[Federal Register Volume 87, Number 117 (Friday, June 17, 2022)]
[Proposed Rules]
[Pages 36654-36761]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-11718]



[[Page 36653]]

Vol. 87

Friday,

No. 117

June 17, 2022

Part III





Securities and Exchange Commission





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17 CFR Parts 200, 230, 232, et al.





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

  Federal Register / Vol. 87, No. 117 / Friday, June 17, 2022 / 
Proposed Rules  

[[Page 36654]]


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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.

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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 sec.gov">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 sec.gov">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

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    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.\1\ Investor interest in ESG 
strategies has rapidly increased in recent years with significant 
inflows of capital to ESG-related services and investment products.\2\ 
Asset managers, as key conduits for these investments, have responded 
to this increase in investor demand by creating and marketing funds and 
strategies that consider ESG factors in their selection process.\3\
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    \1\ 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.
    \2\ 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.
    \3\ 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, Boffo, 
Riccardo and Patalano, Robert, ``ESG Investing: Practices, Progress 
and Challenges'', Organization for Economic Co-operation and 
Development (``OECD''), (2020), available at https://www.oecd.org/finance/ESG-Investing-Practices-Progress-Challenges.pdf (noting that 
ESG investing has evolved in recent years to meet the demands of 
institutional and retail investors, as well as certain public sector 
authorities, that wish to better incorporate long-term financial 
risks and opportunities into their investment decision-making 
processes to generate long-term value).
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    Investors looking to participate in ESG investing face a lack of 
consistent, comparable, and reliable information among investment 
products and advisers that claim to consider one or more ESG factors. 
This lack of consistent, comparable, and reliable information can 
create a risk that a fund or adviser's actual consideration of ESG does 
not match investor expectations, particularly given that funds and 
advisers implement ESG strategies in a variety of ways.\4\ The lack of 
specific disclosure requirements tailored to ESG investing creates the 
risk that funds and advisers marketing such strategies may exaggerate 
their ESG practices or the extent to which their investment products or 
services take into account ESG factors. With respect to environmental 
and sustainability factors, this practice often is referred to as 
``greenwashing.'' The absence of a common disclosure framework also 
makes it difficult for investors to find the disclosures and to 
determine whether a fund's or adviser's ESG marketing statements 
translate into concrete and specific measures taken to address ESG 
goals and portfolio allocation. It also makes it difficult for 
investors to understand how effectively the strategy is implemented 
over time, and can frustrate investors' attempts to compare different 
ESG strategies across funds or advisers.
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    \4\ When referring to a ``fund'' in this release, we variously 
mean management investment companies registered on Form N-1A [17 CFR 
274.11A] or Form N-2 [17 CFR 274 11a-1], unit investment trusts 
registered on Form S-6 [17 CFR 239.16], and BDCs, but not private 
funds as defined under the Advisers Act.
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    The Commission's commitment to improving the information provided 
to investors in disclosures is longstanding. For example, the 
Commission has long required funds to provide key information about a 
fund's fundamental characteristics, while requiring advisers to provide 
clear information about their advisory businesses and the investment 
strategies they utilize or recommend to clients.\5\ Consistent with 
this goal, standardized disclosure of a fund's principal investment 
strategies and other key attributes, along with information about 
advisory practices, is integral to investors' understanding the 
specific types of investments or investment policies underlying certain 
strategies when making informed decisions about funds and advisers. As 
discussed below, the range of matters that different funds and advisers 
consider in implementing ESG strategies, in addition to the increased 
investor demand for investments in these strategies, requires strategy-
specific disclosures. That will improve information available to 
investors by providing investors with an interest in ESG investing with 
key information that is material to their investment decisions.
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    \5\ See Investment Company Act Release No. 23064 (Mar. 13, 1998) 
[63 FR 13916 (Mar. 23, 1998)] (amending Form N-1A to focus 
prospectus disclosure on key information to assist in investment 
decisions) and Investment Company Act Release No. 13436 (Aug. 12, 
1983) [48 FR 37928 (Aug. 22, 1983)] (adopting Form N-1A and its two-
part disclosure format permitting funds to provide investors with a 
simplified prospectus containing essential information along with a 
companion document called the ``Statement of Additional 
Information'' (``SAI'') with more detailed information). See also 
Investment 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'').
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    Accordingly, we are proposing various disclosure and reporting 
requirements to provide shareholders and clients improved information 
from funds and advisers that consider one or

[[Page 36656]]

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.\6\ Investor demand for ESG funds and advisory services has 
increased over the last decade, but consideration of ESG issues in 
investment decision making has deep roots. In the 1970s and 1980s, some 
asset managers began to integrate ESG factors into funds with social 
and environmental investment objectives, while the early 1990s saw the 
launch of the first ``socially responsible'' indexes.\7\ Since the mid-
2000s, many financial institutions have signed on to climate and 
sustainability-related investment frameworks.\8\ In addition, a number 
of organizations have formed to promulgate disclosure reporting 
frameworks that incorporate environmental measures including: the 
Climate Disclosure Standards Board, Global Reporting Initiative, 
Sustainability Accounting Standards Board, and International 
Sustainability Standards Board.\9\ These trends have accelerated in 
recent years as the asset management industry has increasingly focused 
on issues such as financing the transition from fossil fuels and 
mitigating risks associated with climate change, and additional 
voluntary \10\ and regulatory \11\ frameworks have developed.
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    \6\ 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.
    \7\ 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).
    \8\ 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.
    \9\ 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/.
    \10\ 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.
    \11\ 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[hyphen]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).
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    Statistics measuring fund flows and assets under management reflect 
the increasing prevalence of ESG investing in recent years. The size 
and scope of the asset management industry's ESG investing landscape 
varies significantly depending, for example, on the focus of the 
analysis, the assumptions made, and how much of this evolving area is 
measured. For example, the U.S. Forum for Sustainable and Responsible 
Investment (``US SIF'') states that since 1995, the ``U.S. sustainable 
investment universe'' has increased more than 25 times from $639 
billion to $17.1 trillion.\12\ Morningstar found that at the close of 
2020 the number of ``sustainable'' open-end funds and exchange-traded 
funds (``ETFs'') available to U.S. investors had experienced a nearly 
fourfold increase over the past decade with a significant acceleration 
beginning in 2015.\13\ In the same report, Morningstar states that 
sustainable funds have set records for inflows in each of the past 5 
years with more significant increases in 2019 and 2020.
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    \12\ 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.
    \13\ 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.
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    Investors and other market participants increasingly demand access 
to ESG-related investment services, products, and data, as, according 
to one survey, 42% of institutional investors say they consider ESG 
factors when making an investment decision.\14\ Another survey of 
professional fund

[[Page 36657]]

selectors and institutional investors indicated that 75% and 77% 
respectively believe that the consideration of ESG factors is integral 
to investment decision making.\15\ Moreover, funds are increasingly 
selecting fund names to signal ESG considerations or converting 
existing funds into ESG or ``sustainable'' funds.\16\ An analysis of 
Form N-PORT data indicates that 2.4 percent of all funds had names 
containing ``Sustainable,'' ``Responsible,'' ``ESG,'' ``Climate,'' 
``Carbon,'' or ``Green'' as of September 2021.\17\ The Forum for 
Sustainable and Responsible Investment has also documented continued 
growth in ESG funds, expanding from 55 funds in 1995, to 1,002 in 2016, 
and to 1,741 in 2020.\18\
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    \14\ 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.
    \15\ 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.
    \16\ 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).
    \17\ See infra text accompanying note 249.
    \18\ 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.
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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.\19\ First, 
ESG is an expansive term that incorporates three broad categories of 
interest for investors and asset managers: environmental issues, social 
issues, and governance issues.\20\ Some funds and advisers will 
consider only one issue under the ESG umbrella when making investment 
decisions, while others will apply the factors more broadly and 
implement measures across each of the ESG categories. Even those 
focusing on all three categories will have differing perspectives on 
what attributes of an issuer or investment fit within ESG.
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    \19\ See infra section III.B.3.
    \20\ 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.
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    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.\21\ In such strategies, ESG factors may be considered 
in the investment selection process but are generally not dispositive 
compared to other factors when selecting or excluding a particular 
investment.
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    \21\ 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.
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    ``ESG-Focused'' strategies focus on one or more ESG factors by 
using them as a significant or main consideration in selecting 
investments or in engaging with portfolio companies.\22\ For example, 
such ESG-Focused strategies might exclude or include certain 
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.
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    \22\ Unlike the terms ``integration'' and ``impact,'' which are 
currently used within this market, ``ESG-Focused'' is not currently 
a commonly used term and can encompass a number of ESG-related 
strategies and labels used in the market. See infra at Section II. 
See also, e.g., Funds' Use of ESG Integration and Sustainable 
Investing Strategies: An Introduction, Investment Company Institute, 
p. 5 (July 2020), available at https://www.ici.org/system/files/attachments/pdf/20_ppr_esg_integration.pdf. (discussing how 
sustainable investing strategies are distinct from ESG integration 
in that they use ESG analysis as a significant part of the fund's 
investment thesis) [hereinafter ICI White Paper]; A Practical Guide 
to ESG Integration for Equity Investing, Principles for Responsible 
Investment, available at: https://www.unpri.org/listed-equity/esg-integration-techniques-for-equity-investing/11.article.
---------------------------------------------------------------------------

    Finally, ``ESG Impact'' strategies have a stated goal that seeks to 
achieve a specific ESG impact or impacts that generate specific ESG-
related benefits.\23\ Impact strategies generally seek to target 
portfolio investments that drive specific and measurable environmental, 
social, or governance outcomes.\24\
---------------------------------------------------------------------------

    \23\ See Burton, M. Diane, Chadha, Gurveen, Cole, Shawn A., Dev, 
Abhishek, Jarymowycz, Christina, Jeng, Leslie, Kelley, Laura, 
Lerner, Josh, Palacios, Jaime R. Diaz, Xu, Yue (Cynthia), and 
Zochowski, Robert. ``Studying the U.S.-Based Portfolio Companies of 
U.S. Impact Investors,'' Harvard Business School Working Paper, No. 
21-130, (May 28, 2021), available at https://www.hbs.edu/ris/Publication%20Files/21-130_1fd65a3f-c144-4338-b319-7aa205339968.pdf 
(stating that impact investing is characterized by seeking both 
financial returns and a non-financial, social or environmental 
impact). For purposes of the proposed rule, we define Impact Funds 
as a subset of ESG-Focused Funds. See infra at II.A.1.b.
    \24\ ICI White Paper, at p. 8.
---------------------------------------------------------------------------

    Funds and advisers also vary in how they analyze, select, and 
manage investments to achieve their ESG objectives. Third-party service 
providers and ESG consultants (hereafter referred to as ``ESG 
providers'') have emerged that provide data to evaluate ESG factors, 
including issuer-specific ratings or scores. Some advisers and funds 
rely on these analyses and ratings, while others use them in 
combination with internal analyses. Other funds and advisers track 
indexes designed to select investments based on various ESG factors. 
Index providers are playing a large role in driving the flow of assets 
towards issuers that meet the indexes' ESG methodology.\25\
---------------------------------------------------------------------------

    \25\ See Fourth Annual IIA Benchmark Survey Reveals Significant 
Growth in ESG, Continued Multi-Asset Innovation & Heightened 
Competition (Oct. 28 2020), available at http://www.indexindustry.org/2020/10/28/fourth-annual-iia-benchmark-survey-reveals-significant-growth-in-esg-amid-continued-multi-asset-innovation-heightened-competition/.
---------------------------------------------------------------------------

    Funds and advisers also take differing approaches regarding how 
they engage on ESG issues with the issuers in which they invest, such 
as through proxy voting or manager engagement.\26\ ESG-Focused Funds 
and advisers often use proxy voting and other engagement with issuers 
in their portfolios as a more deliberate piece of their strategy than 
other investment products.\27\ As institutional investors increasingly 
integrate ESG into their engagement with portfolio companies and comply 
with their own internal ESG policies or investor mandates, proxy voting 
advice

[[Page 36658]]

businesses have sought to meet this demand by offering proxy voting 
recommendations that consider ESG factors.\28\ While funds are required 
to report information about how they vote proxies, less is disclosed 
regarding other engagements they may have with issuers in their 
capacity as a shareholder.\29\
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    \26\ In 2021, the Commission proposed amendments to Form N-PX to 
enhance the information mutual funds, exchange-traded funds, and 
certain other funds report about their proxy votes including votes 
on ESG issues. See Enhanced Reporting of Proxy Votes by Registered 
Management Investment Companies; Reporting of Executive Compensation 
Votes by Institutional Investment Managers (Sept. 29, 2021) [86 FR 
57478(Oct. 15, 2021)] available at: https://www.sec.gov/rules/proposed/2021/34-93169.pdf.
    \27\ See AMAC Recommendations, supra footnote 20 at 9-10 
(``experts consulted by the subcommittee . . . noted that ESG 
investment products engage in share ownership activities as a more 
deliberate piece of their strategy than many, but not all, other 
investment products . . . Investors in these ESG products, and other 
investment products, would benefit from clear, consistent statement 
[sic] regarding how ownership responsibilities are carried out by 
the product'').
    \28\ Investors are increasingly interested in proxy voting 
practices that consider ESG factors to influence company behavior. 
See, e.g., Peter Reali, Jennifer Grzech, and Anthony Garcia, ESG: 
Investors Increasingly Seek Accountability and Outcomes, Harvard Law 
School Forum on Corporate Governance, (Apr. 25, 2021), available at 
https://corpgov.law.harvard.edu/2021/04/25/esg-investors-increasingly-seek-accountability-and-outcomes/; see also Comment 
Letter of Gary Retelny, President and CEO, Institutional Shareholder 
Services Inc., available at https://www.sec.gov/comments/climate-disclosure/cll12-8914286-244666.pdf.
    \29\ See AMAC Recommendations, supra footnote 20 at 10 (``while 
the AMAC believes that the reporting of proxy voting is already well 
regulated, other ownership responsibilities, if significant to the 
product's strategy, should be noted'').
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3. The Need for Specific ESG Disclosure Requirements
    Currently, funds and registered advisers are subject to disclosure 
requirements concerning their investment strategies. Funds must provide 
disclosures concerning material information on investment objectives, 
strategies, risks, and governance, and management must provide a 
discussion of fund performance in the fund's shareholder report. 
Registered advisers are required to provide information about their 
advisory services in narrative format on Form ADV Part 2--often 
referred to as a brochure--describing their firm's methods of analysis 
and investment strategies, fees, conflicts, and personnel. General 
disclosures about ESG-related investment strategies fall under these 
disclosure requirements, and failure to adhere to current disclosure 
requirements violates Federal securities laws, but there are no 
specific requirements about what a fund or adviser following an ESG 
strategy must include in its disclosures.\30\
---------------------------------------------------------------------------

    \30\ See, e.g., In the Matter of Pax World Management Corp., 
Investment Advisers Act Release No. 2761 (July 30, 2008) (settled 
action) (alleging that despite investment restrictions disclosed in 
its prospectus, statement of additional information, and other 
published materials that it complied with certain socially 
responsible investing restrictions the fund purchased securities 
contrary to those representations and failed to follow its own 
policies and procedures requiring internal screening to ensure 
compliance with those restriction).
---------------------------------------------------------------------------

    While the Commission has not generally prescribed specific 
disclosures for particular investment strategies, ESG strategies differ 
in certain respects that we believe necessitate specific requirements 
and mandatory content to assist investors in understanding the 
fundamental characteristics of an ESG fund or an adviser's ESG strategy 
in order to make a more informed investment decision. First, the 
variation discussed above concerning ESG investing, combined with the 
lack of a more specific disclosure framework, increases the risk of 
funds and advisers marketing or labelling themselves as ``ESG,'' 
``green,'' or ``sustainable'' in an effort to attract investors or 
clients, when the ESG-related features of their investment strategies 
may be limited. Such exaggerations can impede informed decision-making 
as the labels may cause investors to believe they are investing in--and 
potentially are paying higher fees for--a ``sustainable'' strategy that 
may actually vary little from ones without such a label.\31\ 
Ultimately, this can frustrate investor expectations in the market for 
ESG investing, with some investors and market participants questioning 
whether and to what degree certain ESG funds are appreciably different 
than other types of funds.\32\ Requiring comparable, consistent, and 
reliable information from all funds and advisers that use an ESG label 
would reduce the risk of exaggerated claims of the role of ESG factors 
in investing, thereby increasing the efficiency and reliability with 
which investors seeking an ESG strategy can find a fund or adviser that 
meets their investing preferences, better protecting and serving 
investors in the market for ESG-related investing as a whole.
---------------------------------------------------------------------------

    \31\ See Wursthorn, Michael, ``Tidal Wave of ESG Funds Brings 
Profit to Wall Street'', The Wall Street Journal (Mar. 16, 2021), 
available at https://www.wsj.com/articles/tidal-wave-of-esg-funds-brings-profit-to-wall-street-11615887004 (noting that ETFs with 
strategies that focus on socially responsible investments have 
higher fees than ``standard ETFs'').
    \32\ Mackintosh, James, ``ESG Funds Mostly Track the Market'', 
The Wall Street Journal (Feb. 23, 2020), available at https://www.wsj.com/articles/esg-funds-mostly-track-the-market-11582462980 
(noting that an analysis found that ESG funds have inconsistent 
approaches, but on average hold slightly more technology stocks and 
fewer energy stocks than the S&P 500 index).
---------------------------------------------------------------------------

    In addition to the risk of exaggerated labels or claims, funds and 
advisers incorporating or focusing on ESG factors currently present 
inconsistent information concerning how they consider ESG factors in 
their investment strategies to investors, other market participants, 
and the Commission. We believe that a major reason for such 
inconsistency is the variety of perspectives concerning what ESG 
investing means, the issues or objectives it encompasses, and the ways 
to implement an ESG strategy. ``ESG investing,'' ``sustainable 
investing,'' or other terms can reasonably connote different investing 
approaches to different investors. Even when investors focus on the 
same ESG issue, such as climate change or labor practices, there are 
debates about how to address such issues, resulting in different, and 
sometimes opposing, assessments of whether a particular investment 
meets the investors' goals in furthering that issue.\33\ We believe 
that requiring funds and advisers to disclose with specificity their 
ESG investing approach can help investors and clients understand the 
investing approach the fund or adviser uses. It can also help investors 
compare the variety of emerging approaches, such as employment of an 
inclusionary or exclusionary screen, focus on a specific impact, or 
engagement with issuers to achieve ESG goals. The proposed rules would 
help draw out these distinctions and better inform investors by 
providing them with decision-useful information to compare, for 
example, two funds that both refer to their strategy as ``sustainable'' 
but employ different approaches and areas of focus to implement their 
sustainable strategy.
---------------------------------------------------------------------------

    \33\ Some have noted that the ``fluidity of the ESG rubric'' can 
lead to subjective application of ESG factors when applied to 
certain assets. For example, a recent journal article notes that one 
provider of ESG data and ratings found that about half of the ESG 
mutual funds it assessed scored as ``average or worse'' than non-ESG 
funds using the provider's own ESG scoring methodology, showing that 
managers often disagree on the ESG attributes of particular 
investments. In another example, the article posits that an issuer 
that investors may assess to be ``environmentally sound'' or 
``beneficial'' could have what it perceives to be weak corporate 
governance controls or mistreat its workforce leaving an investor 
with subjective judgments in weighting E versus S versus G factors. 
Lastly, the article notes that there is substantial debate around 
how to assess the climate impacts of issuers that rely on certain 
types of energy production and the relative environmental impacts 
and risks of coal, oil, natural gas, and nuclear energy. See 
Schanzenbach, Max and Sitkoff, Robert ``Reconciling Fiduciary Duty 
and Social Conscience: The Law and Economics of ESG Investing by a 
Trustee,'' 72 Stan. L. Rev. 381 (Feb. 2020), available at: https://ssrn.com/abstract=3244665.
---------------------------------------------------------------------------

    Further, ESG investment products can have risk/return objectives 
that reflect a longer time horizon and have objectives that extend 
beyond risk/return goals.\34\ Funds and advisers with ESG-related 
investing objectives can consider factors and measures in addition to 
those often used to measure financial return to manage the portfolio. 
They may also use additional key performance indicators specific to ESG 
objectives to assess the fund's or adviser's effectiveness in meeting 
these goals. Additionally, for ESG investing, investors might be more 
likely to have an interest in knowing

[[Page 36659]]

more about the investment selection and engagement process to ensure 
that the process aligns with the ESG-related values or priorities of 
the investor, rather than simply as a means for gauging effectiveness 
of the end result of financial return.\35\ Accordingly, we believe that 
specific ESG-related disclosures would enable an investor to understand 
and analyze funds' and advisers' ability to meet any ESG-related 
objectives and would complement existing disclosures regarding 
objectives related to financial returns by helping the investor 
understand the relationship between ESG-related objectives and 
financial return objectives.\36\
---------------------------------------------------------------------------

    \34\ See AMAC Recommendations, supra footnote 20 at p. 6.
    \35\ For example, investors often have differing priorities when 
it comes to ESG investment. Studies have shown that certain 
investors in socially responsible investments may be less sensitive 
to financial performance compared to other investors, perhaps 
because SRI investors derive utility from non-pecuniary attributes 
as well. See infra at text accompanying note 288.
    \36\ AMAC Recommendations, supra footnote 20, at 6-7.
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B. Overview of the Proposal

    In light of these observations, we are proposing to require 
additional specific disclosure requirements regarding ESG strategies to 
investors in fund registration statements, the management discussion of 
fund performance in fund annual reports, and adviser brochures.\37\ We 
believe that these disclosures would promote consistent, comparable, 
reliable--and therefore decision-useful--information for investors. 
These changes also would allow investors to identify funds more readily 
and advisers that do or do not consider ESG factors, differentiate how 
they consider ESG factors, and help inform their analysis of whether 
they should invest. To address exaggerated claims about ESG strategies, 
we are proposing minimum disclosure requirements for any fund that 
markets itself as an ESG-Focused Fund, and requiring streamlined 
disclosure for Integration Funds that consider ESG factors as one of 
many factors in investment selections. We also propose that funds tag 
their ESG disclosures using the Inline eXtensible Business Reporting 
Language (``Inline XBRL'') structured data language to provide machine-
readable data that investors and other market participants could use to 
more efficiently access and evaluate ESG funds. We believe that these 
requirements would provide improved transparency and decision-useful 
information to investors assisting them in making an informed choice 
based on their preferences for ESG investing.
---------------------------------------------------------------------------

    \37\ More specifically, we propose to amend Forms N-1A, N-2, N-
CSR, N-8B-2, S-6, N-CEN, and ADV Part 2A.
---------------------------------------------------------------------------

    To complement the disclosure in the prospectus, we are proposing to 
require that certain ESG-Focused Funds provide disclosures in their 
annual reports. Specifically, we are proposing that an Impact Fund 
summarize its progress on achieving its specific impact(s) in both 
qualitative and quantitative terms, and the key factors that materially 
affected the fund's ability to achieve the impact(s), on an annual 
basis. We also are proposing amendments to fund annual reports to 
require a fund for which proxy voting or other engagement with issuers 
is a significant means of implementing its strategy to disclose 
information regarding how it voted proxies relating to portfolio 
securities on particular ESG-related voting matters and information 
regarding its ESG engagement meetings.
    Finally, the Commission is proposing a requirement for ESG-Focused 
Funds that consider environmental factors. Specifically, we are 
proposing to require disclosure of two greenhouse gas (``GHG'') 
emissions metrics for the portfolio in such funds' annual reports. We 
believe the proposed information would provide quantitative metrics 
related to climate for investors focused on climate risk while also 
providing verifiable data from which to evaluate environmental claims. 
This information also would benefit those investors that have made net 
zero or similar commitments by helping them determine whether a 
particular investment is consistent with the commitment they have 
made.\38\ Disclosure of GHG metrics could better prevent exaggerated 
claims in this space by providing consistent, comparable, and reliable 
data that investors can use when reviewing funds that market themselves 
as focusing on climate factors in their investment processes. With 
access to GHG metrics, fund investors and market participants could 
review the relative carbon footprints and carbon intensity of ESG-
Focused Funds against comparable funds and determine whether a fund's 
climate or sustainability disclosures align with its actual GHG 
metrics.
---------------------------------------------------------------------------

    \38\ See Net Zero Asset Managers Initiative, Net Zero Asset 
Managers initiative announces 41 new signatories, with sector seeing 
`net zero tipping point' (July 6, 2021) available at: https://www.netzeroassetmanagers.org/net-zero-asset-managers-initiative-announces-41-new-signatories-with-sector-seeing-net-zero-tipping-point. See also Glasgow Financial Alliance for Net Zero: ``Our 
Progress and Plan Towards a Net-Zero Global Economy'' (Nov. 2021) 
available at: https://www.gfanzero.com/progress-report/.
---------------------------------------------------------------------------

    To complement the proposed ESG disclosures in fund registration 
statements and annual reports and adviser brochures, we are proposing 
to require certain ESG reporting on Forms N-CEN and ADV Part 1A, which 
are XML-structured forms on which funds and advisers, respectively, 
report census-type data. This reporting would provide the Commission, 
investors, and other market participants with structured data that can 
be used to understand industry trends in the market for ESG investment 
products and services.

