did not propose amendments to

the current content requirements of the MDFP. See Tailored Shareholder Reports, Treatment of Annual

Prospectus Updates for Existing Investors, and Improved Fee and Risk Disclosure for Mutual Funds and

Exchange-Traded Funds; Fee Information in Investment Company Advertisements, Investment Company

Act Release No. 33963 (Aug. 5, 2020) [85 FR 70716 (Nov. 5, 2020)] (“Streamlined Shareholder Report

Proposal”).

disclosure would be included in the management discussion and analysis, or “MD&A,” in the

fund’s annual report on Form 10-K. 100 That section of the annual report is similar to a fund’s

MDFP in that it requires a narrative discussion of the financial statements of the company and an

opportunity to look at a company “through the eyes of management.”

Specifically, we are proposing to require Impact Funds to discuss the fund’s progress on

achieving its impact in both qualitative and quantitative terms during the reporting period. 101 The

Impact Fund would also be required to discuss the key factors that materially affected the fund’s

ability to achieve its impact. Additionally, funds for which proxy voting is a significant means of

implementing their ESG strategy would be required to disclose certain information regarding

how the fund voted proxies relating to portfolio securities on ESG issues during the reporting

period. 102 Funds for which engagement with issuers on ESG issues through means other than

proxy voting is a significant means of implementing their ESG strategy would also be required to

disclose certain information about their engagement practices. 103 Finally, the proposal would

require an ESG-Focused Fund that considers environmental factors to disclose the aggregated

GHG emissions of the portfolio. 104 We discuss each of these proposed amendments below.

68.

Should we require funds to provide the impact, engagement, and GHG emissions

disclosure in their annual reports in the MDFP or MD&A as applicable, as

100

Proposed Instruction 10 to Item 24 of Form N-2 [17 CFR 274.11a-1]. BDC annual reports do not include

MDFP.

101

Proposed Item 27(b)(7)(i)(B) of Form N-1A; Proposed Instruction 4.(g)(1)(B) to Item 24 of Form N-2 [17

CFR 274.11a-1].

102

Proposed Item 27(b)(7)(i)(C) of Form N-1A; Proposed Instruction 4.(g)(1)(C) to Item 24 of Form N-2 [17

CFR 274.11a-1].

103

Proposed Item 27(b)(7)(i)(E) of Form N-1A; Proposed Instruction 4.(g)(1)(D) to Item 24 of Form N-2 [17

CFR 274.11a-1].

104

Proposed Item 27(b)(7)(i)(E) of Form N-1A; Proposed Instruction 4.(g)(1)(E) to Item 24 of Form N-2 [17

CFR 274.11a-1].

proposed? Should we instead require these disclosures to be in another regulatory

document such as the fund’s prospectus, or Forms N-CEN, N-CSR, or N-PORT?

Should we require the disclosure to be on the fund’s website? Are there any

modifications or enhancements to all the proposed disclosures in annual reports

and Forms N-CEN, N-CSR, or N-PORT that we should adopt? If the changes to

the shareholder report discussed above that the Commission proposed in August

2020 are adopted substantially as proposed, should we require this disclosure to

be included in one of the new sections that the Commission proposed to be added

to the report, such as the fund statistics section? Should we require funds to make

some or all these disclosures more frequently than annually? For example, should

registered investment companies provide the disclosure in both their annual and

semi-annual reports to shareholders? Would more frequent disclosure, such as

quarterly disclosure, be appropriate? Could more frequent reporting, for example,

help mitigate the potential for window dressing, i.e., buying or selling portfolio

securities shortly before the date as of which a fund’s investments are reported?

69.

We are not proposing to extend these requirements to UITs. 105 Because they are

unmanaged, we are not aware of any UITs that engage in impact investing, or

vote proxies or engage with issuers as a significant means of implementing an

ESG strategy. Should we require UITs to provide certain or all of the information

we are proposing to require to be included in funds’ annual reports? For example,

should we require UITs to provide additional information regarding their ESG

105

For this reason, for purposes of this Section II.A.3 of this release, the term “fund” does not include UITs.

impacts, results of their proxy voting, results of their ESG engagement, or GHG

emissions? How, or to what extent, should any such disclosure requirements

differ for UITs, which are not managed, and in the case of UITs that would be

covered by this proposal, typically have a limited term, sometimes of 12-18

months? Where should UITs provide the disclosure? For example, should a UIT

provide some or all of this disclosure on Form N-CEN?

70.

Should we, as proposed, require BDCs to provide certain or all of the information

we are proposing to require registered management investment companies to

include in MDFP? Is the proposed instruction in Form N-2 that a BDC should

provide this disclosure in Item 7 of its annual report filed under the Exchange Act

sufficiently clear? Are there instructions on Form N-2 or Form 10-K that we

should add?

ESG Impact Fund Disclosure

As discussed above, Impact Funds are seeking to achieve specific ESG impacts with their

investments. Therefore, how the fund performed with respect to the fund’s ESG impact is

relevant to investors, in addition to the currently required information about the fund’s financial

performance. Some Impact Funds voluntarily disclose information regarding their progress

towards achieving their impact in fund fact sheets, shareholder reports, or impact reports.

However, information provided to investors of Impact Funds varies across funds. Additionally,

voluntary disclosures without minimum requirements can create the potential for funds to

exaggerate their ESG-related accomplishments.

