Following the SEC's approval this week of its climate disclosure rule for issuers, some expect the proposed rule for ESG funds and advisers to be imminent.
During a discussion at this year's Investment Advisers Association Compliance Conference, Mara Shreck, managing director in the regulatory affairs office at JPMorgan Chase, said the corporate disclosure rule had taken “a lot of oxygen out of the room.” Now that it's out, she expected the councilors' rule to follow “very quickly”.
Shreck and IAA President Karen Barr also agreed that because the SEC reduced the scope of the climate rule from previous versions, the industry can expect consistent advisor disclosure requirements.
“They've been consistent in understanding the parallels,” Shreck said. “I would expect they would be in step.”
The commission voted 3-2 this week to finalize a rule requiring issuers to disclose certain information about greenhouse gas emissions. SEC Chairman Gary Gensler told reporters at the IAA conference that investors would receive more “reliable and consistent” disclosures than what they currently receive from companies voluntarily.
But the rule was dropped from its original version, proposed nearly two years ago. In the final version, emitters will not have to disclose pollution from their supply chains known as Scope 3 emissions. (For many businesses, Scope 3 emissions account for up to 70% of their carbon footprint, according to Deloitte.)
Scope 1 and Scope 2 emissions (the emissions a company makes directly and indirectly, respectively) are also not required for smaller companies or “growth companies,” according to the IAA's Associate General Counsel, William Nelson, who moderated a panel at the IAA conference on ESG. industry updates.
In May 2022, the commission proposed a special rule related to ESG targeting “greenwashing”, aiming to get investors more information about which funds and advisors are serious about ESG and which are marketing on term rather than substance.
The proposed rule would require funds and investment advisers to provide detailed information on ESG strategies and methods in fund prospectuses, annual reports and adviser disclosure documents. In that time, The IAA generally upheld the rule but concerned that its wording could lead to firms overemphasizing ESG factors in their disclosures.
While the proposal affected asset managers the most, VNRs incorporating ESG strategies would also be affected, particularly by the proposed changes to Forms ADV.
However, Zeena Abdul-Rahman, a branch chief with the SEC's Division of Investment Management, noted during the briefing that the proposal allows for graduated levels of disclosure depending on the importance of ESG to a firm's strategy and marketing.
Gensler declined to comment on the details of the upcoming rule (including whether any changes to the climate issuer rule reflect changes in the ESG proposal), nor would he comment on the timing. But he said the rule at its core focused on advisers and funds practicing “truth in advertising”.
“It's about not misleading the public about what you're doing in a field,” he said. “Even under today's rules, the Names rule, the marketing rule, you don't have to mislead the public about what you're doing in a fund.”
The climate rule for issuers has already had a strong backlash, with investor protection advocates decrying the loss of Scope 3 mandates. At the same time, conservative critics said the commission was overstepping its authority.
Senator Tim Scott (RS.C.) said it planned to use the Congressional Review Act to try and overturn the rule, an effort Neil Simon, the IAA's vice president of government relations, said would not succeed. According to Simon, even if it were to pass both houses of Congress, President Joe Biden would likely veto it.
Still, litigation against the rule was all but inevitable, with Simon saying the U.S. Chamber of Commerce had Trump's former labor secretary Eugene Scalia “on speed dial.” Scalia has been a frequent litigant against Biden's policies.