II. Discussion

A. Proposed Fund Disclosures to Investors

1. Proposed Prospectus ESG Disclosure Enhancements
    We are proposing to require a fund engaging in ESG investing to 
provide additional information about the fund's implementation of ESG 
factors in the fund's principal investment strategies. The proposed 
amendments are designed to provide investors clear and comparable 
information about how a fund considers ESG factors.\39\ They also 
address the significant variability in the ways different funds 
approach the incorporation of ESG factors in their investment decisions 
by contemplating a range of strategies that funds use. The level of 
detail required by this enhanced disclosure would depend on the extent 
to which a fund considers ESG factors in its investment process. 
Additionally, because the information necessary to understand fully a 
fund's ESG methodology could lead to a large amount of disclosure, our 
proposed requirements contemplate layered disclosure. For example, 
open-end funds would provide an overview of their ESG strategy in the 
summary section of the prospectus, and would provide more details about 
the strategy in the statutory prospectus.\40\ We designed this layered 
disclosure approach to highlight key information for investors to help 
them make better informed investment decisions as well as to promote 
disclosure that is inviting and usable to a broad spectrum of 
investors. This approach is designed so

[[Page 36660]]

the additional information that may be interest to some investors is 
available through layered disclosure.\41\
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    \39\ This approach would complement existing requirements that 
funds use plain English and disclose essential information in a 
concise and straightforward manner to help investors make informed 
investment decisions about the fund. See, e.g., General Instructions 
B.4.(c) and C.1-3(c) of Form N-1A [17 CFR 274.11A]; General 
Instruction for Part A and General Instructions for Parts A and B of 
Form N-2 [17 CFR 274.11a-1].
    \40\ While Closed-End Funds do not utilize a summary section in 
their prospectuses, our proposed requirements for closed-end funds 
still utilize principles of layered disclosure by requiring certain 
items to appear earlier in the prospectus.
    \41\ The Commission has taken multiple steps that recognize 
investors' preferences for concise and engaging disclosure of key 
information as well ensure that additional information that may be 
of interest to some investors is available through layered 
disclosure. See, e.g., New Disclosure Option for Open-End Management 
Investment Companies, Investment Company Act Release No. 23065 (Mar. 
13, 1998) [63 FR 13968 (Mar. 23, 1998)]; Enhanced Disclosure and New 
Prospectus Delivery Option for Registered Open-End Management 
Investment Companies, Investment Company Act Release No. 28584 (Jan. 
13, 2009) [74 FR 4546 (Jan. 26, 2009)]; Updated Disclosure 
Requirements and Summary Prospectus for Variable Annuity and 
Variable Life Insurance Contracts, Investment Company Act Release 
No. 33814 (Mar. 11, 2020) [85 FR 25964 (May 1, 2020)]; see also 
Tailored Shareholder Reports, Treatment of Annual Prospectus Updates 
for Existing Investors, and Improved Fee and Risk Disclosure for 
Mutual Funds and Exchange-Traded Funds; Fee Information in 
Investment Company Advertisements, Investment Company Act Rel. No. 
33963 (Aug. 5, 2020) [85 FR 70716, 70720-21 (Nov. 5, 2020)] (stating 
that the ``vast majority of individual investors responding to 
questions in the Fund Investor Experience RFC about summary 
disclosure expressed a preference for summary disclosure . . . . 
[and that] Commenters' overall preference for summary disclosure is 
generally consistent with other information the Commission has 
received--through investor testing, surveys, and other information 
gathering--that similarly indicates that investors strongly prefer 
concise, layered disclosure'').
---------------------------------------------------------------------------

    Specifically, and as discussed further below, funds that meet the 
proposed definition of ``Integration Fund'' would provide more limited 
disclosures. ``ESG-Focused'' Funds, which would include, for example, 
funds that apply inclusionary or exclusionary screens, funds that focus 
on ESG-related engagement with the issuers in which they invest, and 
funds that seek to achieve a particular ESG impact, would be required 
to provide more detailed information in a tabular format.\42\ The 
proposed amendments would apply to open-end funds (including ETFs) and 
closed-end funds (including business development companies (``BDCs'')) 
that incorporate one or more ESG factors into their investment 
selection process.\43\
---------------------------------------------------------------------------

    \42\ Because we are proposing requirements specific to funds 
that seek to achieve a particular ESG impact, we are also proposing 
a distinct definition for this subset of ESG-Focused Funds. See 
infra at Section II.A.1.ii.
    \43\ For a BDC, certain proposed disclosure would be included in 
the management discussion and analysis, in the BDC's annual report 
on Form 10-K [17 CFR 249.310]. Also, a unit investment trust 
(``UIT'') would not be subject to the proposed annual report to 
shareholders requirements because a UIT is not required to provide 
management's discussion of fund performance (``MDFP'') disclosure in 
their annual reports.
---------------------------------------------------------------------------

    1. We are not proposing to define ``ESG'' or similar terms and, 
instead, we are proposing to require funds to disclose to investors (1) 
how they incorporate ESG factors into their investment selection 
processes and (2) how they incorporate ESG factors in their investment 
strategies. Is this approach appropriate? Should we seek to define 
``ESG'' or any of its subparts in the forms? Should we provide a non-
exhaustive list of examples of ESG factors in the forms? Should we 
define certain types of factors as being ESG but allow funds to add 
additional factors to that concept if they choose? Are there any other 
approaches that we should take in providing guidance to funds as to 
what constitutes ESG?
    2. Should these disclosure requirements apply to registered open-
end funds, registered closed-end funds, and BDCs, as proposed? Are 
there other substantive disclosure requirements that should differ 
based on the type of fund? Should our proposed disclosure requirements 
apply to insurance company separate accounts registered as management 
investment companies?
(a) Proposed Integration Fund Disclosure
    We are proposing to require an Integration Fund to summarize in a 
few sentences how the fund incorporates ESG factors into its investment 
selection process, including what ESG factors the fund considers. For 
example, an Integration Fund might provide a brief narrative of how it 
incorporates factors, or provide an example to illustrate how it 
considers ESG factors with other factors.\44\ This disclosure would be 
in addition to the information funds currently are required to provide 
in their prospectuses about their investments, risks, and performance. 
Open-end funds would provide this information in the summary section of 
the fund's prospectus, while closed-end funds, which do not use summary 
prospectuses, would disclose the information as part of the 
prospectus's general description of the fund.\45\
---------------------------------------------------------------------------

    \44\ For example, an Integration Fund might disclose that it 
invests in companies consistent with its objective of risk-adjusted 
return; that it considers ESG factors alongside financial, industry-
related and macroeconomic factors; that the specific ESG factors it 
evaluates are the impact and risk around climate change, 
environmental performance, labor standards, and corporate 
governance; and that its consideration of these factors would not 
necessarily result in a company being included or excluded from the 
evaluation process but rather would contribute to the overall 
evaluation of that company. Proposed Item 4(a)(2)(ii)(A) of Form N-
1A [17 CFR 274.11A]; proposed Item 8.(2)(e)(2)(A) of Form N-2 [17 
CFR 274.11a-1]. For purposes of section II.A.1., the term ``funds'' 
includes all management investment companies, including BDCs, but 
not unit investment trusts; see also General Instructions B.4.(c) 
and C.1.(a) of Form N-1A [17 CFR 274.11A]; General Instructions Part 
A: The Prospectus of Form N-2 [17 CFR 274.11a-1].
    \45\ 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.\46\ At the same time, we are not proposing more extensive 
disclosure requirements in the summary prospectus. Requiring a more 
detailed discussion of ESG factors could cause an Integration Fund to 
overemphasize the role ESG factors play in the fund's investment 
selection process by adding ESG disclosure requirements that could 
result in a more detailed description of ESG factors than other 
factors. This overemphasis could impede informed investment decisions 
because ESG factors discussed at length would not play a central role 
in the fund's strategy.\47\ For these reasons, we are proposing a 
layered disclosure approach for Integration Funds. Specifically, we are 
proposing to complement the concise description discussed above with a 
more detailed description of how an Integration Fund

[[Page 36661]]

incorporates ESG factors into its investment selection process in an 
open-end fund's statutory prospectus or later in a closed-end fund's 
prospectus.\48\ This more detailed description would provide 
information about the fund's integration of ESG factors in its 
investment strategy to facilitate informed decision making by providing 
investors more detail about the extent to which the fund considers 
those ESG factors as compared to other factors in the fund's investment 
selection process.\49\
---------------------------------------------------------------------------

    \46\ 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.
    \47\ 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.
    \48\ 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].
    \49\ 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.\50\ This disclosure must 
include a description of the methodology that the fund uses as part of 
its consideration of portfolio company GHG emissions. For example, an 
Integration Fund that considers GHG emissions might disclose that it 
considers the GHG emissions of portfolio companies within only certain 
``high emitting'' market sectors, such as the energy sector. The fund 
in this example would also be required to describe the methodology it 
uses to determine which sectors would be considered ``high emitting,'' 
as well as the sources of GHG emissions data the fund relied on as part 
of its investment selection process.
---------------------------------------------------------------------------

    \50\ 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,\51\ but Integration Funds 
might vary substantially in how they utilize GHG emissions metrics data 
or otherwise consider portfolio company GHG emissions, which can impede 
informed 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.
---------------------------------------------------------------------------

    \51\ 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,

[[Page 36662]]

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.\52\ Thus, ESG-Focused Funds under this 
proposed definition would include, for example, funds that track an 
ESG-focused index or that apply a screen to include or exclude 
investments in particular industries based on ESG factors.\53\ The 
category would likewise include a fund that has a policy of voting its 
proxies and engaging with the management of its portfolio companies to 
encourage ESG practices or outcomes.\54\
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    \52\ 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].
    \53\ 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.
    \54\ 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.\55\ 
Accordingly, any fund that markets itself, whether through its name or 
marketing materials as having an ESG focus, would be required to 
provide the proposed ESG Strategy Overview Table discussed below.\56\ 
We believe this aspect of the proposed definition can help deter funds 
from making exaggerated claims by requiring funds that market 
themselves as, for example, ``ESG,'' ``green,'' ``sustainable,'' or 
``socially conscious'' to provide specific information in their 
prospectuses to substantiate such claims.
---------------------------------------------------------------------------

    \55\ 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.
    \56\ 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.\57\ For 
example, a fund that invests with the goal of seeking current income 
while also furthering the fund's disclosed goal of financing the 
construction of affordable housing units would be an Impact Fund under 
the

[[Page 36663]]

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.\58\ We 
believe additional disclosure requirements are appropriate for these 
funds to clarify the impact the fund is seeking to achieve as well as 
to allow investors to evaluate the fund's progress in achieving that 
impact.
---------------------------------------------------------------------------

    \57\ 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].
    \58\ 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.\59\ The disclosure 
would be in the following tabular format:
---------------------------------------------------------------------------

    \59\ 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).
[GRAPHIC] [TIFF OMITTED] TP17JN22.008

    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

[[Page 36664]]

more easily as they make investment decisions.\60\
---------------------------------------------------------------------------

    \60\ 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.\61\ In an 
electronic version of the prospectus, that is, a prospectus posted on 
the fund's website, electronically delivered to an investor, or filed 
on EDGAR with the Commission, the fund also would be required to 
provide hyperlinks in the table to the related, more detailed 
disclosure later in the prospectus to help investors easily access the 
information.\62\ We discuss the disclosure that would be required by 
each row of the table further below.
---------------------------------------------------------------------------

    \61\ 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].
    \62\ 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.\63\ For example, a fund might disclose that it focuses 
on environmental factors, and in particular, on greenhouse gas 
emissions. Further, the fund would be required to include a list of 
common ESG strategies as indicated in the ESG Strategy Overview table 
and, in a ``check the box'' style, indicate all strategies in that list 
that apply.\64\ These check boxes would identify common ESG strategies, 
namely, the tracking of an index, the application of an exclusionary or 
inclusionary screen, impact investing, proxy voting, and engagement 
with issuers. An ESG-Focused Fund would not be required to check any of 
the boxes if none of the common ESG strategies applied to the fund, and 
instead, would check the ``other'' box.

[[Page 36665]]

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.
---------------------------------------------------------------------------

    \63\ 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].
    \64\ 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.\65\ Funds would be 
required to provide specific information in this row and supplement the 
overview in this row with a more detailed description later in the 
prospectus.\66\ The fund would provide specific information, in a 
disaggregated manner, with respect to each of the common ESG strategies 
applicable to the fund as identified by the ``check the box'' 
disclosure.\67\ For example, a fund would have to explain an 
inclusionary screen distinctly from an exclusionary screen. To help 
ensure this information would be presented in a clear format, a fund 
would be permitted to use multiple rows in the table or other text 
features to clearly identify the disclosure related to each applicable 
common ESG strategy.\68\ We discuss below each of the disclosures that 
would be required in this row, if applicable.
---------------------------------------------------------------------------

    \65\ 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].
    \66\ 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].
    \67\ 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].
    \68\ 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.\69\ In addition, such fund would be required to state the 
percentage of the portfolio, in terms of net asset value, to which the 
screen applies, if less than 100%, excluding cash and cash equivalents 
held for cash management and to explain briefly why the screen applies 
to less than 100% of the portfolio.
---------------------------------------------------------------------------

    \69\ 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

[[Page 36666]]

operational purposes, such as meeting redemptions.
    As with other items discussed in this row, the fund also would be 
required to provide a more detailed description of any inclusionary or 
exclusionary screen later in the prospectus. That disclosure would 
cover the factors applied by any inclusionary or exclusionary screen, 
including any quantitative thresholds or qualitative factors used to 
determine a company's industry classification or whether a company is 
engaged in a particular activity.\70\ This disclosure would 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.
---------------------------------------------------------------------------

    \70\ 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.\71\ We understand that some ESG-
Focused Funds evaluate, select, or exclude investments using internal 
methodologies, and/or base their investment decisions, at least in 
part, on the data or analysis of a third-party data provider, such as 
scoring or ratings provider, that evaluates or scores portfolio 
companies based on the provider's ESG criteria. This disclosure, if 
applicable, would help an investor understand how these methodologies 
and/or providers guide the fund's investment decisions. Specifically, 
we understand that different advisers or third-party data providers 
conducting internal analyses can disagree on how to analyze how 
companies fare on various ESG factors.\72\ Accordingly, funds that have 
a similar ESG strategy and focus could have different, sometimes even 
contradicting, views on an investment depending on the analysis the 
funds conduct or the third-party data provider they use.\73\ The 
required disclosures protect investors by providing them detailed 
information to help determine whether the fund's process for analyzing 
investments aligns with the ESG-related priorities of the investor.
---------------------------------------------------------------------------

    \71\ Id.
    \72\ See infra section II.A.1.b.
    \73\ See supra footnote 33 and accompanying text.
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    In addition, because the description of an internal methodology or 
third-party data provider's methodology can be lengthy, the summary in 
the table would be complemented by a more detailed description later in 
the prospectus.\74\ There, the fund would provide, if applicable, a 
more detailed description of any internal methodology used and how that 
methodology incorporates ESG factors. If the fund used a third-party 
data provider, the fund would provide a more detailed description of 
the scoring or ratings system used by the third-party data provider. We 
believe the placement of information about additional third-party data 
providers later in the prospectus balances the benefits of the 
information to investors regarding the use of third-party data 
providers generally, while encouraging brevity in the ESG Strategy 
Overview Table and limiting disclosure to those analyses most likely to 
directly influence investment selection. For both scoring providers and 
other third-party data providers, the disclosure would be required to 
include how the fund evaluates the quality of the data from such 
provider, which we believe would help protect investors by allowing 
them to assess the reliability of the information and the extent of the 
independent analysis performed by the fund's adviser.\75\
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    \74\ 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].
    \75\ 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.\76\ 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.
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    \76\ 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.\77\ 
The disclosure in the ESG Strategy Overview table would give investors 
an overview of the index's construction--and thus the fund's 
investments--with additional information in the prospectus about the 
index methodology thereby protecting investors by providing them 
sufficient information to determine whether an index's methodology 
aligns with the ESG-related priorities of the investor.
---------------------------------------------------------------------------

    \77\ 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.\78\ Consistent with our 
approach to the other disclosure items required by the row, the fund 
would provide an overview of those standards in the row, with the more 
detailed description of any applicable ESG framework and how it applies 
to the fund later in the prospectus. We recognize that many advisers to 
ESG-Focused Funds have expressed a commitment to follow frameworks, 
such as the United Nations Sustainable Development Goals (``UN SDG'') 
or the United Nations Principles for Responsible Investing (``UN 
PRI'').\79\ In these cases, requiring a fund to disclose that the 
fund's investments will follow such a framework would help an investor 
understand how the fund considers such ESG frameworks in its investment 
strategy. For example, under the proposed amendments, a fund might 
disclose in its ESG Strategy Overview table that the fund's investment 
objective is to seek long-term capital appreciation while also 
contributing to positive societal impact aligned to the UN SDG by 
limiting the fund's investments to companies that contribute to at 
least one of those goals. The fund would then be required to disclose 
later in its prospectus more information about any UN SDG goal on which 
the fund focuses and how the fund determines that a portfolio company 
contributes to that goal.\80\
---------------------------------------------------------------------------

    \78\ 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].
    \79\ 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.
    \80\ 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].

