Enhanced Disclosures by Certain Investment Advisers and Investment Companies About Environmental, Social, and Governance Investment Practices

Federal RegisterJun 17, 2022

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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

I. Introduction

A. Background

1. Development and Growth of ESG Investing

2. Characteristics of ESG-Related Investment Products and Services

3. The Need for Specific ESG Disclosure Requirements

B. Overview of the Proposal

II. Discussion

A. Proposed Fund Disclosures to Investors

1. Proposed Prospectus ESG Disclosure Enhancements

2. Unit Investment Trusts

3. Fund Annual Report ESG Disclosure

4. Inline XBRL Data Tagging

B. Adviser Brochure (Form ADV Part 2A)

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

1. Form N-CEN

2. Form ADV Part 1A Reporting

D. Compliance Policies and Procedures and Marketing

E. Compliance Dates

III. Economic Analysis

A. Introduction

B. Economic Baseline

1. Current Regulatory Framework

2. Affected Parties

3. Investor Interest in ESG Funds

4. Institutional Investor Engagement With Companies on ESG-Related Issues

5. Current Practices

C. Benefits, Costs and Effects on Efficiency, Competition, and Capital Formation of the Proposed Rule and Form Amendments

1. General Economic Benefits of ESG Disclosure

2. Investor and Client Facing Disclosures

3. Regulatory Reporting

D. Reasonable Alternatives

1. Uniform Narrative Disclosure Requirements for ESG-Integration and Focused Funds

2. More Standardized Disclosures

3. Alternative Approach to Layered Disclosure for Funds

4. More Granular Reporting for Advisers

5. GHG Metrics Reporting Requirements

6. Modified Inline XBRL Requirements

E. General Request for Comment

IV. Paperwork Reduction Act Analysis

A. Introduction

B. Form N-1A

C. Form N-2

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

E. Proposed Inline XBRL Data Tagging Requirements

F. Proposed New Annual Reporting Requirements under Rule 30e-1 and Exchange Act Periodic Reporting Requirements for BDCs

G. Form N-CEN

H. Form N-CSR

I. Form ADV

J. Request for Comments

V. Initial Regulatory Flexibility Analysis

A. Reason for and Objectives of the Proposed Action

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

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

3. Proposed Amendments to Form N-CEN

4. Proposed Amendments to Form N-CSR

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

B. Legal Basis

C. Small Entities Subject to the Rule and Rule Amendments

1. Proposed Amendments to Forms N-1A, N-2, N-8B-2, N-CEN, N-CSR, and S-6 and Fund Annual Reports

2. Proposed Amendments to Form ADV

D. Projected Reporting, Recordkeeping and Other Compliance Requirements 294

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

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

3. Proposed Amendments to Form N-CEN

4. Proposed Amendments to Form ADV

E. Duplicative, Overlapping, or Conflicting Federal Rules

F. Significant Alternatives

1. Proposed Amendments to Forms N-1A, N-2, N-8B-2, N-CEN, N-CSR, and S-6 and Fund Annual Reports

2. Proposed Amendments to Form ADV

G. Solicitation of Comments

VI. Consideration of Impact on the Economy Statutory Authority

I. Introduction

Many registered funds and investment advisers to institutional and retail clients consider environmental, social, and governance (“ESG”) factors in their investment strategies.

Investor interest in ESG strategies has rapidly increased in recent years with significant inflows of capital to ESG-related services and investment products.

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.

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/esg-investing-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,

U.S. 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 decision-making in portfolio management).

See also

Investment 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 website) 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”).

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 client-facing 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 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 ESG-related disclosures in a structured data language to make it easier for investors and others to analyze this data.

A. Background

1. 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.

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.

Since the mid-2000s, many financial institutions have signed on to climate and sustainability-related investment frameworks.

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.

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

and regulatory

frameworks have developed.

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).

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-issb-consolidation-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/ghg-protocol-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 determine to what extent economic activities are environmentally sustainable by reference to six environmental objectives).

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.

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.

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.

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.

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.

Another survey 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.

Moreover, funds are increasingly selecting fund names to signal ESG considerations or converting existing funds into ESG or “sustainable” funds.

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.

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.

See

Whyte, Amy, “More Institutions than Ever are Considering ESG. Will they Follow Through?”, Institutional Investor (Oct. 6, 2020),

available at https://www.institutionalinvestor.com/article/b1npm5yq50b024/More-Institutions-Than-Ever-Are-Considering-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-investing-survey-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.

2. 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.

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.

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

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.

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 three-part 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 company-specific factors like a price-to-earnings ratio.

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.

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.

“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.

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

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

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.

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.

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 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.

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.

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.

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.

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.

See

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).

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 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.

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.

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].

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,

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 decision-making if investors believe Integration Funds that consider GHG emissions do so in the same 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.

See infra

at text accompanying footnote 119.

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:

3. 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 under- inclusive? 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?

4. 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?

5. 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?

6. 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?

7. 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?

8. Is the placement of the proposed disclosure appropriate for funds? If not, is there a different place that would be more appropriate?

9. 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?

(b) 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.

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.

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.

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.

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 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.

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.

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.

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.

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 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.

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 ESG-Focused 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.

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.

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).

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 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.

The disclosure would be in the following tabular format:

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).