Accordingly, we believe that creating a common disclosure requirement in annual reports

specifically tailored to the ESG strategies of Impact Funds would provide investors who seek to

engage in impact investing with information to help these investors to make more informed

investment decisions and receive information to assist them in analyzing how effectively funds

in which they invest are achieving their ESG impacts. Specifically, we are proposing to require

an Impact Fund to summarize briefly the Fund’s progress on achieving its specific impact(s) in

both qualitative and quantitative terms during the reporting period, and the key factors that

materially affected the Fund’s ability to achieve the specific impact(s), on an annual basis in the

annual report. 106 For example, a community development fund that seeks to enhance services in

underserved communities by investing in the construction of community facilities may disclose

that, during the reporting period, the companies in which the fund invests constructed a specific

number of recreational centers in target communities. As another example, a fund that seeks to

conserve natural resources by investing in the construction of certified “green” buildings might

report the number of “green” buildings built by the fund’s portfolio companies over the reporting

period along with a qualitative discussion of how green buildings are defined and how they

contribute to conservation of natural resources.

This type of information would allow investors who are seeking, based on the examples

above, to enhance services in underserved communities or conserve natural resources with their

investments to evaluate, in both qualitative and quantitative terms, how their investment is

achieving their ESG goals in a given year and over time. It would also protect investors from

exaggerated claims about ESG impacts by requiring Impact Funds to substantiate such claims on

an annual basis by disclosing their progress. Additionally, to the extent different Impact Funds

106

Proposed Item 27(b)(7)(i)(B) of Form N-1A; Proposed Instruction 4.(g)(1)(B) to Item 24 of Form N-2 [17

CFR 274.11a-1]. This requirement would apply to any fund that meets the definition of Impact Fund

included in Item 4(a)(2)(i)(C) of Form N-1A and Item 8.2.e.(1)(C) of Form N-2. See supra Section

II.A.1.b.(2).

use the same or similar key performance indicators to measure their progress in achieving a

specific impact, this requirement would allow investors to compare different Impact Funds with

similarly stated ESG impacts.

We request comment on all aspects of our proposed amendments to require an Impact

Fund to report progress on achieving its specific impact on an annual basis in the annual report,

including the following items.

71.

Should we, as proposed, require Impact Funds to discuss their progress on

achieving its ESG impact? To what extent do affected funds already provide this

disclosure in their annual reports or elsewhere?

72.

Should we, as proposed, require the annual report disclosure for Impact Funds to

be in both qualitative and quantitative terms? Are there burdens or other issues

related to this requirement? Would this result in more comparable information

across funds? Are there impacts that commenters do not believe can be conveyed

effectively in quantitative terms? Should we allow, but not require, an Impact

Fund to provide a qualitative discussion and quantitative information? Should we

instead only require Impact Funds to provide a qualitative discussion of its

progress? Alternatively, should we require Impact Funds to provide their progress

only in quantitative terms?

73.

Instead of requiring an Impact Fund to disclose its progress towards achieving its

specific impact in the annual report as proposed, should we instead require it to be

disclosed in another regulatory document such as the fund’s prospectus, or Forms

N-CEN, N-CSR, or N-PORT? Should we allow the fund to omit the disclosure in

its annual report or other regulatory document if the fund provides the information

on its website? If so, should the regulatory documents provide a link to the

website?

74.

As discussed above, the Commission proposed amendments to fund shareholder

reports that would significantly shorten the shareholder reports and change its

contents. 107 If the amendments to shareholder reports in that proposal were

adopted, should the disclosure regarding an Impact Fund’s progress on achieving

its specific impact go in a different section of the shareholder report (other than

the MDFP) as the Commission proposed to amend it? For example, under the

proposed rule, the shareholder report would contain a new section entitled “fund

statistics,” where funds would be required to disclose certain key fund statistics,

including the fund’s net assets, total number of portfolio holdings, and portfolio

turnover rate. A fund would also be allowed to include additional statistics that

are reasonably related to a fund’s investment strategy. To the extent the proposed

rule is adopted, should we require or allow disclosure of an Impact Fund’s

progress towards achieving its specific impact to be included in the fund statistics

section of the proposed shareholder report?

75.

Are the proposed instructions for the disclosure by Impact Funds sufficiently

clear? Are there portions of the instructions that we should clarify? Are there

alternative instructions that would provide investors in Impact Funds with

meaningful information about a fund’s progress towards its objectives? For

example, if an Impact Fund changes the methodology it uses to calculate its

107

See Streamlined Shareholder Report Proposal, supra footnote 99.

progress towards achieving its specific impact, should the instructions require

such a fund to describe the change in methodology and the reasons for the

change?

76.

Should we require all ESG-Focused Funds and/or Integration Funds to provide

MDFP or MD&A disclosure regarding how effectively they implemented their

ESG strategies? For example, do ESG-Focused Funds that primarily use an

inclusionary or exclusionary screen track any key performance indicators to

analyze the effectiveness of the screen in furthering the ESG issues that are

relevant to fund? Do Integration Funds track any key performance indicators?

Would this disclosure of such key performance indicators be helpful to investors?

Would it lead to potential for investors to be misled through overemphasis of ESG

factors relative to such funds’ actual level of consideration of such factors?

ESG Proxy Voting Disclosure

We are also proposing amendments to fund annual reports to require an ESG-Focused

fund for which proxy voting is a significant means of implementing its ESG strategy to disclose

certain information regarding how it voted proxi

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