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[[Page 36667]]

    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,

[[Page 36668]]

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).\81\ As with other proposed 
requirements, the fund would provide a more detailed description later 
in the prospectus to complement the overview provided in the ESG 
Strategy Overview Table.\82\
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    \81\ 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].
    \82\ 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.\83\ We believe an investor needs to 
understand this relationship to make an informed investment decision.
---------------------------------------------------------------------------

    \83\ 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

[[Page 36669]]

disclose in its investment objective the ESG impact that the fund seeks 
to generate with its investments.\84\ Open-end funds disclose their 
investment objectives at the beginning of the prospectus. Because 
closed-end funds are not required to disclose their investment 
objectives until later in the prospectus, the proposed instruction for 
closed-end funds would require an Impact Fund to disclose the ESG 
impact that the fund seeks to generate with its investments where the 
fund first describes its objective in the filing.\85\ For both open- 
and 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:
---------------------------------------------------------------------------

    \84\ 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].
    \85\ 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.\86\ In most cases, a fund's adviser 
votes the proxies of the fund's portfolio companies voting securities 
on the fund's behalf. \87\ In these cases, a fund adviser's stewardship 
can include strategies for how the fund will vote proxies on ESG-
related voting matters that arise. Further, advisers may engage with 
the management of issuers through meetings or statements of policy. As 
a result, funds have significant power that can be used to influence 
the actions of portfolio companies, whether through formal actions such 
as proxy voting or through other forms of engagement such as meetings 
with management or statements of policy. Investors have an interest in 
how funds in which they invest exercise their influence with regard to 
ESG issues.\88\ We are proposing additional disclosure on these topics 
to help investors in ESG-Focused Funds understand how the fund's 
adviser engages with portfolio companies on ESG issues.
---------------------------------------------------------------------------

    \86\ See Letter from Morningstar to Chair Gensler (June 9, 2021) 
attaching Sustainable Funds U.S. Landscape Report--More funds, more 
flows, and impressive returns in 2020, Morningstar Manager Research 
(Feb. 19, 2021) available at https://www.sec.gov/comments/climate-disclosure/cll12-8899329-241650.pdf; Climate Action 100+, available 
at https://www.climateaction100.org/ (an initiative of more than 370 
institutional investors that uses proxy voting power to ensure 
action on climate change); see, e.g., Managers Wield Proxy Votes to 
Target Corporate Governance, Lisa Fu, Fund Fire (Mar. 18, 2020) 
available at https://www.fundfire.com/c/2686753/328173/managers_wield_proxy_votes_target_corporate_governance. Staff has 
observed that funds that invest in other parts of the capital 
structure, for instance through holding debt or investing in asset-
backed securities, also engage on ESG issues; discussion herein of 
fund engagement with issuers also includes fund engagement as a debt 
holder, asset-backed security investor, or similar stakeholder due 
to investment in an issuer.
    \87\ 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 Proxy Voting: Proxy Voting 
Responsibilities of Investment Advisers and Availability of 
Exemptions from Proxy Rules for Proxy Advisory Firms, Staff Legal 
Bulletin No. 20 (IM/CF) (June 30, 2014), available at https://www.sec.gov/investment/slb20-proxy-voting-responsibilities-investment-advisers at text accompanying n.4.
    \88\ See also Enhanced Reporting of Proxy Votes by Management 
Investment Companies; Reporting of Executive Compensation Votes by 
Institutional Investment Managers, Investment Company Act Rel. No. 
34389 (Sept. 29, 2021) [86 FR 57478 (Oct, 15, 2021)]; see also 
Commission Guidance Regarding Proxy Voting Responsibilities of 
Investment Advisers, Investment Company Act Rel. No. 33605 (Aug. 21, 
2019) [84 FR 47416 (Sept. 10, 2019)].
---------------------------------------------------------------------------

    Specifically, we are proposing that funds for which engagement with 
issuers, either by voting proxies or otherwise, is a significant means 
of implementing their ESG strategy check the appropriate box in the 
first row of the ESG Strategy Overview Table.\89\ A fund that checks 
either the proxy voting or engagement box in the first row of the ESG 
Strategy Overview Table indicating that proxy voting or engagement with 
issuers is a significant means of implementing its ESG strategy would 
be required to provide a brief narrative overview in the last row of 
the ESG Strategy Overview table of how the fund engages with portfolio 
companies on ESG issues. This could include, for example, an overview 
of the fund's voting of proxies and meetings with management.\90\ As 
discussed further below, a fund that does not check the box in the 
first row would still be required to include this item in the ESG 
Strategy Overview Table and would disclose that neither proxy voting 
nor engagement with issuers is a significant part of its investment 
strategy.
---------------------------------------------------------------------------

    \89\ Proposed Item 4(a)(2)(ii)(B), Instructions 4 and 8 of Form 
N-1A [17 CFR 274.11A]; Proposed Item 8.e.(2)(B), Instructions 4 and 
8 of Form N-2 [17 CFR 274.11a-1]. See also Section II.A.1.b.
    \90\ 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

[[Page 36670]]

strategy.\91\ Funds that invest in voting securities generally vote 
proxies they receive as a result, and without clarification, a fund may 
incorrectly believe that simply voting on ESG proxy matters could be 
sufficient for the fund to check the associated box in the ESG strategy 
overview row. Likewise, funds may hold meetings with certain issuers on 
an infrequent or ad hoc basis rather than as a significant part of 
their strategy, and may incorrectly believe that such infrequent or ad 
hoc engagement would be sufficient for them to claim that engagement is 
a part of their strategy. We believe that the proposed additional 
requirement for the fund to make proxy voting or other engagement a 
``significant'' portion of its strategy in order to check the 
associated box results in the strategy being appropriately limited to 
funds that proactively use proxy voting or engagement with issuers as a 
means of implementing of their ESG strategy. While a fund's 
determination of whether either strategy is significant would depend on 
the facts and circumstances, we generally believe a fund that regularly 
and proactively votes proxies or engages with issuers on ESG issues to 
advance one or more particular ESG goals the fund has identified in 
advance would be using voting and engagement as a significant means to 
implement its strategy.\92\
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    \91\ 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.
    \92\ 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.\93\ Finally, if 
the fund does not engage or expect to engage with issuers on ESG 
issues, the Fund must provide that disclosure in the row. As is the 
case for funds' voting policies, we believe it is important for 
investors to understand if an ESG-Focused Fund does not engage or 
expect to engage with issuers on ESG issues because investors may 
expect that an ESG-Focused Fund that holds voting securities generally 
would engage with issuers on topics within the fund's ESG goals.
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    \93\ 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.
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    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.\94\ Collectively, these disclosures are designed to help an 
investor monitor how the fund engages on ESG issues, for example by 
implementing the ESG strategies it advertises to investors, and to 
understand the role of voting and engagement activity with respect to 
the fund's ESG focus and strategy.
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    \94\ 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].
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    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

[[Page 36671]]

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.\95\ Accordingly, 
we are proposing to require these UITs to provide investors with clear 
information about how portfolios are selected based on ESG factors. The 
proposed amendment would require any UIT with portfolio securities 
selected based on one or more ESG factors to explain how those factors 
were used to select the portfolio securities.\96\
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    \95\ 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.
    \96\ 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].
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    A UIT, by statute, is an unmanaged investment company that invests 
the money that it raises from investors in a generally fixed portfolio 
of stocks, bonds, or other securities.\97\ Investors can review that 
portfolio before investing and, therefore, know the portfolio in which 
they will be investing for the duration of their UIT investment. Unlike 
a management company, a UIT does not trade its investment portfolio, 
and does not have a board of directors, officers, or an investment 
adviser to render advice during the life of the UIT. In addition, UITs 
that do not serve as variable insurance contract separate account 
vehicles or that are not ETFs typically have a limited term of 12 to 18 
months.\98\
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    \97\ 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).
    \98\ 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.
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    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?

[[Page 36672]]

    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.\99\ 
Although funds have flexibility in deciding what information they 
include in the MDFP, funds are required to disclose factors that 
materially impacted the fund's financial performance and operations. 
For BDCs, the proposed 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.''
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    \99\ 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.
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    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.
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    \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].
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    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?
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    \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.

[[Page 36673]]

    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.
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    \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

[[Page 36674]]

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\
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    \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.
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    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/s7-11-21/s71121-20109559-263921.pdf.
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    We request comment on all aspects of these proposed amendments, 
including the following items.
    77. Should we, as proposed, require any fund that indicates that it 
uses proxy voting as a significant means of implementing its ESG 
strategy to disclose the percentage of voting matters during the 
reporting period for which the fund voted in furtherance of the 
initiative? Should we permit the fund to limit this disclosure to 
voting matters involving the ESG factors the fund incorporates into its 
investment decisions, as proposed? Would investors and other market 
participants find this information helpful? Is there any additional 
information regarding their proxy voting that we should require funds 
to provide?
    78. Are there any complexities with calculating the aggregate 
percentage of fund votes in furtherance of an ESG voting matter? For 
example, to what extent would there be ambiguity as to whether a voting 
matter involves the ESG factors the fund incorporates into its 
investment decisions? Are there cases in which it may be unclear 
whether or not a shareholder proposal that relates to an ESG factor a 
fund incorporates into its investment decisions advances the particular 
ESG goal? Could there be situations in which a shareholder proposal may 
be related to a particular ESG factor the fund incorporates into its 
investment decisions but the fund nonetheless votes against the 
proposal, for instance because it believes the proposal would not be a 
constructive way to address the particular ESG matter? Would funds that 
wish to provide additional context in these or similar situations be 
able to do so effectively and concisely within the MDFP or MD&A 
disclosure?
    79. Should funds be required to provide a narrative explanation of 
how they cast their proxy votes on ESG matters, either instead of or in 
addition to statistics on ESG matters? If we required a narrative, what 
elements should a fund be required to include?
    80. Should we, as proposed, require funds to provide cross-
references to the more detailed disclosure regarding the fund's full 
proxy voting record on Form N-PX? Should we also require funds to cross 
reference their ESG proxy voting policies and procedures?
(c) ESG Engagement Disclosure
    We are proposing amendments to fund annual reports that would 
require funds for which engagement with issuers through means other 
than proxy voting is a significant means of implementing their ESG 
strategy to disclose progress on any key performance indicators of such 
engagement.\112\ The amendments we are proposing also require 
disclosure of the number or percentage of issuers with whom the fund 
held ESG engagement meetings during the reporting period related to one 
or more ESG issues and total number of ESG engagement meetings. Funds 
have previously asserted that much of their influence is asserted in 
private communications outside of formal shareholder votes.\113\ We 
believe that this disclosure would allow investors to evaluate 
critically the disclosure of funds whose ESG strategy involves 
engagement other than or in addition to proxy voting in order to reduce 
the potential for exaggerated claims of engagement, as well as to allow 
investors to understand better whether these funds are accomplishing 
their objectives.\114\
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    \112\ See Proposed Item 27(b)(7)(i)(D) of Form N-1A; Proposed 
Instruction 4.(g)(1)(D) to Item 24 of Form N-2.
    \113\ See N-PX Adopting Release, supra footnote 87, at Section 
II.B (``[C]ommenters argued that mandatory disclosure of proxy votes 
would undermine their ability to change corporate governance 
practices of portfolio companies through `behind the scenes' private 
communications''). Public interest groups have noted the influence 
that may be wielded through engagement meetings and have suggested 
that the nonpublic nature of such meetings makes it difficult for 
investors to understand whether their interests are being served. 
See Letter from Mercatus 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/s7-11-21/s71121-9374387-262127.pdf.
    \114\ See also Section I.A.3 (discussing need for a disclosure 
framework that allows investors to understand specific information 
about an ESG investment strategy in light of the different 
approaches taken by ESG investors).
---------------------------------------------------------------------------

    We are proposing to define ``ESG engagement meeting'' for this 
purpose to mean a substantive discussion with management of an issuer 
advocating for one or more specific ESG goals to be accomplished over a 
given time period, where progress that is made toward meeting such goal 
is measurable, that is part of an ongoing dialogue with management 
regarding this goal. This definition is intended to identify 
substantive interactions on ESG issues and distinguish an ``ESG 
engagement meeting'' for this purpose from other meetings or 
interactions for which advocacy on ESG issues is not a focus, or from 
aspects of a fund's ESG engagement strategy that are not directed to a 
particular company, such as letters to all issuers in a fund's 
portfolio or policy statements describing a fund's ESG priorities. For 
example, if a fund adviser met with management of an issuer in the 
fossil fuel industry to urge the issuer to divest carbon-intensive 
assets by the year 2030 due to their impact on the environment, with a 
list of measurable interim steps that could be made in each period and 
a follow-up meeting scheduled with management in six months to discuss 
progress toward that goal, the each such meeting would be an ESG 
engagement

[[Page 36675]]

meeting under the proposed definition.\115\
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    \115\ In many cases, we recognize that fund advisers meet with 
management of issuers on behalf of several funds they advise. When 
an adviser meets with management of an issuer on behalf of multiple 
funds, each fund for which the meeting is within its ESG strategy 
would count the engagement meeting in its annual report. See 
proposed Item 27(b)(7)(i)(D) of Form N-1A; proposed Instruction 
4.(g)(1)(D) to Item 24 of Form N-2.
---------------------------------------------------------------------------

    We recognize that funds may be incentivized to report a higher 
number or percentage of engagements, and this may result in funds 
construing the term ``ESG engagement meeting'' differently. For 
example, certain funds could perceive pressure to report a high number 
or percentage of engagements and thus adopt a more expansive 
understanding of what constitutes an engagement than an investor would 
expect. In order to support compliance with the Federal securities 
laws, funds should generally consider including in their compliance 
policies and procedures a requirement that employees memorialize the 
discussion of ESG issues, for example by creating and preserving 
meeting agendas and contemporaneous notes of engagements relating to 
ESG issues to assure accurate reporting on the number of engagements, 
as we propose to define it.\116\
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    \116\ See 17 CFR 270.38a-1 under the Investment Company Act and 
Investment Company Act Section 34(b) [15 U.S.C. 80a-33(b)].
---------------------------------------------------------------------------

    On the other hand, a ``meet and greet'' between a fund's adviser 
and the management of an issuer in the fossil fuel industry where the 
topic is mentioned, but only at a high level would be unlikely to meet 
the definition, even if the adviser and the issuer's management do 
discuss transitioning away from fossil fuels. Likewise, a fund adviser 
that issues a press release announcing a policy that issuers in its 
portfolio will be expected to divest from their carbon-intensive assets 
by 2030 due to their impact on the environment could not treat this 
press release as an ESG engagement meeting because it is not tailored 
to the operations of a particular company and does not actually 
interact or engage with anyone at the company, but instead is part of a 
dialogue with the public, rather than the issuer.\117\
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    \117\ After issuing the press release, the fund adviser may 
follow up with a particular issuer to discuss the specific ways in 
which the policy announced in the press release would impact the 
issuer's business and identify specific goals the fund expected the 
issuer to achieve. Such a meeting would generally constitute an ESG 
engagement meeting because, unlike a press release or open letter, 
the fund and the issuer actually discussed how it should be applied 
to the issuer.
---------------------------------------------------------------------------

    We recognize that, unlike the proposed disclosure requirements 
relating to a fund's proxy voting, the level of subjectivity involved 
in determining whether a discussion meets the definition of an ESG 
engagement meeting could diminish the comparability across funds of the 
statistics reported pursuant to this instruction. While this metric is 
only one of several means by which investors could compare ESG-Focused 
Funds, we believe that it is important to provide this information for 
investors to allow them to evaluate the efficacy of their fund's 
engagement activities and to provide some basis for comparison among 
funds. Though there may be some ambiguities in the inputs for the 
calculation, we believe that in many cases this would be 
straightforward for funds to calculate and useful for investors as they 
consider investments. We believe it would provide investors with 
enhanced means to monitor whether the results of ESG engagement 
strategy comport with investor expectations and the fund's prospectus 
disclosure, as opposed to solely relying on qualitative statements, as 
well as to compare ESG-Focused Funds. Moreover, we recognize that forms 
of engagement other than ESG engagement meeting as we propose to define 
the term may be a valuable part of a fund's engagement strategy, and 
the proposal would not preclude a fund from also discussing these other 
efforts in the fund's MDFP or MD&A as applicable.
    We request comment on all aspects of these proposed amendments, 
including the following items.
    81. Should we, as proposed, require disclosure of the number or 
percentage of issuers with which the fund engaged and total number of 
ESG engagement meetings, as we propose to define that term? Would this 
information be useful to investors? Instead of, or in addition to, ESG 
engagement meetings, are there other metrics that we could require to 
be disclosed in relation to a fund's engagement strategy? Should we 
require funds to provide additional context to this information beyond 
the number or percentage of issuers with which the fund engaged and 
number of engagement meetings?
    82. What incentives for funds, issuers, or others would exist as a 
result of the proposed requirement that funds report the number of ESG 
engagement meetings they have? For example, will management of certain 
issuers be more or less likely to engage with a fund if they believe it 
would be reported? Will funds be more or less likely to engage on 
certain types of issues? For example, will funds only engage with 
management of issuers on ESG issues where the fund believes that 
management already agrees with it? Would disclosure of engagement 
result in funds or issuers being influenced by other parties who become 
aware of the engagement, including parties that are not investors in 
the fund or the applicable issuer, and, if so, should we take any steps 
as a result of this influence?
    83. Is our proposed definition of ``ESG engagement meeting'' 
sufficiently clear? Is it appropriate that in order for a discussion to 
constitute an ESG engagement meeting, the meeting must be a substantive 
discussion with management of an issuer advocating for one or more 
specific ESG goals to be accomplished over a given time period, where 
progress that is made toward meeting such goal is measurable, that is 
part of an ongoing dialogue with the issuer regarding this goal? Are 
there additional criteria that we should require in order for a 
discussion to constitute an ESG engagement meeting, for example, by 
requiring that meetings be with personnel of a particular seniority 
(such as executive officer or board member) of an issuer, requiring 
that the meeting must only discuss ESG issues?
    84. Is it possible that funds will construe the term ``ESG 
engagement meeting'' more liberally than investors, resulting in a 
higher reported number than if the definition of ESG engagement meeting 
were more narrow? Should we provide additional guidance on the 
definition of ESG engagement meeting or require additional policies and 
procedures, recordkeeping, or disclosure in order to assist in making 
funds' approaches to what constitutes an ESG engagement meeting more 
consistent between funds and more consistent with investors' 
expectations? For example, should we require funds to develop written 
documentation regarding their engagement objectives, performance 
indicators to measure progress, monitoring and evaluation of ESG 
engagement meetings, or development of relationships with issuers? How 
do funds currently set and track their ESG engagement objectives? Is 
the requirement that progress toward an ESG goal be ``measurable'' 
sufficiently clear? Should we provide additional guidance or context 
regarding the definition of ``measurable'' as used in this instruction? 
Are there certain ESG goals where progress is not measurable where it 
would be appropriate for funds to be required to describe their 
engagement strategy?
    85. Should funds be required to provide additional information 
regarding their engagement strategy, either instead of or in addition 
to the

[[Page 36676]]

proposed narrative explanation and statistics regarding number of ESG 
engagement meetings and progress toward key performance indicators? If 
we required additional information, what elements should a fund be 
required to include? Could the proposed disclosure of narrative 
information or statistics regarding ESG engagement meetings result in 
investors being misled as to the nature or results of a fund's ESG 
strategy?
    86. As proposed, the form would require funds to report statistics 
regarding the number of ESG engagements meetings across their entire 
portfolio, irrespective of the ESG goal of the meeting; should we 
instead require funds to break down their engagement statistics based 
on category? Would this provide helpful detail for an investor seeking 
to assess a fund's engagement on a particular topic? Would the breadth 
of potential categories make it difficult to convey the overall extent 
of a fund's engagement? Are there particular categories of engagement 
where investors would find it useful for ESG engagement meeting 
statistics to be presented separately? Would subcategorizing the 
statistics in this fashion present any challenges, such as 
administrative burden for funds or complexity in determining the 
particular category into which an ESG engagement meeting falls?
(d) GHG Emissions Metrics Disclosure
(1) Scope of Proposed Rule
    Investors who seek to invest in environmentally focused funds have 
shown an increasing interest in consistent and comparable climate-
related disclosures, including emissions metrics.\118\ Environmentally 
focused funds have taken various approaches to address this investor 
interest. Some environmentally focused funds provide metrics or other 
quantifiable information in fund shareholder reports or marketing 
materials regarding the amount of GHG emissions financed by such 
funds.\119\ However, this type of disclosure is inconsistent across 
funds, and funds vary in the methodologies they use to generate such 
GHG-related quantitative data. Other funds make vague or broad claims 
regarding the GHG emissions of their portfolio of investments.\120\
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    \118\ See, e.g. Robeco Survey Reveals Big Investor Shift on 
Climate Change and Decarbonization (Mar. 22, 2021), available at 
https://www.robeco.com/en/media/press-releases/2021/robeco-survey-reveals-big-investor-shift-on-climate-change-and-decarbonization.html (stating that a survey of 300 of the world's 
largest institutional and wholesale investors revealed that, while 
climate change is a significant factor in the investment policy of 
almost three-quarters (73%) of investors who were surveyed, 44% of 
surveyed investors viewed the lack of data and reporting as the 
biggest obstacle to implementing decarbonization). Additionally, 
investor demand for improved climate-related metric disclosure has 
recently developed in the private equity market. A coalition of 
private equity firms has formed to standardize ESG disclosures by 
selecting 6 quantitative metrics, including a GHG emissions metric, 
that portfolio companies will have to report and that private equity 
funds would then report to their limited partners. See Institutional 
Limited Partners Association, ESG Data Convergence Project, 
available at https://ilpa.org/ilpa_esg_roadmap/esg_data_convergence_project/.
    \119\ See CDP's ``The Time to Green Finance,'' (``CDP Report'') 
available at https://www.cdp.net/en/research/global-reports/financial-services-disclosure-report-2020.
    \120\ See Sustainable finance and market integrity: promise only 
what you can deliver, A regulatory perspective on environmental 
impact claims associated with sustainable retail funds in France, 
2investinginitiative, July 2021, available at Sustainable-Finance-
and-Market-Integrity.pdf (2degrees-investing.org); see also CFA 
Institute, Global ESG Disclosure Standards for Investment Products 
(2021), available at https://www.cfainstitute.org/-/media/documents/ESG-standards/Global-ESG-Disclosure-Standards-for-Investment-Products.pdf (explaining that, because of the wide variety of 
methods that the investment management industry uses to incorporate 
ESG into its investment process and the lack of standardized 
disclosures around ESG, it is difficult for investors to sort these 
products into well-defined categories).
---------------------------------------------------------------------------

    The current lack of consistent, comparable and decision-useful data 
makes it difficult for investors to make better informed investment 
decisions that are in line with their ESG investment goals and to 
assess any GHG-related claims a fund has made. It also may lead to 
potential greenwashing and compromise the reliability of sustainable 
investment product disclosures.\121\ These concerns are heightened for 
funds that make specific claims regarding the GHG emissions or 
emissions intensity of their portfolios because such claims may give 
rise to specific investor expectations regarding the impact of the 
fund's investments on the environment. At the same time, we are 
requesting comment on ways in which registrants could have flexibility 
in making the necessary disclosures.
---------------------------------------------------------------------------

    \121\ See supra at text following footnote 4 (describing 
greenwashing).
---------------------------------------------------------------------------