EP17JN22.008

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.

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.

To facilitate a layered disclosure approach, the amendments would require an ESG-Focused 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.

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.

We discuss the disclosure that would be required by each row of the table further below.

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 ESG-related 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 ESG-Focused 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.

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.

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.

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.

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?

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.

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.

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.

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 applicable common ESG strategy.

We discuss below each of the disclosures that would be required in this row, if applicable.

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].

Id.

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.

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.

Id.

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 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.

This disclosure would 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.

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].

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.

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.

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.

The required disclosures protect investors by providing them detailed information to help determine whether the fund's process for analyzing investments aligns with the ESG-related priorities of the investor.

Id.

See infra

section II.A.1.b.

See supra

footnote 33 and accompanying text.

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.

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.

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.

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.

For example, a fund tracking the XYZ Sustainability Index would disclose that it tracks this index and provide 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.

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].

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.

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.

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].

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.

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 frameworks, such as the United Nations Sustainable Development Goals (“UN SDG”) or the United Nations Principles for Responsible Investing (“UN PRI”).

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.

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].

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].

We request comment on all aspects of our proposal with respect to disclosure by ESG-Focused 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 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 ESG-Focused 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 third-party 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 third-party 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 third-party 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).

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.

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].

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 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.

We believe an investor needs to understand this relationship to make an informed investment decision.

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.

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 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.

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.

For both open- and closed-end 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:

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].

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?

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.

In most cases, a fund's adviser votes the proxies of the fund's portfolio companies voting securities on the fund's behalf.

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.

We are proposing additional disclosure on these topics to help investors in ESG-Focused Funds understand how the fund's adviser engages with portfolio companies on ESG issues.

See

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)] (“N-PX 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

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

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].

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” means of implementing the fund's ESG

strategy.

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.

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].

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 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.

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 ESG-Focused Fund that holds voting securities generally would engage with issuers on topics within the fund's ESG goals.

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.

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 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.

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?

2. Unit Investment Trusts

In addition to management investment companies, some UITs provide exposures to portfolios selected based on ESG factors.

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.

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].

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.

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.

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).

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.

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:

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?

3. 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.

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 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.”

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”).

100

Proposed Instruction 10 to Item 24 of Form N-2 [17 CFR 274.11a-1]. BDC annual reports do not include MDFP.

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.

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].

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 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 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?

105

For this reason, for purposes of this Section II.A.3 of this release, the term “fund” does not include UITs.

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?

(a) 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.

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).

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 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?

107

See

Streamlined Shareholder Report Proposal,

supra

footnote 99.

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 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?

(b) 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 proxies relating to portfolio securities on particular ESG-related voting matters.

108

Specifically, the proposed amendments would require the fund to disclose, in the MDFP or MD&A section of the annual report as applicable, the percentage of ESG-related voting matters during the reporting period for which the Fund voted in furtherance of the initiative.

109

The fund would be

permitted to limit the disclosure to voting matters involving ESG factors that the fund incorporates into its investment decisions. Additionally, a fund would be required to refer investors to the fund's full voting record filed on Form N-PX by providing a cross reference, and for electronic versions of the annual report, including a hyperlink, to the fund's most recent complete proxy voting record filed on Form N-PX.

110

108

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]. This requirement would apply to any fund that checks the proxy voting box included in the proposed amendments to Item 4 of Form N-1A and Item 8 of Form N-2.

See supra

Section II.A.1.b.(3).

109

Take, for example, a fund focused on deforestation. During the reporting period, the fund

was eligible to vote on 100 voting matters that would have limited deforestation. If the fund voted in favor of 75 of those matters, then the fund would report that it voted in furtherance of limiting deforestation 75% of the time during the reporting period.

110

The requirement to refer investors to the fund's full voting record filed on Form N-PX would not apply to BDCs because they do not file reports on Form N-PX.

We believe that this disclosure regarding the percentage of the fund's votes in furtherance of relevant ESG initiatives would complement the prospectus disclosure we are proposing funds to provide regarding how they use proxy voting to influence portfolio companies, as well as the existing granular report funds provide with their full proxy voting records on Form N-PX.

111

The proposed disclosure would allow an investor immediately to see the extent to which the fund was voting in favor of relevant ESG initiatives, while directing investors to the more detailed disclosure of the fund's voting record filed on Form N-PX for investors interested in that more detailed information.

111

The Commission has proposed amendments to Form N-PX that would require filers to select from a standardized list of categories to identify the subject matter of each of the reported proxy voting items, including categories of proxy votes relating to numerous ESG matters.

See

Enhanced Reporting of Proxy Votes by Registered Management Investment Companies; Reporting of Executive Compensation Votes by Institutional Investment Managers, Investment Company Act Release No. IC-34389 (Sep. 29, 2021) [86 FR 57478 (Oct. 15, 2021)]. Commenters on that proposal requested that the Commission propose additional comprehensive disclosure on funds' ESG engagement, whether by proxy voting or other means, to complement the disclosure on Form N-PX.

See

Letter from Vanguard Group Center regarding Enhanced Reporting of Proxy Votes by Registered Management Investment Companies; Reporting of Executive Compensation Votes by Institutional Investment Managers (File No. S7-11-21),

available at https://www.sec.gov/comments/s7-

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