    Therefore, we are proposing to require an ESG-Focused Fund that 
considers environmental factors as part of its investment strategy to 
disclose the carbon footprint and the weighted average carbon intensity 
(``WACI'') of the fund's portfolio in the MDFP or MD&A section of the 
fund's annual report as applicable.\122\ This proposed requirement 
would apply to ESG-Focused Funds that indicate that they consider 
environmental factors in response to Item C.3(j)(ii) on Form N-CEN, but 
do not affirmatively state that they do not consider issuers' GHG 
emissions as part of their investment strategy in the ``ESG Strategy 
Overview'' table in the fund's prospectus (``environmentally focused 
fund'').\123\ As discussed in more detail below, the carbon footprint 
and WACI metrics are generally aligned with the recommendations from 
the TCFD \124\ and Partnership for Carbon Accounting Financials 
(``PCAF'') frameworks and based on emission data consistent with those 
defined by the GHG Protocol framework.\125\
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    \122\ See proposed Item 27(b)(7)(i)(E) of Form N-1A; proposed 
Instruction 4.(g)(1)(E) to Item 24 of Form N-2.
    \123\ Except as otherwise provided or the context requires, when 
we refer to an ``environmentally-focused fund'' in this release, we 
are referring to an ESG-Focused Fund that considers environmental 
factors as part of its investment strategy that has not made this 
affirmative disclosure in the ``ESG Strategy Overview'' table in the 
fund's prospectus.
    \124\ See supra footnote 10 (defining the TCFD).
    \125\ In this regard, several studies have found that GHG 
emissions data prepared pursuant to the GHG Protocol have become the 
most commonly referenced measurements of a company's exposure to 
climate-related risks See, e.g., C. Kauffmann, C. T[eacute]bar Less, 
and D. Teichmann (2012), Corporate Greenhouse Gas Emission 
Reporting: A Stocktaking of Government Schemes, OECD Working Papers 
on International Investment, 2012/01, OECD Publishing, at 8, 
available at http://dx.doi.org/10.1787/5k97g3x674lq-en (``For 
example, the use of scope 1, 2, 3 to classify emissions as defined 
by the GHG Protocol has become common language and practice 
today.'').
---------------------------------------------------------------------------

    We recognize, however, that not all ESG-Focused Funds that consider 
environmental factors as part of their investment strategies consider 
the GHG emissions of the issuers in which they invest as part of their 
investment strategies. Therefore, and as discussed above, a fund would 
not be required to disclose its GHG emissions metrics if it 
affirmatively states in the ``ESG Strategy Overview'' table in the 
fund's prospectus that it does not consider issuers' GHG emissions as 
part of its investment strategy.\126\ We believe it is appropriate to 
limit the scope of funds that would be required to disclose GHG 
emissions data to those funds where GHG emissions data play a role in 
the fund's stated investment strategy. We believe that this approach 
appropriately limits the scope of this disclosure to funds that 
consider GHG emissions in their investment strategies, and ensures that 
investor expectations on a fund's approach to GHG emissions are aligned 
with the fund's actual investment strategy.
---------------------------------------------------------------------------

    \126\ See proposed Item 27(b)(7)(i)(E) of Form N-1A and proposed 
Instruction 4.(g)(1)(E) to Item 24 of Form N-2.
---------------------------------------------------------------------------

    These requirements also would apply to a BDC that is an 
environmentally focused fund. The Commission has proposed in a separate 
release to require

[[Page 36677]]

BDCs to provide climate-related information in their annual reports on 
Form 10-K, including a BDC's Scope 3 emissions if material or if Scope 
3 emissions are part of an announced emissions reduction target.\127\ 
We believe the GHG emission disclosure we are proposing in this release 
would complement that climate disclosure, if both proposals were 
adopted. As discussed in more detail below, carbon footprint and WACI 
together would provide investors in environmentally focused funds with 
a comprehensive view of the GHG emissions associated with the fund's 
investments, both in terms of the footprint or scale of the fund's 
financed emissions and in terms of the portfolio's exposure to carbon-
intensive companies. We believe these specific measures are appropriate 
for environmentally focused funds, regardless of whether the fund is a 
registered open- or closed-end fund or business development company.
---------------------------------------------------------------------------

    \127\ See The Enhancement and Standardization of Climate-Related 
Disclosures for Investors, 33-11042 (Mar. 21, 2022) [87 FR 21334 
(Apr. 11, 2022)] (``Climate Disclosure Proposing Release'').
---------------------------------------------------------------------------

    We believe that these requirements would advance the Commission's 
mission by meeting the demands of investors in environmentally focused 
funds for consistent and reasonably comparable quantitative information 
regarding the GHG emissions associated with those funds' portfolios. 
Investors may need GHG-related quantitative data in environmentally 
focused funds where GHG emissions data play a role in the fund's 
investment strategy because such disclosures would provide investors 
with consistent, comparable, and decision-useful information about 
their portfolio of investments that are relevant to their investment 
decisions. This information would better allow investors to make 
decisions in line with their ESG investment goals and expectations set 
by the fund, and allow investors in these funds to assess GHG-related 
claims that a fund has made or to compare the fund's GHG data against 
the fund's investment strategy.
(2) Emissions Reporting Frameworks and the Development of Financed 
Emissions Metrics for Investment Portfolios
    The GHG Protocol has become the most widely used global greenhouse 
gas accounting standard for companies.\128\ The GHG Protocol's 
Corporate Accounting and Reporting Standard provides uniform methods to 
measure and report the greenhouse gases covered by the Kyoto 
Protocol.\129\ It also introduced the concept of ``scopes'' of 
emissions to help delineate those emissions that are directly 
attributable to the reporting entity and those that are indirectly 
attributable to the company's activities.\130\ The GHG Protocol has 
been updated periodically since its original publication and has been 
broadly incorporated into sustainability reporting frameworks, 
including, among others, the TCFD and the PCAF frameworks for reporting 
of Scope 3 financed emissions at the investment portfolio level. These 
frameworks are discussed in more detail below.
---------------------------------------------------------------------------

    \128\ See, e.g., letters from ERM CVS; and Natural Resources 
Defense Council; see also Greenhouse Gas Protocol, About Us [verbar] 
Greenhouse Gas Protocol (ghgprotocol.org). For example, the 
Environmental Protection Agency (``EPA'') Center for Corporate 
Climate Leadership references the GHG Protocol's standards and 
guidance as resources for companies that seek to calculate their GHG 
emissions. See, e.g., EPA Center for Corporate Climate Leadership, 
Scope 1 and Scope 2 Inventory Guidance, available at https://www.epa.gov/climateleadership/scope-1-and-scope-2-inventory-guidance.
    \129\ The Kyoto Protocol, adopted in 1997, implemented the 
United Nations Framework Convention on Climate Change by obtaining 
commitments from industrialized countries to reduce emissions of the 
seven identified gasses according to agreed targets. See United 
Nations Climate Change, What is the Kyoto Protocol? The EPA includes 
these seven greenhouse gases in its greenhouse gas reporting 
program. See, e.g., EPA, GHGRP Emissions by GHG.
    \130\ See World Business Council for Sustainable Development and 
World Resources Institute, The Greenhouse Gas Protocol, A Corporate 
Accounting and Reporting Standard REVISED EDITION. Under the GHG 
Protocol, Scope 1 emissions are direct GHG emissions that occur from 
sources owned or controlled by the company, such as emissions from 
company-owned or controlled machinery or vehicles. Scope 2 emissions 
are those indirect emissions primarily resulting from the generation 
of electricity purchased and consumed by the company. Scope 3 
emissions are all other indirect emissions not accounted for in 
Scope 2 emissions. These emissions are a consequence of the 
company's activities but are generated from sources that are neither 
owned nor controlled by the company.
---------------------------------------------------------------------------

    As fund investors' interest in GHG emissions has increased, 
substantial work also has been done to develop effective means to 
present aggregated GHG emissions information at a portfolio level in a 
comparable, consistent, and decision-useful way. Specifically, to 
address investor concerns and expectations, the TCFD developed a 
framework to foster consistent climate-related financial disclosures 
that could be used by organizations across sectors and industries, 
including funds.\131\ As part of its recommendations initially 
published in 2017, the TCFD suggested several metrics that asset 
managers and asset owners, including funds, can use to calculate the 
GHG emissions of their investments.\132\ These metrics initially 
focused on calculating financed Scope 1 and Scope 2 emissions and 
included, among others, the WACI and carbon footprint metrics.\133\ 
Several international third-party ESG organizations and regulators have 
endorsed the TCFD framework, including its GHG emissions metrics, and 
have worked to implement the framework and converge around a unified 
approach to climate reporting.\134\
---------------------------------------------------------------------------

    \131\ See supra footnote 10; See UN Environment Programme 
Finance Initiative, Task Force on Climate-Related Financial 
Disclosures, available at https://www.unepfi.org/climate-change/tcfd/.
    \132\ See Final Report, Recommendations of the TCFD (June 2017), 
available at https://assets.bbhub.io/company/sites/60/2020/10/FINAL-2017-TCFD-Report-11052018.pdf (``2017 TCFD Guidance'').
    \133\ See Implementing the Recommendations of the Task Force on 
Climate-related Financial Disclosures (Oct. 2021) (``Updated TCFD 
Guidance''), available at https://www.fsb.org/wp-content/uploads/P141021-4.pdf. (defining the WACI metric as a portfolio's exposure 
to carbon-intensive companies, expressed in tons of carbon dioxide 
equivalents ('' CO2e'') per million dollars of the 
portfolio company's revenue and defining the carbon footprint metric 
as the total carbon emissions for a portfolio normalized by the 
market value of the portfolio, expressed in tons CO2e per 
million dollars invested).
    \134\ See e.g., Reporting on Enterprise Value Illustrated with a 
Prototype Climate-related Financial Disclosure Standard, CDP, CDSB, 
GRI, IIRC, and SASB, (Dec. 2020) available at Reporting-on-
enterprise-value_climate-prototype_Dec20.pdf (netdna-ssl.com); see 
also Financial Conduct Authority (``FCA''), Enhancing Climate 
Related Disclosures by Asset Managers, Life Insurers, and FCA-
Regulated Pension Providers (2021), available at https://www.fca.org.uk/publication/consultation/cp21-17.pdf (``FCA 
Consultation Paper'') (proposal to make TCFD-aligned disclosures 
mandatory in the UK); see also New Zealand Government Press Release, 
New Zealand Becomes First in the World to Require Climate Risk 
Report (Sept. 15, 2020), available at https://www.beehive.govt.nz/release/new-zealand-first-world-require-climate-risk-reporting 
(adopting a mandatory climate-related financial disclosure regime in 
line with the TCFD framework).
---------------------------------------------------------------------------

    There has been significant progress in the development of GHG 
metric calculations since 2017, particularly in the area of financed 
GHG emissions.\135\ In November of 2020, PCAF established the first 
global carbon accounting standard for the measurement and disclosure of 
financed emissions (``PCAF Standard''),\136\ which has

[[Page 36678]]

subsequently been endorsed by the TCFD \137\ in updated guidance issued 
by the TCFD in 2020 and reviewed by the GHG Protocol.\138\ Under the 
PCAF Standard, a financial institution (including a fund) measures and 
reports the Scope 1 and Scope 2 emissions of the investments it holds 
as of its fiscal year-end using the PCAF methodologies.\139\
---------------------------------------------------------------------------

    \135\ Scope 3 emissions include the financed emissions of an 
investment portfolio and are calculated based on the GHG emissions 
of each company in which the investment portfolio invests. See infra 
footnote 155 (defining Scope 3 emissions).
    \136\ See Partnership for Carbon Accounting Financials, The 
Global GHG Accounting and Reporting Standard for Financial Industry 
(Nov. 2020), available at https://carbonaccountingfinancials.com/files/downloads/PCAF-Global-GHG-Standard.pdf. Financed emissions are 
emissions that are financed by loans and investments in a portfolio 
of a financial institution, including mutual fund portfolios. 
Financed emissions fall within the Greenhouse Gas Protocol's (``GHG 
Protocol's'') Scope 3 downstream emissions, specifically listed as 
category 15 Scope 3 emissions.
    \137\ See Updated TCFD Guidance, supra footnote 133.
    \138\ See id. See also GHG Protocol Press Release, New Standard 
Developed to Help Financial Industry Measure and Report Emissions 
(Mar. 2021), available at https://ghgprotocol.org/blog/new-standard-developed-help-financial-industry-measure-and-report-emissions.
    \139\ See the PCAF Standard, supra footnote 136.
---------------------------------------------------------------------------

    In addition, under the PCAF Standard, the disclosure of a portfolio 
investment's Scope 3 emissions are separate from its Scope 1 and Scope 
2 emissions. Because of the limited information regarding Scope 3 
emissions currently available, PCAF follows a phased-in approach to 
Scope 3 reporting, with reporting of Scope 3 emissions only for certain 
select sectors that provide Scope 3 emissions data. PCAF recognized the 
difficulties inherent in the comparability, coverage, transparency, and 
reliability of Scope 3 data of the investments held by a financial 
institution when attempting to capture the Scope 3 dimension of 
financed emissions. Therefore, by separating Scope 3 emissions from 
Scope 1 and 2 emissions and having Scope 3 emissions reported by 
sector, the PCAF Standard seeks to make Scope 3 emissions reporting 
more common practice by improving data availability and quality over 
time.
    TCFD endorsed the PCAF Standard in its updated guidance and 
recommended that asset owners disclose the appropriate financed-
emissions metric based on PCAF's methodology along with the WACI 
metric, if relevant.\140\ Several foreign jurisdictions are considering 
regulations that would require financial institutions, including funds 
and advisers, to disclose GHG emissions data.\141\
---------------------------------------------------------------------------

    \140\ The TCFD also recommended that asset owners consider 
providing other carbon footprinting and exposure metrics that they 
believe are decision useful for investors.
    \141\ See Sustainable Finance and EU Taxonomy: Commission takes 
further steps to channel money towards sustainable activities, 
available at https://ec.europa.eu/commission/presscorner/detail/en/ip_21_1804 (summarizing the European Commission's proposed mandatory 
TCFD-aligned disclosure within new Corporate Sustainability 
Reporting Directive, including data regarding GHG emissions); see 
also FCA Consultation Paper, supra footnote 134, at 32 (proposal by 
the FCA to require certain FCA regulated entities, including funds, 
to disclose carbon emissions consistent with the TCFD framework and 
PCAF Standard).
---------------------------------------------------------------------------

(3) Proposed Fund Metrics Reporting Requirement
    The proposal would require environmentally focused funds to 
disclose the carbon footprint and the WACI of the fund's portfolio in 
the MDFP or MD&A section of the fund's annual report as 
applicable.\142\ Carbon footprint is the total carbon emissions 
associated with the fund's portfolio, normalized by the fund's net 
asset value and expressed in tons of CO2e per million 
dollars invested in the fund.\143\ Carbon footprint is an economic 
measure of the amount of absolute GHG emissions that a fund portfolio 
finances, through both equity ownership and debt investments, 
normalized by the size of the fund. This measure would allow investors 
to understand the extent to which their investments are exposed to 
carbon-related assets and their associated risks, as well as the 
climate impact of fund's investment decisions. For example, if a 
company has an ``enterprise value'' of $100 million in equity capital 
and no debt, and a fund buys $10 million of the fund's equity 
securities, this measure treats the fund as having ``financed'' 10% of 
the company's emissions and attributes those emissions to the fund. 
Where the sum of the financed emissions is divided by the net asset 
value of the fund, as we are proposing, this provides a normalized 
value of the fund's financed emissions that allows an investor to 
compare funds of different sizes with each other. Without normalizing 
for the fund's size, a larger fund might have a larger carbon footprint 
than a smaller fund simply because of the larger fund's size.
---------------------------------------------------------------------------

    \142\ See proposed Item 27(b)(7)(i)(E) of Form N-1A; proposed 
Instruction 4.(g)(1)(E) to Item 24 of Form N-2; Proposed Instruction 
10 to Item 24 of Form N-2 [17 CFR 274.11a-1].
    \143\ Expressing GHG emissions in terms of CO2e is 
the common unit of measurement to indicate the global warming 
potential of a greenhouse gas. See infra footnote 153. We are 
proposing to require this expression to be presented per millions of 
dollars, rather than dollars, invested in the fund to avoid smaller 
calculations that may be less informative to investors and more 
difficult to calculate.
---------------------------------------------------------------------------

    To calculate the fund's carbon footprint under the proposal, a fund 
would first calculate the portfolio company's enterprise value.\144\ 
Enterprise value is the sum of the portfolio company's equity value 
plus its total debt.\145\ We are proposing to include both equity and 
debt because a portfolio company can use capital raised from either or 
both of equity and debt to finance its business activities that 
generate GHG emissions. A fund would then calculate the carbon 
emissions associated with each portfolio holding by dividing the 
current value of the fund's investment in the portfolio company by the 
portfolio company's enterprise value, then multiplying the resulting 
amount by the portfolio company's Scope 1 and Scope 2 GHG emissions. 
Finally, the fund would add up the carbon emissions associated with 
each portfolio holding and divide the resulting amount by the current 
net asset value of the portfolio to derive the fund's carbon footprint.
---------------------------------------------------------------------------

    \144\ See proposed Instruction 1(a)(i) of proposed Item 
27(b)(7)(i)(E) of Form N-1A and proposed Instruction 1(a)(i) of 
Instruction 4.(g)(1)(E) to Item 24 of Form N-2.
    \145\ A portfolio company's total debt is the sum of the book 
value of its short- and long-term debt.
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    Using the example above to illustrate the calculation, the 
portfolio company had an enterprise value of $100 million and the fund 
owned equity securities equal to 10% of the company's enterprise value. 
If a company's Scope 1 and 2 emissions totaled 2 metric tons of 
CO2e in the last year, the emissions attributable to the 
fund for this calculation would be 10% of 2 metric tons of 
CO2e (or 0.2 metric tons of CO2e). The fund would 
repeat this calculation for each of its portfolio holdings and then add 
up the resulting values for all of its portfolio holdings. The fund 
would then divide the resulting amount by the net asset value of the 
fund to derive the fund's carbon footprint.
    WACI is the fund's exposure to carbon-intensive companies, 
expressed in tons of CO2e per million dollars of the 
portfolio company's total revenue.\146\ A fund's WACI measures a fund's 
exposure to carbon-intensive companies. That is, this measure allows an 
investor to see, in quantitative terms, the portfolio companies' carbon 
intensity--the portfolio companies' GHG emissions relative to their 
revenue--rather than the companies' absolute GHG emissions. For 
example, if 10% of the fund was invested in XYZ company, the fund would 
determine XYZ company's carbon emissions per million dollars of revenue 
by dividing the company's Scope 1 and 2 GHG emissions by the company's 
total revenue (in millions of dollars). These emissions would then be 
attributed to the fund in proportion to the weight of the investment in 
the fund's portfolio: ten percent of the emissions would be 
attributable to the fund because the

[[Page 36679]]

holding represents 10% of the fund's net asset value.\147\
---------------------------------------------------------------------------

    \146\ WACI is consistent with the emissions metrics suggested by 
the TCFD. See Updated TCFD Guidance, supra footnote 137; see also 
Climate Disclosure Proposing Release, supra footnote 127 (proposing 
to require corporate issuers to disclose their GHG intensity in 
terms of metric tons of CO2e per unit of total revenue 
and per unit of production for the fiscal year).
    \147\ The current value of the portfolio's investment in the 
portfolio company and the fund's current net asset value would be 
calculated as of the end of the most recently completed fiscal year.
---------------------------------------------------------------------------

    To calculate the fund's WACI under the proposal, as reflected in 
the example above, a fund would first calculate the portfolio weight of 
each portfolio holding by dividing the value of the fund's investment 
in the portfolio company by the current net asset value of the 
fund.\148\ The fund would then calculate the carbon emissions of each 
portfolio company by dividing the portfolio company's Scope 1 and Scope 
2 GHG emissions by the portfolio company's total revenue (in millions 
of dollars). These emissions would then be attributed to the fund in 
proportion to the weight of the investment in the fund's portfolio, 
that is, if the fund's investment in ABC Company represented 10% of the 
fund's net asset value and ABC Company's Scope 1 and 2 GHG emissions 
divided by revenue was 1 million metric tons of CO2e, the 
emissions attributable to the fund under this calculation for ABC 
Company would be 10% of 1 million. The fund would perform this 
calculation for each portfolio company in its portfolio and the sum of 
the emissions attributable to the fund would be the fund's WACI.
---------------------------------------------------------------------------

    \148\ See proposed Instruction 1(b)(i) of proposed Item 
27(b)(7)(i)(E) of Form N-1A and proposed Instruction 1(b)(i) of 
Instruction 4.(g)(1)(E) to Item 24 of Form N-2.
---------------------------------------------------------------------------

    We believe these measures together would provide investors in 
environmentally focused funds with a comprehensive view of the GHG 
emissions associated with the fund's investments, both in terms of the 
footprint or scale of the fund's financed emissions and in terms of the 
portfolio's exposure to carbon-intensive companies. For example, a 
fund's carbon footprint would help investors understand the extent to 
which a fund's investments contribute to emissions and how that changes 
over time and compare it to other environmentally focused funds. On the 
other hand, a fund's WACI would allow investors to analyze more 
effectively the fund's exposure to climate risk and to reasonably 
compare the exposure to climate risk of different funds. For example, a 
fund's WACI highlights for investors the extent to which a fund's 
portfolio is exposed to portfolio companies with higher carbon 
intensity. These portfolio companies may be more susceptible to 
transition risk, that is, risks related to the expected transition to a 
lower carbon economy.\149\ These measures also are familiar to 
environmentally focused investors and fund managers, as they are 
generally consistent with standards developed by the PCAF (a measure 
similar to carbon footprint) and the TCFD (WACI).
---------------------------------------------------------------------------

    \149\ Transition risks are the actual or potential negative 
impacts on a portfolio company's consolidated financial statements, 
business operations, or value chains attributable to regulatory, 
technological, and market changes to address the mitigation of, or 
adaptation to, climate-related risks, such as increased costs 
attributable to changes in law or policy, reduced market demand for 
carbon-intensive products leading to decreased prices or profits for 
such products, the devaluation or abandonment of assets, risk of 
legal liability and litigation defense costs, competitive pressures 
associated with the adoption of new technologies, reputational 
impacts (including those stemming from a portfolio company's 
customers or business counterparties) that might trigger changes to 
market behavior, consumer preferences or behavior, and portfolio 
company's behavior.
---------------------------------------------------------------------------

    For both the carbon footprint and WACI measures, the proposed rules 
do not permit a fund to reduce the GHG emissions associated with a 
portfolio company as a result of the company's use of purchased or 
generated carbon offsets.\150\ We believe that disclosing GHG emissions 
data without giving effect to any purchased or generated carbon offsets 
is appropriate, not only because such a measure would provide investors 
with important information about the magnitude of climate-related risk 
posed by a fund portfolio's financed GHG emissions, but also because 
the value of offsets may change due to restrictions imposed by 
regulation or market conditions. A fund could disclose such offsets 
separately from its financed emissions if it believed this information 
was helpful to investors because funds are not restricted from 
providing additional information in the MDFP beyond what is permitted 
or required in the form.\151\ Similarly, if a fund engages in a short 
sale of a security, the proposed requirements do not include a 
provision that would permit the fund to subtract the GHG emissions 
associated with the security from the GHG emissions of the fund's 
portfolio that are used to calculate the fund's WACI or carbon 
footprint. A short sale would allow the fund to profit from a decline 
in value of the security, but would not reduce the extent of the fund's 
financed emissions and may not offset the transition risk expressed by 
the fund's WACI.
---------------------------------------------------------------------------

    \150\ Carbon offsets represent an emissions reduction or removal 
of greenhouse gases in a manner calculated and traced for the 
purpose of offsetting company's GHG emissions. See, EPA, Offsets and 
RECs: What's the Difference?, available at https://www.epa.gov/sites/default/files/2018-03/documents/gpp_guide_recs_offsets.pdf.
    \151\ This proposed approach is again similar to the approach of 
the GHG Protocol as well as the PCAF Standard. See GHG Protocol, 
Corporate Accounting and Reporting Standard, Chapter 9; see also the 
PCAF Standard, supra footnote 136 at text accompanying n. 12.
---------------------------------------------------------------------------

    We also are proposing several specific instructions that would 
apply to a fund's calculation of its carbon footprint and WACI. First, 
the proposal would define CO2e to mean the common unit of 
measurement to indicate the global warming potential (``GWP'') \152\ of 
each greenhouse gas, expressed in terms of the GWP of one unit of 
carbon dioxide.\153\ Additionally, the proposal would define GHG 
emissions to mean the direct and indirect greenhouse gases expressed in 
metric tons of CO2e.\154\ The proposal would also provide 
definitions for the types of emissions that should be calculated within 
financed Scopes 1, 2, and 3.\155\ For purposes of the definition

[[Page 36680]]

of Scope 3 emissions, the proposal also defines the term value chain to 
mean, in part, the upstream and downstream activities related to a 
portfolio company's operations, including activities by a party other 
than the portfolio company.\156\ These definitions are generally 
consistent with the definitions provided in the GHG Protocol and PCAF 
Standard.\157\
---------------------------------------------------------------------------

    \152\ The proposal would also define GWP as a factor describing 
the global warming impacts of different greenhouse gases. It is a 
measure of how much energy will be absorbed in the atmosphere over a 
specified period of time as a result of the emission of one ton of a 
greenhouse gas, relative to the emissions of one ton of carbon 
dioxide. See proposed Instruction 1(d)(ii) of proposed Item 
27(b)(7)(i)(E) of Form N-1A and proposed Instruction 1(d)(ii) of 
Instruction 4.(g)(1)(E) to Item 24 of Form N-2.
    \153\ See proposed Instruction 1(d)(i) of proposed Item 
27(b)(7)(i)(E) of Form N-1A and proposed Instruction 1(d)(i) of 
Instruction 4.(g)(1)(E) to Item 24 of Form N-2.
    \154\ Under the proposal, direct emissions are GHG emissions 
from sources that are owned or controlled by a portfolio company and 
indirect emissions are GHG emissions that result from the activities 
of the portfolio company, but occur at sources not owned or 
controlled by the portfolio company. See proposed instruction 
1(d)(iv) of proposed Item 27(b)(7)(i)(E) of Form N-1A and proposed 
Instruction 1(d)(iv) of Instruction 4.(g)(1)(E) to Item 24 of Form 
N-2. The proposal would also define ``Greenhouse gases,'' in turn, 
to mean carbon dioxide, methane, nitrous oxide, nitrogen 
trifluoride, hydrofluorocarbons, perfluorocarbons, or sulphur 
hexafluoride. See proposed instruction 1(d)(iii) of proposed Item 
27(b)(7)(i)(E) of Form N-1A and proposed Instruction 1(d)(iii) of 
Instruction 4.(g)(1)(E) to Item 24 of Form N-2.
    \155\ Under the proposal, Scope 1 emissions would be defined as 
the direct GHG emissions from operations that are owned or 
controlled by a portfolio company. Scope 2 emissions would be 
defined as indirect GHG emissions from the generation of purchased 
or acquired electricity, steam, heat, or cooling that is consumed by 
operations owned or controlled by a portfolio company. Finally, 
Scope 3 emissions would be defined as all indirect GHG emissions not 
otherwise included in a portfolio company's Scope 2 emissions, which 
occur in the upstream and downstream activities of a portfolio 
company's value chain. See proposed Instructions 1(d)(v) through 
(vii) of Item 27(b)(7)(i)(E) of Form N-1A and proposed Instruction 
1(d)(v) through (vii) of Instruction 4.(g)(1)(E) to Item 24 of Form 
N-2. Upstream activities in which Scope 3 emissions might occur 
include: a portfolio company's purchased goods and services, a 
portfolio company's capital goods; a portfolio company's fuel and 
energy related activities not included in Scope 1 or Scope 2 
emissions; transportation and distribution of purchased goods, raw 
materials, and other inputs; waste generated in a portfolio 
company's operations; business travel by a portfolio company's 
employees; employee commuting by a portfolio company's employees; 
and a portfolio company's leased assets related principally to 
purchased or acquired goods or services. Downstream emissions in 
which Scope 3 emissions might occur include: transportation and 
distribution of a portfolio company's sold products; goods or other 
outputs; processing by a third party of a portfolio company's sold 
products; use by a third party of a portfolio company's sold 
products; end-of-life treatment by a third party of a portfolio 
company's sold products; a portfolio company's leased assets related 
principally to the sale or disposition of goods or services; a 
portfolio company's franchises; and investments by a portfolio 
company.
    \156\ See proposed instruction 1(d)(viii) of proposed Item 
27(b)(7)(i)(E) of Form N-1A and proposed Instruction 1(d)(viii) of 
Instruction 4.(g)(1)(E) to Item 24 of Form N-2.
    \157\ See supra footnotes 128-131 and accompanying text.
---------------------------------------------------------------------------

    Additionally, for both the carbon footprint and WACI measures, the 
fund would determine the GHG emissions associated with each ``portfolio 
company'' (or ``portfolio holding''), which we are proposing to define 
as: (a) an issuer that is engaged in or operates a business or activity 
that generates GHG emissions; or (b) an investment company, or an 
entity that would be an investment company but for section 3(c)(1) or 
3(c)(7) of the Investment Company Act (a ``private fund''), that 
invests in issuers described in clause (a), except for an investment in 
reliance on 17 CFR 12d1-1 (``rule 12d1-1'') under the Investment 
Company Act (i.e., investments in money market funds).\158\ This 
definition is designed to identify companies engaged in business 
activities that generate GHG emissions. Therefore, fund investments 
that are not ``portfolio companies''--for example, cash, foreign 
currencies (or derivatives thereof), and interest rate swaps--would be 
excluded from the GHG metrics calculations because these investments do 
not generate GHG emissions.
---------------------------------------------------------------------------

    \158\ See proposed Instruction 1(d)(ix) of Item 27(b)(7)(i)(E) 
of Form N-1A and proposed Instruction 1(d)(ix) of Instruction 
4.(g)(1)(E) to Item 24 of Form N-2.
---------------------------------------------------------------------------

    The definition would require a fund to take into account GHG 
emissions when the fund invests in other funds or private funds to 
avoid a fund investing in portfolio companies through such a fund 
structure without reflecting the associated emissions in the investing 
fund's GHG metrics. If the underlying fund itself were an 
environmentally focused fund required to report its carbon footprint 
and WACI, the investing fund could determine the GHG emissions 
associated with the investment for purposes of calculating the 
investing fund's carbon footprint and WACI by taking its pro rata share 
of the underlying fund's GHG emissions. If the underlying fund was not 
required to disclose that information, the investing fund could look 
through its investment in the fund or private fund and take the 
investing fund's pro rata share of the emissions of the portfolio 
holdings of the fund or private fund. For this purpose we believe it 
would be sufficient to identify an underlying fund's holdings based on 
the underlying fund's most recent financial statements. We are 
proposing an exception for fund investments in money market funds to 
allow the fund to invest in money market funds for cash management 
purposes without having to consider potential GHG emissions associated 
with the investment. Money market funds, which are regulated 
extensively under 17 CFR 270.2a-7 (``rule 2a-7''), also may be more 
limited in their financed emissions because of their relatively limited 
holdings of commercial paper and similar investments.\159\
---------------------------------------------------------------------------

    \159\ Under the proposal, a portfolio company would not include 
an investment in a money market fund in reliance on rule 12d1-1. 
That rule defines a money market fund to mean a registered open-end 
management investment company regulated as a money market fund under 
rule 2a-7, or certain private funds that are limited to investing in 
the types of securities and other investments in which a money 
market fund may invest under rule 2a-7 and undertake to comply with 
that rule's requirements.
---------------------------------------------------------------------------

    Additionally, if a fund obtains its exposure to a portfolio company 
by entering into a derivatives instrument, the derivatives instrument 
for purposes of the GHG metrics calculations would be treated as an 
equivalent position in the securities of the portfolio company that are 
referenced in the derivatives instrument.\160\ For example, if a fund 
enters into an equity total return swap on XYZ Company with a notional 
amount of $100 million, the fund would treat this investment as an 
investment in $100 million of the company's equity securities when 
computing the fund's carbon footprint and WACI. This approach would 
avoid creating an incentive for funds to invest in derivatives instead 
of cash market investments to avoid including the GHG emissions 
associated with those holdings in the portfolio-level GHG metric 
calculations.
---------------------------------------------------------------------------

    \160\ See proposed Instruction 1(d)(xiii) of Item 27(b)(7)(i)(E) 
of Form N-1A and proposed Instruction 1(d)(xiii) of Instruction 
4.(g)(1)(E) to Item 24 of Form N-2. The proposal would define a 
derivatives investment to include any swap, security-based swap, 
futures contract, forward contract, option, any combination of the 
foregoing instruments, or any similar instrument. This list of 
instruments is consistent with the Commission's rule regarding 
funds' use of derivatives. See 17 CFR 270.18f-4.
---------------------------------------------------------------------------

    Third, the proposed instructions specify where the fund must obtain 
information required to perform the calculations. Funds would be 
required to obtain the information necessary to calculate a portfolio 
company's enterprise value and the portfolio company's total revenue 
from the company's most recent public report required to be filed with 
the Commission pursuant to the Securities Exchange Act of 1934 or the 
Securities Act of 1933 (``regulatory report''), containing such 
information.\161\ We believe a portfolio company's most recent 
regulatory filings would be the most reliable sources of this 
information where available. Absent a regulatory report containing the 
necessary information, the fund would calculate the portfolio company's 
enterprise value and total revenue based on information provided by the 
company. Furthermore, if a portfolio company reports its revenue in 
currency other than U.S. dollars, the proposed instructions would 
require a fund to convert the portfolio company's revenue into U.S. 
dollars using the exchange rate as of the date of the relevant 
regulatory report providing the company's revenue. This conversion is 
necessary so that all of the financial information underlying the 
fund's carbon footprint and WACI is expressed in U.S. dollars.
---------------------------------------------------------------------------

    \161\ See proposed Instruction 1(d)(x) of Item 27(b)(7)(i)(E) of 
Form N-1A and proposed Instruction 1(d)(x) to instruction 4.g.(1)(E) 
of Item 24 of Form N-2. For example, an issuer's equity value, total 
debt, and total revenue is generally included in registration 
statements and reports on Form 10-K or Form 20-F. Form 20-F is the 
Exchange Act form typically used by a foreign private issuer for its 
annual report or to register securities under the Exchange Act.
---------------------------------------------------------------------------

    Additionally, where the calculations require the value of the 
fund's holding in a portfolio company or the fund's net asset value, 
the fund would use the values as of the end of the fund's most recently 
completed fiscal year (i.e., the values included in the fund's annual 
report in which the carbon footprint and WACI disclosure would 
appear).\162\ We recognize that the value of the fund's net assets and 
the value of any particular portfolio holding likely would be as of a 
date that differs from the date of the data related to the

[[Page 36681]]

portfolio company, which would be based on the portfolio company's 
fiscal year end. We believe that any data anomalies that may occur in a 
given year are justified by the benefits of transparency, comparability 
and simplicity of implementation derived from the proposed approach.
---------------------------------------------------------------------------

    \162\ See proposed Instruction 1(d)(xii) of Item 27(b)(7)(i)(E) 
of Form N-1A and proposed Instruction 1(d)(xii) of Instruction 
4.(g)(1)(E) to Item 24 of Form N-2.
---------------------------------------------------------------------------

    The proposed instructions also would address the sources of 
portfolio companies GHG emissions. We are proposing a data hierarchy 
for sources that funds would be required to use in obtaining portfolio 
company GHG emissions data. Specifically, if a portfolio company 
discloses its Scopes 1 and 2 emissions in a regulatory report, the fund 
would be required to use these disclosed emissions from the most recent 
regulatory report when calculating carbon footprint and WACI.\163\ 
Issuers also may disclose GHG information in regulatory reports absent 
a current specific regulatory requirement to do so. We believe that GHG 
emissions information that is filed with the Commission in a regulatory 
report, if available, would be the most reliable source of such 
information.\164\ If a portfolio company does not file such regulatory 
reports, or they do not contain the GHG information necessary for the 
fund to calculate carbon footprint and WACI, the fund would be required 
to use GHG emissions information that is otherwise publicly provided by 
the portfolio company, such as a publicly available sustainability 
report published by the company.\165\ Using a publicly available source 
of the information provided by the company would help provide 
consistency among different funds' calculations of carbon footprint and 
WACI where the information is not disclosed in a regulatory report.
---------------------------------------------------------------------------

    \163\ See proposed Instruction 1(d)(xi)(A) of Item 
27(b)(7)(i)(E) of Form N-1A and proposed Instruction 1(d)(xi)(A) of 
Instruction 4.(g)(1)(E) to Item 24 of Form N-2.
    \164\ For example, information filed by a portfolio company with 
the Commission in Exchange Act periodic reports is subject to 
disclosure controls and procedures, which we believe help to ensure 
that such a company maintains appropriate processes for collecting 
and communicating any GHG emissions information included in the 
report. See 17 CFR 240.13a-15.
    \165\ See proposed Instruction 1(d)(xi)(B) of Item 
27(b)(7)(i)(E) of Form N-1A and proposed Instruction 1(d)(xi)(B) of 
Instruction 4.(g)(1)(E) to Item 24 of Form N-2. Portfolio company 
GHG emissions information that is only accessible from a third-party 
service provider would not be considered information that is 
publicly provided by the portfolio company. See infra footnote168 
and related text (stating that funds could take into account 
information provided by third party service providers as part of the 
good faith estimation process).
---------------------------------------------------------------------------

    We recognize that some portfolio companies do not report GHG 
emissions in regulatory reports and may not otherwise make the 
information publicly available (``non-reporting portfolio companies''). 
If a fund, after conducting a reasonable search, does not identify 
Scope 1 and Scope 2 emissions information publicly provided by the 
portfolio company, the fund would use a good faith estimate of the 
portfolio company's Scope 1 and Scope 2 emissions.\166\ Requiring a 
fund to make a good faith estimate--rather than excluding non-reporting 
portfolio companies altogether--would allow the fund to ascribe GHG 
emission information to each of its portfolio holdings and therefore 
provide portfolio-wide measures of the fund's carbon footprint and 
carbon intensity.
---------------------------------------------------------------------------

    \166\ See proposed Instruction 1(d)(xi)(C) of Item 
27(b)(7)(i)(E) of Form N-1A and proposed Instruction 1(d)(xi)(C) of 
Instruction 4.(g)(1)(E) to Item 24 of Form N-2.
---------------------------------------------------------------------------

    We are not proposing to require that funds use a particular 
estimation method. We understand there are different approaches to 
estimating a portfolio company's GHG emissions that funds could use 
when calculating their WACI or carbon footprint under the proposal. For 
example, under the PCAF Standard, funds use a non-reporting portfolio 
company's primary physical activity data, such as the company's energy 
consumption, where available.\167\ Where that data is not available, 
funds use other economic-activity emissions factors for estimates, 
including sector-specific industry averages. We also understand that 
third-party service providers provide estimated emissions data for 
portfolio companies that a fund could take into account in forming a 
good faith estimate.\168\
---------------------------------------------------------------------------

    \167\ See the PCAF Standard, supra footnote 136, at text 
following n.65 (explaining that estimates using emissions factors 
from production-based models (i.e., emission intensity per physical 
activity) are preferred over emissions factors from revenue-based 
models (i.e., emission intensity per revenue)).
    \168\ There are a number of third-party service providers that 
currently provide GHG emissions data to funds.
---------------------------------------------------------------------------

    While there has been a significant increase in the public 
availability and quality of corporate GHG emissions data,\169\ the 
proposed requirement to perform good faith estimates in certain cases 
reflects that not all of the companies in which an environmentally 
focused fund may invest will currently provide the GHG information 
necessary for the fund to calculate the proposed financed emissions 
disclosures.\170\ We recognize that the methodologies and assumptions 
underlying different good faith estimates of a company's GHG emissions 
data may impact the consistency of the data across different portfolio 
holdings of one fund as well as the comparability of funds with the 
same or similar portfolio holdings. GHG information produced by 
companies themselves, rather than estimated by a fund, also may not be 
fully comparable, due to the differences in assumptions and approaches 
at each company. We believe, however, that the proposed disclosure 
requirements would provide investors with an effective depiction of the 
GHG emissions associated with fund's investments and provide a 
reasonable basis for comparison among funds, notwithstanding that the 
GHG information underlying the disclosures may not be calculated using 
identical methods and assumptions.\171\
---------------------------------------------------------------------------

    \169\ See e.g., Azar et al., The Big Three and corporate carbon 
emissions around the world, (2021), at n.9, available at https://reader.elsevier.com/reader/sd/pii/S0304405X21001896?token=23AED5DA8B483D8297FDF29337EC3D429A8E4A88984AF54214180DF07617BB9F51FE2357B456C9023ED605E67363FBA7&originRegion=us-east-1&originCreation=20220201195451 (noting that some ESG third-
party vendors provide corporate issuer carbon emissions data for 80% 
of global market capitalization); see also Bolton P., Kacperczyk M. 
2020. Do investors care about carbon risk?, National Bureau of 
Economic Research available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3398441.
    \170\ Id.
    \171\ See Timo Busch, Matthew Johnson, Thomas Pioch, Corporate 
carbon performance data: Quo vadis? (2020), available at Corporate 
carbon performance data: Quo vadis?--Busch--2022--Journal of 
Industrial Ecology--Wiley Online Library (comparing available 
corporate carbon emission data across several main providers and 
finding, among other things, that the consistency of data is high in 
scopes 1 and 2 when the outliers are removed).
---------------------------------------------------------------------------

    In order for investors to understand the extent to which a fund's 
carbon footprint and WACI metrics are based on estimated GHG emissions, 
a fund that uses estimates in these calculations would be required to 
disclose the percentage of the aggregate portfolio GHG emissions that 
was calculated using the fund's good faith estimation process.\172\ The 
fund also would be required to provide a brief explanation of the 
process it used to calculate its good faith estimates of its portfolio 
company GHG emissions, including the data sources the fund relied on to 
generate these estimates. This brief explanation is designed to provide 
context for the fund's carbon footprint and WACI and allow investors to 
take into the account the extent to which these calculations rely on 
estimates and the information on which those estimates are based.
---------------------------------------------------------------------------

    \172\ See proposed Instruction 1(d)(xi)(C) of Item 
27(b)(7)(i)(E) of Form N-1A and proposed Instruction 1(d)(xi)(C) to 
instruction 4.g.(2)(B) of Item 24 of Form N-2.

---------------------------------------------------------------------------

[[Page 36682]]

    The brief explanation also would be complemented by additional, 
more granular information about the fund's process for calculating and 
estimating its portfolio's GHG emissions in order to facilitate 
investors' decision making.\173\ Specifically, we are proposing to 
require a fund to provide additional information on Form N-CSR 
regarding any assumptions and methodologies the fund applied in 
calculating the portfolio's GHG emissions, and any limitations 
associated with the fund's methodologies and assumptions, as well as 
explanations of any good faith estimates of GHG emissions the fund was 
required to make.\174\
---------------------------------------------------------------------------

    \173\ See proposed Item 7 of Form N-CSR. See also proposed 
Instruction 10 to Item 24 of Form N-2 (requiring BDCs to disclose, 
on Form 10-K, the information requiring by Item 7 of Form N-CSR).
    \174\ Id.
---------------------------------------------------------------------------

    While these additional disclosures provide important contextual 
information to investors and other industry participants regarding the 
fund's process for calculating GHG metrics, this information can be 
technical and complex. If we were to require funds to include this 
information in the annual report, it could make the report 
substantially longer and more difficult to understand. Therefore, we 
are proposing a layered approach to this disclosure, requiring a fund 
to disclose GHG metrics data in the annual report along with a brief 
summary of the sources of the data and the amount of estimated GHG 
emissions used, while providing more detailed information regarding the 
fund's process and methodology for calculating and estimating GHG 
metrics on Form N-CSR for investors and other industry participants who 
wish to access this additional information.\175\
---------------------------------------------------------------------------

    \175\ This layered approach to disclosure is in line with the 
Commission's approach in other contexts. See, e.g., Enhanced 
Disclosure and New Prospectus Delivery Option for Registered Open-
End Management Investment Companies, Investment Company Act Release 
No. 28584 (Jan. 13, 2009) [74 FR 4546 (Jan. 26, 2009)]; see also 
Updated Disclosure Requirements and Summary Prospectus for Variable 
Annuity and Variable Life Insurance Contracts, Investment Company 
Act Release No. 33814 (Mar. 11, 2020) [85 FR 25964 (May 1, 2020)]; 
Streamlined Shareholder Report Proposal, supra footnote 99.
---------------------------------------------------------------------------

    In addition to the above metrics, an environmentally focused fund 
would also be required to disclose the Scope 3 emissions of its 
portfolio companies, to the extent that Scope 3 emissions data is 
reported by the fund's portfolio companies.\176\ Scope 3 emissions 
would be disclosed separately for each industry sector in which the 
fund invests, and would be calculated using the carbon footprint 
methodology discussed above.\177\ We believe that presenting the Scope 
3 emissions separately and not combined with the fund's financed Scope 
1 and 2 emissions would alleviate some of the concerns related to the 
possibility of double counting emissions when adding Scope 3 emissions 
to a fund's financed Scope 1 and 2 emissions.\178\ Additionally, we 
recognize that Scope 3 emissions typically result from the activities 
of third parties in a portfolio company's value chain, making it more 
difficult for a fund to estimate the Scope 3 emissions associated with 
its portfolio companies as compared to Scope 1 and 2 emissions. 
Therefore, funds would not be required to estimate the Scope 3 
emissions of their portfolio companies under the proposal.
---------------------------------------------------------------------------

    \176\ See proposed Instruction 1(d)(x) of Item 27(b)(7)(i)(E) of 
Form N-1A; proposed Instruction 1(d)(x) of Item 24.4.g.(2)(B) of 
Form N-2. As with Scopes 1 and 2 emissions information, the proposal 
would also require funds to use Scope 3 emissions that are reported 
by a portfolio company in the company's most recently filed 
regulatory report, if available. In the absence of reported Scope 3 
emissions data from a portfolio company in a regulatory report, the 
fund would be required to use Scope 3 emissions information that is 
otherwise publicly provided by the portfolio company, such as a 
publicly available sustainability report published by the company, 
if available. See supra footnotes 166 and 164 and accompanying text.
    \177\ Funds would not be required to disclose their financed 
Scope 3 emissions using the WACI methodology.
    \178\ See the PCAF Standard, supra footnote 136 at n.40 (noting 
that double counting occurs between the different Scopes of 
emissions from loans and investments when a fund invests in 
portfolio companies that are in the same value chain because the 
Scope 1 emissions of one company can be the upstream Scope 2 or 3 
emissions of its customer).
---------------------------------------------------------------------------

    In addition, because financed Scope 3 emissions would already be 
broken out by sector, providing two metrics for each sector (i.e., one 
WACI and one carbon footprint metric for each sector) could result in 
an amount of GHG-related disclosure that may be confusing to investors. 
We believe that carbon footprint is an effective measure for this 
purpose because it is a relatively simple measure, depicting the scale 
of the fund's financed emissions, normalized by the size of the fund.
    We request comment on all aspects of the proposed amendments to 
fund annual reports and related disclosure in proposed Item 7 of Form 
N-CSR requiring GHG emissions disclosures for certain funds, including 
the following items.
    87. Should we, as proposed, require environmentally focused funds 
to disclose their GHG emissions? Would such disclosure help investors 
interested in investing in such funds select a fund that is appropriate 
for them? To what extent would requiring GHG metrics reporting help 
prevent greenwashing?
    88. Should we, as proposed, limit the GHG emissions reporting 
requirements to environmentally focused funds that do not affirmatively 
state that they do not consider GHG emissions of the issuers in which 
they invest as part of their ESG strategy? Should the GHG emissions 
reporting requirement be limited to fund strategies where the fund's 
adviser considers GHG emissions information in executing the fund's 
strategy? If so, would this approach achieve this goal? Are there other 
environmentally focused funds that should not be subject to the GHG 
emissions reporting requirements? Alternatively, should we propose 
modified or different GHG emissions reporting requirements for certain 
environmentally focused funds, such as funds that focus on investing in 
carbon capture technology?
    89. Do commenters agree that, with respect to BDCs that are 
environmentally focused funds, the GHG emission disclosure we are 
proposing in this release would complement the GHG disclosure proposed 
in the Climate Disclosure Proposing Release if both proposals were 
adopted? Conversely, should a BDC only be required to disclose the GHG 
emissions disclosure proposed in this release or only provide the 
disclosure proposed in the Climate Disclosure Proposing Release?
    90. Are there any potential unintended effects in requiring GHG 
emissions reporting? For example, are there investments that might 
report high emissions that could nonetheless help the fund achieve an 
investment objective related to the environment generally or climate 
change specifically, such as the GHG emissions generated from 
investments in the construction of windmills or electric cars? If so, 
would our proposed approach to limit GHG reporting to environmentally 
focused funds that do not affirmatively state that they do not consider 
GHG emissions of the issuers in which they invest help alleviate 
potential unintended effects of the GHG emissions reporting 
requirement? Rather than our proposed approach to limit the scope of 
funds subject to the GHG reporting requirement, should we instead 
require these funds to report alternative metrics that they consider in 
making investment decisions?
    91. Are there alternative metrics that funds focused on climate 
change consider in making investment decisions that we should require 
funds to report alongside or instead of the proposed GHG emission 
metrics?

[[Page 36683]]

    92. In addition to requiring environmentally focused funds to 
disclose their GHG emissions, should we also require Integration Funds 
that state that they use GHG metrics in their integration or investment 
process, or Integration Funds that consider environmental factors 
generally, to disclose their GHG emissions? Alternatively, should we 
require all ESG funds, regardless of their focus on E, S or G, to 
disclose these metrics? Alternatively, should we require all funds, 
regardless of whether they are ESG funds, to disclose their GHG 
emissions? Are investors in funds that do not involve ESG factors 
nonetheless interested in the GHG emissions associated with the funds' 
portfolios?
    93. Should we, as proposed, require funds to disclose the Scope 1 
and Scope 2 GHG emissions of their portfolio holdings using the carbon 
footprint and the WACI metrics? Do these metrics provide investors with 
useful information about the emissions associated with the fund's 
portfolio? Are we correct in our understanding that investors would 
benefit from seeing both metrics to appreciate the climate impact of 
the fund's investment decision as well as the fund's exposure to 
transition risks? Alternatively, should we require only one of these 
metrics to be disclosed? What are the costs associated with requiring 
the disclosure of a portfolio's Scope 1 and Scope 2 emissions?
    94. Should we require funds to disclose other metrics? Rather than 
requiring funds to disclose carbon footprint and WACI, should we allow 
funds to use any reasonable methodology to calculate the GHG emissions 
associated with their portfolios and provide an explanation of their 
methodology?
    95. The carbon footprint and WACI metrics we are proposing are 
generally consistent with the metrics recommended by the PCAF Standard 
and the TCFD. Are there alternative calculation methodologies that we 
should require funds to use? For example, should we require funds to 
disclose the carbon emissions of the portfolio as a whole? For example, 
would investors benefit from seeing the fund's carbon footprint not 
normalized for the size of the fund, to focus investors on the absolute 
level of GHG emissions associated with fund portfolios?
    96. Should we, as proposed, require funds to calculate their GHG 
emissions without including a provision permitting a fund to give 
effect to any purchased or generated carbon offsets? Alternatively, 
should we allow funds to provide GHG emissions net of such carbon 
offsets in lieu of an absolute presentation?
    97. Should we, as proposed, require funds to combine the Scope 1 
and Scope 2 emissions of their portfolios? Alternatively, should we 
require funds to report separately their portfolio Scope 1 emissions 
from their portfolio Scope 2 emissions?
    98. Are the proposed methods of calculating the carbon footprint 
and WACI metrics described above appropriate? Is there a better 
methodology for calculating a portfolio's carbon footprint and WACI? 
For example, should we require funds to use total assets, rather than 
net asset value as proposed, in the calculation of carbon footprint and 
WACI? Should we require funds to express the portfolio emissions in 
dollars, rather than millions of dollars as proposed?
    99. Is the proposed approach to calculating enterprise value 
appropriate? Is there a better way to calculate enterprise value?
    100. If an environmentally focused fund invests in a portfolio 
company with a holding company structure, should the fund's carbon 
footprint and WACI include the consolidated emissions of all 
subsidiaries owned by that holding company as Scope 2 emissions, or 
should the calculations include solely the Scope 1 and 2 emissions of 
the holding company? Are there alternative approaches to account for 
the holding company's control over the emissions of its subsidiaries?
    101. Should we, as proposed, require the disclosure of portfolio 
companies' Scope 3 emissions to the extent they are publicly reported 
by a portfolio company? Should we require funds to estimate these Scope 
3 emissions when they are not reported? How burdensome would this be 
for funds? Would the estimated Scope 3 emissions be reliable?
    102. Should we, as proposed, require the calculation of portfolio 
companies' Scope 3 emissions using the carbon footprint methodology 
only? Alternatively, should we require funds to disclose these Scope 3 
emissions using both the carbon footprint and the WACI metrics? Are 
there other metrics that we should require for portfolio company Scope 
3 emissions?
    103. Should we, as proposed, require the disclosure of portfolio 
companies' Scope 3 emissions separately for each industry sector in 
which the fund invests? Is ``industry sector'' the appropriate category 
for the portfolio companies' Scope 3 emissions? Alternatively, should 
we permit or require funds to use the same reasonably identifiable 
category for portfolio company Scope 3 emissions that they use to 
depict the portfolio holdings of the fund in the graphical 
representation of holdings section of the annual report?\179\ 
Alternatively, should we require the disclosure of a single metric for 
all these portfolio companies' Scope 3 emissions?
---------------------------------------------------------------------------

    \179\ See Item 27(d)(2) of Form N-1A; see also Instruction 6(a) 
to Item 24 of Form N-2.
---------------------------------------------------------------------------

    104. Should we, as proposed, require the calculation of Scope 1 and 
Scope 2 emissions separately from Scope 3 emissions? Alternatively, 
should we require funds to disclose all three emission types as a 
single metric?
    105. Are the proposed instructions related to the calculation of 
GHG metric methodologies clear, easily understandable, and appropriate?
    106. Are our proposed definitions of CO2e, GWP, GHG, GHG 
emissions, and Scopes 1, 2 and 3 appropriate? Are we correct in our 
understanding that these defined terms are generally accepted as the 
appropriate basis for measuring emissions, including financed emissions 
of portfolios? Are they consistent with the GHG Protocol, the TCFD and 
PCAF Standards? Are there alternative defined terms that we should 
adopt? Rather than defining these terms, should we instead allow funds 
to use their own definitions and provide an explanation of such terms?
    107. Is our definition of ``portfolio company,'' which includes the 
types of fund investments that should be included in the GHG metric 
calculations, appropriate? Should we, as proposed, include a fund's 
investments in other funds and private funds in the definition of the 
types of fund investments that should be included in the GHG emissions 
calculations? What are the costs associated with such a requirement?
    108. Should we prescribe how the fund must determine the GHG 
emissions associated with its investments in a fund or private fund? If 
the underlying fund or private fund discloses the GHG emissions of its 
portfolio, should funds be allowed to rely on the underlying fund's 
disclosed GHG emissions data as proposed? Alternatively, should the 
fund be required to look through its investment in the underlying fund 
regardless of whether such underlying fund discloses its GHG emissions?
    109. Should our definition of ``portfolio company'' exclude 
investments in money market funds, as proposed? To what extent do money 
market funds' investments finance emissions? Should this exclusion be 
limited to government money market

[[Page 36684]]

funds, as defined in rule 2a-7, which invest 99.5 percent or more of 
their total assets in cash, government securities, and/or repurchase 
agreements that are collateralized fully?
    110. Are there asset classes or investments that are not included 
in the proposed definition of a ``portfolio company'' that we should 
include in the definition? For example, should a ``portfolio company'' 
include sovereign bonds, cash, foreign currencies, and/or interest rate 
swaps and other derivatives that do not reference a ``portfolio 
company''? Would it be practical to include these holdings and how 
would funds calculate the financed emissions attributable to them? Are 
there other types of fund investments that we should include or 
exclude? Should funds be required to separately disclose the percentage 
of the fund's investments that were not included in the GHG emissions 
calculations? If so, where should such disclosure appear?
    111. Are there particular types of investments that should be 
treated differently for purposes of a fund's carbon footprint or WACI? 
For example, should fixed-income securities or securities sold short be 
treated differently? When a bond is issued for a specific purpose or 
project, should the GHG emissions associated with the bond be limited 
to those associated with the purpose or project? Is sufficient 
information available for such an attribution? When a security is sold 
short, should the GHG emissions associated with the security be 
subtracted from a fund's WACI or carbon footprint? To what extent would 
special instructions for particular types of investments such as 
special-purpose bonds or securities sold short increase the complexity 
of the calculation and attendant costs?
    112. Is our proposed approach to the calculation of GHG metrics 
related to derivative instruments appropriate? To what extent do funds 
that would be subject to this disclosure requirement enter into 
derivatives? Is the proposed treatment of derivatives appropriate and 
clear as applied to these derivatives? Alternatively, should we exclude 
derivatives instruments from the definition of a ``portfolio company'' 
or ``portfolio holding'' so that funds would be not be required to 
attribute GHG emission to these investments?
    113. Should we, as proposed, require funds to obtain all the 
information necessary to calculate a portfolio company's enterprise 
value from their most recent regulatory report? Would this approach 
ease the burdens and costs associated with complying with the proposal? 
Would it enhance the comparability of the information across funds with 
similar investments? Alternatively, should we require funds to obtain 
more recent data, if such information is voluntarily provided by the 
portfolio company?
    114. For non-U.S. portfolio companies, should we require funds to 
obtain all the information necessary to calculate a portfolio company's 
enterprise value from non-U.S. regulatory reports, if available? If so, 
would funds experience challenges in identifying relevant non-U.S. 
regulatory reports and determining if they contain information that can 
be used to calculate the fund's WACI or carbon footprint?
    115. For fund investments in private companies or other portfolio 
companies that do not file regulatory reports, should we require funds 
to obtain all the information necessary to calculate private company's 
enterprise value data related to those holdings directly from the 
companies, as proposed? What are the burdens and costs associated with 
such an approach? Would such information be consistent and reliable 
across portfolio companies? If this information is not available, 
should we require funds to estimate the data necessary to calculate the 
company's enterprise value?
    116. Should we, as proposed, require all necessary data related to 
the fund to be provided as of the fund's most recently completed fiscal 
year and all necessary data related to the portfolio company as of the 
date of the relevant regulatory report filed by the portfolio company 
containing the necessary information? Would the inconsistency in the 
``as of'' dates of the data used in the calculation of GHG metrics 
affect the quality of the fund's GHG emissions disclosure?
    117. If a portfolio company reports its total revenue in currency 
other than U.S. dollars, should we, as proposed, require a fund to 
convert the reported revenue to U.S. dollars using the exchange rate as 
of the date of the portfolio company's regulatory report? What are the 
costs associated with such a requirement? Should we instead allow a 
fund to use the exchange rate as of the fund's most recently completed 
fiscal year or, alternatively, the current exchange rate?
    118. If a portfolio company reports zero revenue in a given year, 
how should funds represent the carbon emissions for such portfolio 
companies in the fund's calculation of its WACI? For example, should 
funds be required to use ``1'' as the revenue for a portfolio company 
with zero revenue when calculating the WACI to avoid incorrectly 
reporting zero emissions for such a portfolio company? Alternatively, 
should funds exclude portfolio companies that report zero revenue from 
the fund's calculation of its WACI and disclose the percentage of the 
fund's NAV represented by these portfolio companies?
    119. Should we, as proposed, include a data hierarchy for the 
sources of GHG emissions information? Is the specific proposed 
hierarchy--i.e., regulatory reports, followed by other public reports, 
and then good faith estimates of emissions--appropriate? Are there any 
sources of data we should explicitly include or remove? If we were to 
add sources of data, where in the hierarchy should they be placed? For 
example, should we require funds to use data from portfolio companies 
filed with non-U.S. securities or banking regulators if available, 
instead of other publicly reported data? Should we, instead of 
establishing a hierarchy, require funds to form a reasonable estimate 
of each portfolio company's GHG emissions in all cases and permit funds 
to use whatever data they believe in good faith to be the most 
reliable?
    120. Should we, as proposed, require that a fund use the Scope 1, 
Scope 2, and Scope 3 emissions of a portfolio company from the 
company's most recent regulatory report if the report includes that 
information? Would this approach ease the burdens and costs associated 
with complying with the proposal to the extent portfolio companies 
include the relevant GHG information in their regulatory reports? Would 
it enhance the comparability of the information across funds with 
similar investments? Are we correct in our understanding that data 
provided in a regulatory report filed with the Commission is always 
more reliable than information disclosed on portfolio company website 
and GHG emissions estimates generated by an ESG provider? 
Alternatively, should we require funds to seek to obtain more recent 
data from the portfolio company? What are the costs and burdens 
associated with such an alternative approach?
    121. For portfolio companies that do not report or otherwise 
provide their Scope 1 and Scope 2 emissions (``non-reporting portfolio 
companies''), should we, as proposed, require funds to use a good faith 
estimate of the portfolio companies' Scope 1 and Scope 2 emissions? 
Should we provide additional guidance on performing these calculations?
    122. How burdensome would it be to estimate Scope 1 and Scope 2 
emissions and how reliable would the estimates be? Are there ways to 
ease such burdens

[[Page 36685]]

that we should adopt? For example, should we provide a safe harbor from 
liability for fund disclosure of GHG emissions data because the 
disclosure will be based on information provided by third parties? If 
so, should any safe harbor apply to all of the GHG disclosures we are 
proposing for funds, or should it be more limited, such as only 
applying to the Scope 3 emissions of the fund's portfolio companies, 
and/or a fund's good faith estimates of Scope 1 and Scope 2 financed 
emissions? How should any safe harbor operate? Should the safe harbor 
provide that the disclosure will not be a fraudulent statement if 
certain conditions are met? What conditions would be appropriate? For 
example, should a safe harbor require a fund to perform a certain level 
of diligence to take advantage of the safe harbor, to ensure that the 
fund does not receive the benefit of the safe harbor without 
appropriate diligence? How should any diligence requirement or required 
state of mind be worded? For example, should the safe harbor be 
available only if the fund's disclosure of GHG emissions have a 
reasonable basis and were disclosed in good faith? How should we define 
a ``fraudulent statement'' for purposes of such a safe harbor, and are 
there are any antifraud provisions in the Securities Act, Exchange Act, 
Investment Company Act, or any other provisions of the Federal 
securities laws, to which the safe harbor should not apply?
    123. If a portfolio company does not provide GHG emissions data in 
a regulatory report, but does provide it in other publicly available 
documents or on its website, should we require a fund to use this 
information, as proposed? Alternatively, should we allow a fund to form 
its own good faith estimate even when a portfolio company publicly 
provides its GHG emissions data? Would it be difficult for a fund to 
determine with high confidence that a given portfolio company does not 
publicly report GHG information outside of the company's regulatory 
reports?
    124. Rather than requiring a fund to estimate a non-reporting 
company's GHG emissions, should we exclude non-reporting companies from 
a fund's GHG emission calculations? If so, should we also limit a 
fund's ability to invest in non-reporting companies? For example, 
should we limit a fund's ability to invest in non-reporting companies 
to 20% of a fund's net asset value?
    125. Should we, as proposed, require a fund to briefly discuss in 
the MDFP or MD&A how the fund estimates any GHG emissions, including 
the sources of data for determining such estimates, and the percentage 
of the fund's aggregated GHG emissions for which the fund used 
estimates rather than reported emissions? Is it clear to funds what 
this description should include? Is there any additional guidance that 
we should provide? For example, if a fund bases its estimate on 
information provided by an ESG service provider, is there any 
additional information that we should explicitly require regarding 
these service providers? Would this additional information be helpful 
to investors in understanding how a fund calculates its GHG emissions?
    126. Should we, as proposed, require a fund to narratively explain 
on Form N-CSR the methodologies and assumptions it applied when 
calculating any good faith estimates of a portfolio company's GHG 
emissions? Is it clear to funds what this description should include? 
For funds that base their estimates on information provided by ESG 
service providers, would the funds be able to describe the underlying 
methodologies and assumptions used by these service providers?
    127. Is our layered approach to the disclosure of GHG emissions 
appropriate? Should we require a fund to state, in the shareholder 
report, that additional information regarding the underlying 
assumptions and methodologies is available on Form N-CSR? Would 
investors be sufficiently familiar with Form N-CSR to understand the 
cross reference? Would funds be able to provide a hyperlink or other 
more specific reference even though the fund may not have filed its 
report on Form N-CSR at the time it delivers the shareholder report? 
Alternatively, should we require a fund to summarize briefly the 
underlying methodologies and assumptions, including any limitations of 
the methodology, in the shareholder report?
4. Inline XBRL Data Tagging
    We are proposing to require that funds submit all proposed ESG-
related registration statement and fund annual report disclosure filed 
with the Commission in a structured, machine-readable data 
language.\180\ Specifically, we would require such funds to submit the 
specified information to the Commission in Inline XBRL, which allows 
investors and other market participants, such as data aggregators 
(i.e., entities that, in general, collect, package, and resell data) to 
use automated analytical tools to extract the information sought 
wherever it may be located within a filing.\181\
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    \180\ The requirement to submit this information in Inline XBRL 
would apply to open- and registered closed-end funds and BDCs, and 
to UITs that file with the Commission on Forms N-1A [17 CFR 
274.11A], N-2 [17 CFR 274.11a-1], or S-6 [17 CFR 239.16] and to 
annual shareholder reports filed on Form N-CSR [17 CFR 274.128] and 
annual reports filed on Form 10-K [17 CFR 249.310]. This tagging 
requirement would be implemented by including cross-references to 
rule 405 of Regulation S-T in each fund registration form (and, as 
applicable, updating the cross-references to rule 405 in those 
registration forms that currently require certain information to be 
tagged in Inline XBRL--that is, Form N-1A and Form N-2); revising 
rule 405(b) of Regulation S-T to include the tagging of the ESG-
related disclosures. Pursuant to 17 CFR 232.301 (``rule 301 of 
Regulation S-T''), the EDGAR Filer Manual is incorporated into the 
Commission's rules. In conjunction with the EDGAR Filer Manual, 
Regulation S-T governs the electronic submission of documents filed 
with the Commission. Rule 405 of Regulation S-T specifically governs 
the scope and manner of disclosure tagging for operating companies 
and investment companies, including the requirement in rule 
405(a)(3) to use Inline XBRL as the specific structured data to use 
for tagging disclosures.
    \181\ The Commission has an open source Inline XBRL Viewer that 
allows the user to make an Inline XBRL data human-readable and 
allows filers to more readily filter and identify errors. Anyone 
with a recent standard internet browser can view any Inline XBRL 
filing on the Commission's Electronic Data Gathering, Analysis, and 
Retrieval (EDGAR) system at no cost. More information about the 
Commission's Inline XBRL Viewer is available at https://www.sec.gov/structureddata/osd-inline-xbrl.html. In addition, our proposed 
amendments to 17 CFR 232.11 (``rule 11 of Regulation S-T''), which 
would include Forms N-8B-2 and S-6 in the definition of an 
``Interactive Data File,'' mean that an UIT that files on those 
forms would, as registrants that file on Forms N-1A, N-3, N-4, and 
N-6, automatically be suspended from the ability to file a post-
effective amendment for immediate effectiveness if the UIT fails to 
submit any Interactive Data File required by the form on which it 
files its post-effective amendment. See proposed amendments to 17 
CFR 230.485 (``rule 485'') and 17 CFR 230.497(c) and (e) (``rule 
497(c) and (e)''). We also are proposing to amend these rules to 
simplify the current structured data rule requirements prescribed by 
those rules. Id.
---------------------------------------------------------------------------

    To implement the proposed structured data requirements, we propose 
to amend 17 CFR 232.405 (``rule 405 of Regulation S-T'') to reference 
the ESG-specific form provisions.\182\ The information required to be 
tagged in Inline XBRL would have to satisfy the requirements of rule 
405 of Regulation S-T in accordance with the EDGAR Filer Manual.
---------------------------------------------------------------------------

    \182\ See proposed 17 CFR 232.405(b)(2)(i) and (b)(3)(iii); see 
also proposed amendments to 17 CFR 232.11 (amending the term 
``related official filing,'' in part, to include references to Form 
N-8B-2 [17 CFR 274.12] and Form S-6 [17 CFR 239.16]).
---------------------------------------------------------------------------

Background
    All open- and registered closed-end funds and BDCs are currently 
subject to Inline XBRL structured data requirements.\183\ In 2009, the

[[Page 36686]]

Commission adopted rules requiring operating company financial 
statements and mutual fund risk/return summaries to be submitted in 
XBRL entirely within an exhibit to a filing.\184\ In 2018, the 
Commission adopted modifications to these requirements by requiring 
issuers to use Inline XBRL to reduce the time and effort associated 
with preparing XBRL filings and improve the quality and usability of 
XBRL data for investors.\185\ In 2020, the Commission adopted new 
Inline XBRL requirements for registered closed-end funds and BDCs that 
will be effective no later than February 2023.\186\ The Commission has 
also adopted requirements for most registered investment companies to 
file monthly reporting of portfolio securities on a quarterly basis, in 
a structured data language.\187\ Much of this information is publicly 
available as structured data on the Commission's website at 
www.sec.gov.
---------------------------------------------------------------------------

    \183\ Many funds are already required to tag certain 
registration statement disclosure items using Inline XBRL; however, 
UITs that register on Form N-8B-2 and file post-effective amendments 
on Form S-6 are not currently subject to any tagging requirements. 
The costs of these requirements for funds that are currently subject 
to tagging requirements and those that newly would be required to 
tag certain disclosure items are discussed in the Economic Analysis. 
See section III.C.2 infra.
    \184\ Interactive Data to Improve Financial Reporting, Release 
No. 33-9002 (Jan. 30, 2009) [74 FR 6776 (Feb. 10, 2009)] as 
corrected by Release No. 33-9002A (Apr. 1, 2009) [74 FR 15666 (Apr. 
7, 2009)]; Interactive Data for Mutual Fund Risk/Return Summary, 
Investment Company Act Release No. 28617 (Feb. 11, 2009) [74 FR 
7748] (Feb. 19, 2009)]) (``2009 Risk/Return Summary Adopting 
Release'').
    \185\ Inline XBRL Filing of Tagged Data, Investment Company Act 
Rel. No. 33139 (June 28, 2018) [83 FR 40846, 40847 (Aug. 16, 2018)] 
(``Inline XBRL Adopting Release''). Inline XBRL allows filers to 
embed XBRL data directly into an HTML document, eliminating the need 
to tag a copy of the information in a separate XBRL exhibit. Id. at 
40851.
    \186\ Securities Offering Reform for Closed-End Investment 
Companies, Investment Company Act Rel. No. 33814 (Apr. 8, 2020) [85 
FR 33290 (June 1, 2020) at 33318] (``Closed-End Fund Offering Reform 
Adopting Release'') (requiring BDCs to submit financial statement 
information, and registered closed-end funds and BDCs to tag Form N-
2 cover page information and specified prospectus disclosures using 
Inline XBRL). In 2020, the Commission also adopted Inline XBRL 
requirements for separate accounts registered as management 
investment companies. See Updated Disclosure Requirements and 
Summary Prospectus for Variable Annuity and Variable Life Insurance 
Contracts, Investment Company Act Rel. No. 33814 (Mar. 11, 2020) [85 
FR 25964 (May 1, 2020)] (``Variable Contract Summary Prospectus 
Adopting Release'') (requiring variable contracts to use Inline XBRL 
to submit certain required prospectus disclosures). Most recently, 
the Commission adopted amendments that revise most fee-bearing 
forms, schedules, statements, and related rules to require all fee 
calculation information to be in a filing fee exhibit that must be 
tagged in Inline XBRL. See Filing Fee Disclosure and Payment Methods 
Modernization, Investment Company Act Rel. No. 34396 (Oct. 13, 2021) 
[86 FR 70166 (Dec. 9, 2021)] (``Filing Fee Adopting Release'').
    \187\ Registered investment companies (other than money market 
funds and small business investment companies) must report 
information about their monthly portfolio holdings to the Commission 
in a structured data format on a quarterly basis, 60 days after 
quarter end, on Form N-PORT, and the holdings for the last month of 
each quarter is made publicly available. See Investment Company 
Reporting Modernization, Investment Company Act Rel. No. 32314 (Oct. 
13, 2016) [81 FR 81870 (Nov. 18, 2016)] (``Reporting Modernization 
Release''); see also Amendments to the Timing Requirements for 
Filing Reports on Form N-PORT, Investment Company Act Release No. 
33384 (Feb. 27, 2019) [84 FR 7980 (Mar. 6, 2019)] (``N-PORT 
Modification Release''). Money market funds must report portfolio 
information on Form N-MFP. See Money Market Fund Reform, Investment 
Company Act Release No. 29132 (Feb. 23, 2010) [75 FR 10060 (Mar. 4, 
2010)]. See also infra at 0, discussing information we are proposing 
to require in regulatory census reporting forms using a structured 
data language. Mutual fund prospectus risk/return summary data sets 
are available at https://www.sec.gov/dera/data/mutual-fund-prospectus-risk-return-summary-data-sets.
---------------------------------------------------------------------------

Discussion
    We believe that requiring funds to tag their ESG disclosures using 
Inline XBRL would benefit investors, other market participants, and the 
Commission by making the disclosures more readily available and easily 
accessible for aggregation, comparison, filtering, and other analysis, 
as compared to requiring a non-machine readable data language such as 
ASCII or HTML. The proposed tagging requirements using Inline XBRL 
would enable automated extraction and analysis of data regarding the 
ESG disclosures for investors and other market participants who seek to 
access information about funds that provide ESG disclosures, both 
directly and through information intermediaries such as data 
aggregators and financial analysts. Providing a standardized, 
structured data framework could facilitate more efficient investor 
large-scale analysis and comparisons across funds and across time 
periods. An Inline XBRL requirement would facilitate other analytical 
benefits, such as more easily extracting/searching ESG-related 
disclosures (rather than having to manually run searches for those 
disclosures through entire documents), automatically compare/redline 
these disclosures against prior periods, and perform targeted 
assessments of specific narrative disclosures rather than the entire 
unstructured document. For investors and other market participants, 
requiring funds to tag their ESG disclosures in a structured data 
language would both increase the availability, and reduce the cost, of 
collecting and analyzing such information, potentially increasing 
transparency and mitigating the potential informational costs as 
compared to unstructured disclosure. Further, for filers, Inline XBRL 
can enhance the efficiency of review, yield time and costs savings, and 
potentially enhance the quality of data compared to other machine-
readable standards, as certain errors would be easier to correct 
because the data is also human readable. This aspect of our proposed 
amendments is in keeping with the Commission's ongoing efforts to 
implement reporting and disclosure reforms that take advantage of the 
benefits of advanced technology to modernize the fund reporting regime 
and to, among other things, help investors and other market 
participants better assess different funds.
    We request comment on all aspects of our proposed Inline XBRL 
requirements, including the following items:
    128. Should any of the proposed disclosure items be excepted from 
the proposed Inline XBRL requirement? What would be the effects on data 
quality and usability to investors and other data users with excepting 
such disclosure items from the requirement to submit data in Inline 
XBRL?
    129. Should we require or permit funds to use a different 
structured data language to tag the proposed disclosures? If so, what 
structured data language should we require or permit, and why?
    130. What costs or other burdens (e.g., related to personnel, 
systems, operations, compliance, etc.) would the proposed Inline XBRL 
requirements impose on funds? Please provide quantitative estimates to 
the extent available.
    131. How long is it likely to take for vendors and filers to 
develop solutions for tagging the disclosure required by our proposed 
amendments?
    132. Are any other amendments necessary or appropriate to require 
the submission of the proposed information required to be submitted in 
Inline XBRL? What changes should we make and why?
    133. To what extent do investors and other market participants find 
information that is available in Inline XBRL useful for analytical 
purposes? Is information that is narrative, rather than numerical, 
useful content for analytical tools?
    134. Are there any funds, such as smaller funds, that we should 
except from the Inline XBRL requirements? Should we, as proposed, apply 
the Inline XBRL requirements to UITs?

B. Adviser Brochure (Form ADV Part 2A)

    Given the rising significance investors place on the consideration 
of ESG factors when making investment decisions, we also are proposing 
amendments to Form ADV Part 2A to include information about registered

[[Page 36687]]

advisers' ESG practices. Advisers registered with the Commission must 
deliver a brochure and one or more brochure supplements to each of 
their clients or prospective clients, which advisers may use to help 
them with their disclosure obligations as fiduciaries.\188\ The adviser 
brochure is designed to provide a narrative, plain English description 
of the adviser's business, conflicts of interest, disciplinary history, 
and other important information to help clients make more informed 
decisions about whether to hire or retain that adviser.\189\ We are 
proposing to require ESG-related disclosures from registered investment 
advisers that consider ESG factors as part of their advisory 
businesses.
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    \188\ See 17 CFR 275.204-3 (``Advisers Act rule 204-3'') and 
Amendments to Form ADV, Investment Advisers Act Release No. 3060 
(July 28, 2010) [75 FR 49233 (Aug. 12, 2010)], available at https://www.sec.gov/rules/final/2010/ia-3060.pdf (``Brochure Adopting 
Release''). See also Commission Interpretation Regarding Standard of 
Conduct for Investment Advisers, Release No. IA-5248, at 6-8 (June 
5, 2019) [84 FR 33669 (July 12, 2019)], available at https://www.sec.gov/rules/interp/2019/ia-5248.pdf (``Fiduciary 
Interpretation'').
    \189\ See Brochure Adopting Release, supra footnote 188, at text 
accompanying nn.8 and 9.
---------------------------------------------------------------------------

    We designed these proposed requirements to provide clients and 
prospective clients with useful and comparable information to help them 
better evaluate the ESG-related services of the growing number of 
advisers that offer them and the variety of ways advisers currently 
approach ESG investing. We believe that requiring advisers to disclose 
with specificity their ESG investing approach would help clients 
understand the investing approach the adviser uses, as well as compare 
the variety of emerging approaches, such as employment of an 
inclusionary or exclusionary screen, focus on a specific impact, or 
engagement with issuers to achieve ESG goals. While the proposed 
requirements share several elements with the requirements we are 
proposing for registered funds that consider ESG factors, they differ 
in key respects. First, the proposed requirements for advisers reflect 
that, unlike a fund prospectus, which describes a single portfolio 
strategy, an adviser's brochure typically reflects the entire business 
of the adviser, which may encompass multiple advisory services, 
investment strategies, and methods of analysis.\190\ Additionally, the 
proposed requirements reflect that the brochure discloses key aspects 
of the advisory relationship, including certain relationships with 
related persons.\191\ We believe our proposed additions to the brochure 
would help clients and prospective clients better understand how these 
advisers consider ESG factors when formulating investment advice and 
providing investment recommendations, and any corresponding risks or 
conflicts of interest. A client may use this disclosure to select an 
adviser and evaluate the adviser's business practices and conflicts on 
an ongoing basis. As a result, the disclosure that clients and 
prospective clients receive is critical to their ability to make an 
informed decision about whether to engage an adviser and, having 
engaged the adviser, to manage that relationship. We believe these 
amendments would overall improve the ability of clients and prospective 
clients to evaluate firms offering advisory services that consider ESG 
factors, help clients make more informed choices regarding ESG 
investing, and better compare advisers and investment strategies.
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    \190\ However, if an adviser offers substantially different 
types of advisory services, the adviser may opt to prepare separate 
brochures so long as each client receives all applicable information 
about services and fees. See Instructions for Part 2A of Form ADV: 
Preparing Your Firm Brochure, Instruction 9.
    \191\ See, e.g., Form ADV Part 2A Item 10.C.
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(a) Item 8: Methods of Analysis, Investment Strategies and Risk of Loss
    Item 8 of the brochure requires advisers to describe the methods of 
analysis and investment strategies used when formulating investment 
advice or managing assets, and to provide a detailed explanation of any 
material, significant, or unusual risks presented by each of the 
adviser's significant investment strategies or methods of 
analysis.\192\ Further, if an adviser primarily recommends a particular 
type of security, the adviser must explain any material, significant, 
or unusual risks of investing in that security. We are proposing to add 
a new sub-Item 8.D, which would require an adviser to provide a 
description of the ESG factor or factors it considers for each 
significant investment strategy or method of analysis for which the 
adviser considers any ESG factors. Similar to our proposal for 
registered funds, we are not proposing to define ``ESG'' or similar 
terms.\193\ Instead, we are proposing to require advisers to provide a 
description of the ESG factor or factors they consider, and disclose to 
clients how they incorporate these factors when providing investment 
advice, including when recommending or selecting other investment 
advisers. However, we are proposing definitions for ESG integration, 
focused, and impact strategies, which are similar to the way we propose 
to define them for registered funds.\194\ We believe that proposed sub-
Item 8.D, which would include the additional disclosures described 
below, would help clients and prospective clients, as well as other 
market participants, better understand how advisers consider ESG 
factors when implementing their significant investment strategies. More 
specifically, these disclosures would allow clients and prospective 
clients to compare the ways different advisers consider ESG factors in 
their significant investment strategies.\195\ We believe that as a 
result, clients and prospective clients would be better able to select 
an investment adviser that matches their expectations regarding ESG 
investing.
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    \192\ For purposes of this release, we refer to significant 
investment strategies or methods of analysis as ``significant 
strategies.''
    \193\ See supra Section II.A.1 (``Proposed Prospectus ESG 
Disclosure Enhancements'').
    \194\ See Proposed Form ADV Part 2A sub-Item 8.D. The 
differences between the proposed terms for funds and advisers 
reflect the structural differences between funds and advisers (e.g., 
that advisers to clients that are not registered investment 
companies provide investment advice that may or may not be 
discretionary). In addition, for example, the proposed definition of 
``ESG-Focused'' for advisers would differ from the proposed 
definition for funds because the adviser definition would not 
specifically incorporate advisers with certain ESG-related names or 
advertising materials.
    \195\ We believe that clients seeking advisory services tailored 
to their ESG investing goals would refer to advisers' disclosures 
under the brochure's current Item 4, to assess whether and how an 
adviser tailors its advisory services to the individual needs of 
clients, and whether clients may impose restrictions on investing in 
certain securities or types of securities.
---------------------------------------------------------------------------

    As with our proposal for registered funds and for the reasons 
described above, we believe that for a client or prospective client to 
evaluate effectively the relevant ESG strategies offered by an adviser, 
an adviser must explain what it means when it states that it 
incorporates ESG factors in its investment recommendations, including 
describing the ESG factors. This proposed sub-item would require an 
explanation of whether and how the adviser incorporates a particular 
ESG factor (E, S, or G) and/or a combination of factors. In addition, 
similar to funds, the proposed disclosure would include an explanation 
of whether and how the adviser employs integration and/or ESG-focused 
strategies, and if ESG-focused, whether and how the adviser also 
employs ESG impact strategies. An adviser that considers different ESG 
factors for different strategies should include the proposed 
disclosures for each strategy.\196\
---------------------------------------------------------------------------

    \196\ See infra footnote 223 and accompanying text.
---------------------------------------------------------------------------

    For example, an adviser pursuing an integration strategy may 
consider the carbon emissions of its investments

[[Page 36688]]

alongside other, non-ESG factors when making investment 
recommendations. In such a case, when explaining its integration 
strategy, our proposal would require the adviser to explain how it 
incorporates carbon emissions when making investment recommendations. 
This explanation would include that the adviser considers other, non-
ESG factors alongside its consideration of carbon emissions, but that 
carbon emissions are generally no more significant than the other 
factors when providing investment advice, such that carbon emissions 
may not be determinative in deciding whether to recommend any 
particular investment. If an adviser employs an ESG-focused strategy 
because it focuses on one or more ESG factors by using them as a 
significant or main consideration in providing investment advice or in 
its engagement strategy with the companies in which its clients invest, 
it would describe those ESG factors. It would also describe how the 
adviser incorporates those factors when providing investment advice. To 
the extent an adviser employs an ESG-focused approach that is also 
considered ESG-impact because the adviser seeks to achieve a specific 
ESG impact or impacts for the significant strategy, our proposed 
brochure amendment would require additional disclosures. Such an 
adviser would provide an overview of the impact(s) the adviser is 
seeking to achieve, and how the adviser is seeking to achieve the 
impact(s). This would include how the adviser measures progress toward 
the stated impact, disclosing the key performance indicators the 
adviser analyzes, the time horizon the adviser uses to analyze 
progress, and the relationship between the impact the adviser is 
seeking to achieve and financial return(s).
    We are also proposing that if an adviser uses, for any significant 
strategy, criteria or a methodology to evaluate, select, or exclude 
investments based on the consideration of ESG factors, it must describe 
those criteria and/or methodologies and how it uses them. An adviser 
that employs different criteria or methodologies for different 
strategies would include the proposed disclosures for each significant 
strategy. Similar to our proposed disclosures for funds, proposed sub-
Item 8.D would provide a non-exclusive list of criteria and 
methodologies to address, as applicable. They are an adviser's use of:
    (i) An internal methodology, a third-party criterion or methodology 
such as a scoring provider or framework, or a combination of both, 
including an explanation of how the adviser evaluates the quality of 
relevant third-party data;
    (ii) An inclusionary or exclusionary screen, including an 
explanation of 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 the inclusionary or exclusionary 
screen; and
    (iii) An index, including the name of the index and a description 
of the index and how the index utilizes ESG factors in determining its 
constituents.
    As described above, this disclosure is designed to help a client or 
prospective client understand how the adviser implements ESG into its 
investment process so that a client with ESG investing objectives can 
evaluate whether the adviser's ESG investment process matches the 
client's objectives and expectations. Under the proposed requirement, 
if an adviser applies inclusionary or exclusionary investment screens 
based on ESG factors, the adviser would describe those screens, 
including identifying the specific industries or business activities it 
seeks to include or exclude and any applicable exceptions. If an 
adviser utilizes other criteria or methodologies to evaluate, select, 
or exclude investments based on the consideration of ESG factors, for 
example relying on an internal scoring methodology for investments 
based on ESG factors, it would describe the internal methodology and 
how the adviser uses it. If an adviser's criteria or methodologies 
include following a third-party ESG framework, it would describe, and 
explain how it uses, the framework and may consider providing a 
hyperlink to the framework in its brochure to enhance investors' 
understanding of the framework.
(b) Item 10: Other Financial Industry Activities and Affiliations
    Advisers are currently required to disclose information about their 
other financial industry activities and affiliations in Item 10 of Form 
ADV Part 2A. We are proposing an amendment to Item 10.C. to require an 
adviser to describe any relationship or arrangement, that is material 
to the adviser's advisory business or to its clients, that the adviser 
or any of its management persons have with any related person that is 
an ESG consultant or other ESG service provider (for purposes of this 
release, a ``related person ESG provider'').\197\ Related person ESG 
providers may include, for example, ESG index providers and ESG scoring 
providers.\198\
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    \197\ Under our proposal, the term ``management person'' and 
``related person'' would be defined as currently defined in the Form 
ADV glossary of Terms.
    \198\ For a discussion of ESG providers, see supra text 
accompanying footnote 25.
---------------------------------------------------------------------------

    In our view, the relationship between an adviser or its management 
person and a related person ESG provider is the type of relationship 
the disclosure in this item was designed to address because such a 
relationship could create conflicts of interest. For example, if an 
adviser's related person provides ESG ratings or an ESG index, the 
adviser could be incentivized to employ its related person ESG 
provider's services rather than purchasing ESG ratings or indices from 
unrelated ESG providers. The proposed amendments would require the 
adviser to identify the related person ESG provider, describe its 
relationship or arrangement with the provider, and if the relationship 
or arrangement creates a material conflict of interest with clients, 
describe the nature of the conflict, as well as how the adviser 
addresses it.
    Additionally, while some advisers' related person ESG providers may 
also be related persons falling into other categories listed in Item 
10.C (e.g., other investment advisers or broker-dealers), others may 
not fall into any of those categories. We believe adding ESG providers 
to the list of related parties covered under Item 10.C would promote 
advisory clients and prospective clients receiving full and fair 
disclosure of the conflicts created by an adviser's relationships or 
arrangements with related persons. Clients and prospective clients 
would be able to incorporate related person ESG providers and potential 
conflicts of interest into their adviser selection processes. In some 
cases, the client may not be comfortable with the conflicts of interest 
that those affiliations create, while other clients may value an 
advisory relationship that allows for broader access to ESG providers 
and may seek an adviser with ESG provider affiliates.
(c) Item 17 Voting Client Securities
    Among other matters, Item 17 of the brochure requires advisers that 
have, or will accept, the authority to vote client securities to 
briefly describe their voting policies and procedures. We are proposing 
to amend Item 17.A to require advisers that have specific voting 
policies or procedures that include one or more ESG considerations when 
voting client securities to include in their brochures a description of 
which ESG factors they consider and how they consider them.\199\ If an 
adviser has

[[Page 36689]]

different voting policies and procedures for strategies that address 
ESG-related matters, or for different clients or different ESG-related 
strategies, the adviser generally should describe those 
differences.\200\
---------------------------------------------------------------------------

    \199\ Proposed Form ADV Part 2A, Item 17.A. As with the other 
ESG-related information, we are proposing in this context--and to 
the extent not addressed elsewhere in their brochures--that advisers 
should describe the ESG factors they consider. If an adviser 
provides such a description earlier, then a cross reference to such 
description would meet this proposed requirement.
    \200\ An adviser generally should include whether the adviser 
allows clients to direct their votes on ESG-related voting matters.
---------------------------------------------------------------------------

    These amendments are designed to provide clients and prospective 
clients additional information on proxy voting practices at these 
advisers given some clients' increased focus on ESG-related issues. We 
believe that clients (and other market participants) could use this 
information to understand better and to monitor advisers' engagement 
with portfolio companies on ESG issues. In addition, the Commission 
would be better able to understand the variety of advisers' ESG-related 
proxy voting practices that are emerging in the markets.
    We request comment on all aspects of these proposed amendments to 
Items 8, 10, and 17 of Form ADV Part 2A, including the following items.
    135. Instead of our proposed narrative ESG disclosures that would 
be similar in style of presentation to the rest of the brochure, should 
advisers be required to present ESG-related information in the brochure 
in a particular format (e.g., a table or chart),? If so, should we 
require a format similar to the format we are proposing for funds? 
Should it differ? Should advisers be required to use other formatting 
and design features to highlight or distinguish ESG-related disclosures 
from other information provided in any of these Items? For example, 
should we require advisers to use subheadings or another formatting 
feature designed to identify ESG-related information? Should we 
consider moving any of the proposed disclosures to a separate section 
of the brochure or to a new ESG appendix to the brochure, and/or should 
we require an ESG-specific brochure?
    136. Is there other information about the consideration of ESG 
factors when providing investment advice that advisers should be 
required to include in their brochures? If so, please describe.
    137. Is it clear from the current brochure Item 4 that an adviser 
that offers advisory services that may be tailored to the ESG 
preferences of its clients is required to explain whether (and, if so, 
how) it tailors its advisory services and whether clients may impose 
restrictions on investing in certain securities or types of securities? 
If not, should we also propose to specify that all advisers that tailor 
their advisory services based on the ESG preferences of clients must 
describe the tailoring as part of Item 4 (Advisory Business)? How do 
advisers currently describe and disclose information about their 
tailored ESG services in their brochures?
    138. To what extent do advisers tailor their advisory business to 
address the ESG preferences of individual clients? What level of 
tailoring do advisers offer? For example, can clients create their own 
exclusionary investment screens or do advisers offer a menu of ESG-
focused strategies from which clients can choose, but not customize?
    139. Similar to our proposal for funds, we are not proposing to 
define ``ESG'' or similar terms for Form ADV (the brochure and Part 
1A). Instead, our proposal for Form ADV would require advisers that 
consider ESG factors in any significant strategy or that tailor their 
advisory services to the individual needs of clients based on clients' 
ESG preferences, to describe the factors they consider and how they 
implement them. Is this approach appropriate for Form ADV? Should we 
seek to define ``ESG'' or any of its subparts in Form ADV? Are the 
terms ``E,'' ``S,'' and ``G,'' and ``ESG'' factors as we refer to them 
in Form ADV appropriate and clear?
    140. We have proposed terms for ESG ``integration'', ESG-
``focused'' and ESG ``impact'' under our Form ADV proposal, which are 
generally similar to the corresponding definitions we are proposing for 
funds. Is this appropriate? Do those terms capture the types of 
significant strategies for which advisers consider ESG factors? Are 
there alternative ways to describe advisers' significant strategies 
that consider ESG factors? Should we additionally specify, similar to 
our approach for funds, that the description ESG-focused includes any 
significant strategy that includes certain terms in the strategy name 
or advertising practices? Are there other ways in which the terms as 
applied to advisers should differ from the corresponding definitions we 
are proposing for funds?
    141. Are the distinctions between integration and ESG-focused 
strategies, as proposed for Form ADV, sufficiently clear? Are there 
alternative ways to distinguish between integration and ESG-focused 
strategies?
    142. Similar to our proposal for funds, should the brochure require 
differing levels of disclosure for integration and ESG-focused 
strategies? Or, as proposed, should we permit advisers to respond to 
the brochure disclosures as applicable to their significant strategy or 
strategies?
    143. Should we, as proposed and similar to the proposed 
requirements for funds, specifically require an adviser to disclose 
additional information regarding impacts for any significant strategy 
that is an ESG impact strategy? Should we modify the application of 
this proposed requirement to advisers? For example, should advisers 
include the key performance indicators used to measure progress given 
that advisers do not have a disclosure that corresponds to the MDFP, 
where we are proposing to require specific disclosures by Impact Funds 
on their progress?
    144. Should we create an additional, separate disclosure 
requirement for an adviser's significant strategy for which the adviser 
primarily uses shareholder engagement, as opposed to portfolio 
management, to implement its ESG-focus? Do advisers engage with 
portfolio companies on ESG issues in other ways that we have not 
proposed to address, but should specifically address, in the brochure?
    145. As proposed, should we require advisers to describe in the 
brochure each of their significant strategy or strategies for which 
they consider ESG factors, and to provide the proposed information 
about how they incorporate those factors? Should we additionally 
provide a non-exhaustive list of examples of ESG factors in Form ADV, 
and allow advisers to add factors as applicable? Are there any other 
approaches that we should take in providing guidance to advisers as to 
what constitutes ESG?
    146. As proposed, should we require advisers to describe in Item 8 
their criteria or a methodology for evaluating, selecting, or excluding 
investments in their significant strategy or strategies based on the 
consideration of ESG factors? Do commenters agree with the non-
exhaustive list of criteria or methodology we included in this Item? Is 
it clear and appropriate?
    147. Should we, as proposed, include the use of third-party 
frameworks that incorporate ESG factors in the non-exhaustive list? 
Should we require additional detail about the framework (in addition 
to, as proposed, a description of the framework or standard and whether 
(and how) the adviser uses it), and if so, what additional disclosures 
should we require?
    148. Are there other types of disclosure about advisers' 
significant strategies for which the adviser considers ESG factors that 
a client would find helpful? If so, what

[[Page 36690]]

additional disclosures would be helpful for a client? Where should that 
additional disclosure be located in the brochure?
    149. Would an adviser with multiple significant strategies that 
each consider ESG factors differently be able to explain the proposed 
required information for each significant strategy? Should we require 
advisers to include our proposed disclosures for all strategies and 
methods of analysis that consider ESG factors? For instance, an adviser 
that tailors its advisory services based on the ESG preferences of 
individual clients generally would explain such tailoring in response 
to the current Item 4, but may not be required to describe that 
tailored strategy in Item 8 if the strategy is not significant. In that 
case, should an adviser disclose the tailored strategy in one or both 
Items?
    150. Item 8.B currently requires advisers to explain material risks 
involved for each of its significant strategies, which we believe 
includes material risks associated with an adviser's ESG investing. 
Does an adviser's consideration of ESG factors in implementing its 
significant strategies create any material, significant, or unusual 
risks related to its consideration of ESG factors? If so, what are some 
examples and how do advisers describe those risks? Should we amend Item 
8.B to state explicitly that advisers must include the material risks 
involved in each significant strategy for which the adviser considers 
any ESG factors?
    151. Should we additionally require all advisers that consider ESG 
factors as part of their significant strategies to state that the 
consideration of ESG factors may lead to the adviser selecting or 
recommending an investment that may not generate the same level of 
returns as investments where the adviser does not consider ESG factors? 
Or, should advisers be required to describe the applicable risks in 
their own words?
    152. As proposed, should we require advisers to disclose whether 
they or their management persons have any relationships or arrangements 
with related person ESG providers (i.e., a related person that is an 
ESG consultants or other ESG service provider) that are material to the 
adviser's business or to its clients? Is it common for advisers to have 
agreements or arrangements with related person ESG providers that are 
material to the adviser's business or to its clients? If so, what is 
the nature of such arrangements? Do any of those agreements or 
arrangements create conflicts of interest? If so, what conflicts of 
interest do they create and how do advisers address those conflicts?
    153. Should we define the term ``ESG consultants or other ESG 
service providers'' in the Form ADV glossary? If so, what definition 
should we adopt? Given the range of services they provide, would a 
definition be useful? Alternatively, should we provide additional 
guidance on the types of entities that would qualify as an ESG 
consultant or other ESG service provider for purposes of Form ADV 
reporting? If so, what guidance should we provide? To the extent that 
there are a variety of these types of providers, should we require or 
permit advisers to identify particular categories of ESG consultants or 
other ESG service providers? If so, what categories?
    154. As proposed, should advisers that consider ESG factors when 
voting client securities be required to provide the proposed 
information in Item 17 about their consideration of ESG factors when 
voting client securities? Should we require additional disclosures 
regarding voting client securities? If so, please describe the 
additional information.
    155. Should advisers that do not consider ESG factors when voting 
client securities be required to expressly disclose this fact in their 
brochures?
(d) Wrap Fee Brochure (Form ADV Part 2A, Appendix 1)
    Advisers that sponsor wrap fee programs are required to prepare a 
specialized brochure that must be delivered to their wrap fee clients 
(``wrap fee program brochure'').\201\ Because wrap fee programs may 
incorporate ESG factors in the selection of portfolio managers for the 
wrap fee clients, we are proposing ESG disclosure requirements for wrap 
fee program brochures. We believe that wrap fee clients should receive 
similar ESG-related information as advisory clients that do not 
participate in such programs. However, we are proposing disclosure 
requirements tailored to this structure. We believe this information 
would help current and prospective wrap fee clients understand better 
how wrap fee programs consider ESG factors and help to facilitate 
clients' evaluations and comparisons of wrap fee programs that consider 
ESG factors.
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    \201\ See Form ADV Part 2A, Appendix 1; Instructions for Part 2A 
of Form ADV: Preparing Your Firm Brochure, at Instruction 10. In 
wrap fee programs, clients generally are charged one fee in exchange 
for both investment advisory services and the execution of 
transactions as well as other services.
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    Advisers sponsoring wrap fee programs are required to describe in 
Item 4 of their wrap fee brochures the services, including the types of 
portfolio management services, provided under each program. Like the 
proposed brochure disclosures, we propose to amend this Item to specify 
that advisers that consider ESG factors in their wrap fee programs must 
provide a description of what ESG factors they consider, and how they 
incorporate the factors under each program. Similar to our proposed 
brochure amendments, we would not define E, S, or G, but our proposed 
amendments to the wrap fee program brochure would require advisers to 
discuss any ESG factors they consider.
    Advisers sponsoring wrap fee programs are required to describe in 
Item 6 of their wrap fee brochures how they select and review portfolio 
managers within their wrap fee programs, the basis for recommending or 
selecting portfolio managers for particular clients, and the criteria 
for replacing or recommending the replacement of portfolio managers for 
the program and for particular clients. Additionally, among other 
disclosures, Item 6 requires a description of any standards used to 
calculate portfolio manager performance. The selection, and replacement 
of portfolio managers within a wrap fee program is an integral part of 
the adviser's advisory services for clients of the wrap fee program. 
Therefore, similar to above, we are proposing an amendment to this Item 
to require advisers that consider ESG factors when selecting, 
reviewing, or recommending portfolio managers within the wrap fee 
programs they sponsor, to describe the ESG factors they consider and 
how they consider them.\202\ The description of ESG factors generally 
should include the types ESG information the adviser considers and must 
include how the adviser considers the ESG factors. We believe these 
proposed additions would help wrap fee clients and potential clients 
with ESG investing objectives to evaluate whether the adviser's 
selection and evaluation of the program's portfolio manager matches the 
client's objectives and expectations for the program's portfolio 
management.
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    \202\ Proposed Form ADV, Part 2A, Appendix 1, Item 6.A.4.
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    Additionally, we are proposing three disclosure requirements as 
part of advisers' description of how they consider the relevant ESG 
factors described above. All three disclosures are designed to 
facilitate clients' determinations of whether and how a wrap fee 
program that claims to consider ESG factors, actually considers ESG 
factors when selecting, reviewing or recommending the programs' 
portfolio managers. With this

[[Page 36691]]

information, clients and prospective wrap fee clients could compare 
wrap fee programs' processes for selecting, reviewing or recommending 
portfolio managers based on ESG factors, and find wrap fee programs 
with portfolio management that best match their ESG investing goals. We 
believe our proposed disclosures would also help the Commission better 
understand the variety of ESG investing approaches that are emerging in 
wrap fee programs.
    The first of the three disclosures would require advisers to 
describe any criteria or methodology they use to assess portfolio 
managers' applications of the relevant ESG factors into their portfolio 
management. This would include any industry or other standards for 
presenting the achievement of ESG impacts and/or third-party ESG 
frameworks, and any internal criteria or methodology.\203\ For example, 
if an adviser evaluates a portfolio manager's achievement of ESG 
impacts by comparing its impacts to an ESG benchmark or ESG index, the 
adviser generally should describe how that portfolio manager's ESG 
impacts are calculated, the applicable benchmark or index, and how the 
portfolio manager's impacts compared to the specified benchmark or 
index. Similarly, if an adviser evaluates a portfolio manager's 
application of specific ESG factors by determining whether and how the 
portfolio manager follows a global ESG framework, the adviser generally 
should describe the framework and how it assess whether the manager 
follows the framework.
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    \203\ Proposed Form ADV, Part 2A, Appendix 1, Item 6.A.4.
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    Second, we are proposing that these advisers provide an explanation 
of whether they review, or whether a third party reviews, portfolio 
managers' applications of the relevant ESG factors described above. If 
so, our proposal would require them to describe the nature of the 
review and the name of any third party conducting the review. An 
example of this could be an adviser that engages a third party to 
review information reported by a portfolio manager about the carbon 
emissions of its portfolio companies to determine its accuracy. In this 
case, the adviser would be required to identify the third party 
completing the review and the nature of the review, which generally 
should explain how the third party assesses the accuracy of the 
emissions information provided by the portfolio manager. Another 
example could be an adviser that employs a third-party ESG service 
provider to score portfolio managers based on their considerations of 
specific ESG factors. In this case, the adviser would be required to 
name the third-party ESG provider and the nature of the review, which 
generally should describe the relevant ESG factors it uses to score 
portfolio managers, and how it arrives at the scores.
    Third, we are proposing to require that an adviser explain, if 
applicable, that neither the adviser nor a third party assesses 
portfolio managers' applications of the relevant ESG factors into their 
portfolio management, and/or that the portfolio managers' applications 
of the relevant ESG factors may not be calculated, compiled, assessed, 
or presented on a uniform and consistent basis. Whether the adviser (or 
a third party) actually reviews how the portfolio manager applies the 
relevant ESG factors is important for wrap fee clients to understand. 
For example, if a portfolio manager's application of the relevant ESG 
factors is calculable and presentable on a uniform and consistent 
basis, but the adviser discloses that it does not review the 
calculation or presentation, a client can assess whether its wrap fee 
sponsor is committed to evaluating, and/or equipped to evaluate, the 
portfolio manager's application of ESG factors.
    As part of this third disclosure item, the adviser would also be 
required to state and explain why, if applicable, any ESG factors it 
considers in evaluating portfolio managers may not be calculated, 
compiled, assessed, or presented on a uniform and consistent basis. We 
believe this information would assist an investor in understanding the 
limitations of any information provided to it about the portfolio 
manager's applications of relevant ESG factors. In this case, the 
client can request additional information from the sponsor about how 
the sponsor reviews the manager's application of ESG factors in its 
portfolio management.
    Finally, we are proposing to amend Item 6.C. to require any adviser 
that acts (itself or through its supervised persons) as a portfolio 
manager for a wrap fee program described in its wrap fee program 
brochure (for purposes of this release, a ``sponsor-manager''), to 
respond to an additional specified brochure Item; namely, proposed Item 
8.D. Item 6.C of the wrap fee program brochure currently requires 
sponsor-managers to respond to specified brochure Items that describe 
the investments and investment strategies the adviser (or its 
supervised persons) will use as portfolio manager.\204\ Rather than 
deliver both a wrap fee program brochure and a brochure to its wrap fee 
program clients, a sponsor-manager may deliver just a wrap fee program 
brochure to its wrap fee program clients, provided the clients receive 
no other advisory services from the adviser.\205\
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    \204\ See Instructions for Part 2A Appendix 1 of Form ADV: 
Preparing Your Wrap Fee Program Brochure, Instruction 6.
    \205\ Id.
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    For a sponsor-manager that considers ESG factors for a significant 
strategy of its wrap fee program, we believe the information required 
by proposed Item 8.D of the brochure is an important component of the 
adviser's description of its investment strategies. Because wrap fee 
clients of sponsor-managers are generally not required to receive 
separate brochures from the sponsor-manager, we believe it would be 
beneficial for these clients to receive these ESG disclosures in the 
wrap fee brochure. Further, they would complete the sponsor-manager's 
currently required disclosure in response to brochure Item 8.A.\206\
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    \206\ Item 6.C of the wrap fee program brochure also currently 
requires a sponsor-manager to include a response to Item 17 of the 
brochure (Voting Client Securities), for which we are proposing an 
amendment to address ESG.
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    We request comment on all aspects of the proposed amendments to the 
wrap fee brochure, including the following items.
    156. Do commenters agree that wrap fee program participants should 
receive similar ESG-related information as advisory clients that do not 
participate in such programs, tailored to the wrap fee program 
structure as proposed?
    157. Have we tailored the proposed requirements appropriately to 
the wrap fee program structure? If we should tailor the requirements in 
a different way, please describe how. For example, should we, as 
proposed in Item 6 of the wrap fee program brochure, require advisers 
that consider ESG factors in their portfolio manager selection, review 
and recommendations to describe those ESG factors and how they consider 
them? Are there other ways a wrap fee program sponsor could consider 
ESG factors in its wrap fee program services in addition to in its 
selection and evaluation of portfolio managers?
    158. Do commenters agree with the proposal's specified disclosures 
for wrap fee program sponsors? For example, should we, as proposed, 
require an adviser that engages a third party to review portfolio 
managers' applications of relevant ESG factors, to describe the nature 
of the review and the name of any third party conducting

[[Page 36692]]

the review? Are there any sensitivities with requiring disclosure of 
the name of the reviewer?
    159. Should we, as proposed, amend Item 6.C. to include a required 
response to proposed Item 8.D of the brochure, which would apply only 
to certain sponsor-managers that deliver wrap fee program brochures? 
Alternatively, should all wrap fee program sponsors be required to 
include this information in their wrap fee program brochures? Would 
this information be necessary in the wrap fee program brochure for wrap 
fee program clients that receive both a wrap fee program brochure from 
the sponsor and a brochure from the program's third-party portfolio 
manager? Under our proposal, are there wrap fee clients that would not 
receive this information, and if so, who are they? Similarly, we 
currently require certain sponsor-managers to respond in the wrap fee 
program brochure to Item 17 (Voting Client Securities) of the brochure, 
which would include our proposed ESG amendment. Should we alternatively 
require all wrap fee sponsors to disclose in their wrap fee program 
brochures whether and how their portfolio managers incorporate ESG 
factors into proxy voting for clients' securities in the wrap fee 
program?
    160. What, if any, ESG-related information do advisers (or third 
parties on their behalf) evaluate when they evaluate portfolio managers 
for wrap fee programs? For example, do they evaluate portfolio 
managers' quantified information such as GHG metrics for managed 
portfolios, as applicable?
    161. Do advisers engage in any other types of evaluation of 
portfolio managers' applications of ESG factors that our proposed 
disclosure requirements would not cover for which we should require 
disclosure? If so, what are they and how should we include them? 
Alternatively, should we limit our disclosure requirement to address 
only an adviser's evaluation of portfolio managers' achievement of 
stated metrics or other quantifiable information, such as GHG emissions 
reductions?

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

    To complement our proposed investor- and client-facing disclosures, 
we are also proposing to collect census-type information about funds' 
and advisers' uses of ESG factors, including their uses of ESG 
providers. We are proposing to amend Forms N-CEN and ADV Part 1A for 
registered funds and advisers (both registered investment advisers and 
exempt reporting advisers), respectively, to collect this information 
using the structured XML-based data languages in which those Forms are 
currently submitted, thus providing the Commission and investors with 
consistent, usable, and comparable data.\207\ We believe that our 
proposed new data on Forms N-CEN and ADV Part 1A would assist both the 
Commission staff and the public in understanding the trends in this 
evolving space including, for example, changes in total assets under 
management for which funds or advisers incorporate E, S, and/or G. We 
additionally believe clients and investors would use this data, 
together with the narrative ESG information we are proposing to require 
in investor- and client-facing disclosures, to make more informed 
decisions about their selection of funds or advisory services that 
consider ESG factors.
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    \207\ Throughout this Release, we refer to advisers exempt from 
registration under sections 203(l) and 203(m) of the Advisers Act as 
``exempt reporting advisers.'' Because BDCs are not required to file 
Form N-CEN, the proposed amendments to Form N-CEN will not apply to 
BDCs.
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1. Form N-CEN
    As discussed above, the information that is currently available to 
the Commission and data users, including investors and other market 
participants, regarding how funds incorporate ESG factors into their 
investment strategies and portfolio holdings is inconsistent across 
funds. To enhance the ability of the Commission, investors and other 
market participants to track trends in ESG funds, we are proposing 
amendments to Form N-CEN that are designed to collect census-type 
information regarding these funds and the ESG-related service providers 
they use in a structured data language.\208\ We believe that this 
standardized and structured disclosure would complement the proposed 
tailored narrative disclosure included in the fund prospectus and 
annual report discussed above.\209\ For example, the Commission, 
investors and other market participants could use this information to 
identify efficiently funds that incorporate ESG factors into their 
investment strategies and categorize funds based on the type of ESG 
strategy they employ. This information would also enhance the 
Commission's ability to carry out its regulatory functions, including 
assessing trends related to ESG investing in the fund industry and 
their processes for incorporating ESG into their investment 
strategies.\210\
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    \208\ Form N-CEN is currently submitted using a structured, XML-
based data language that is specific to that Form.
    \209\ See supra section II.A.1 (discussing proposed prospectus 
ESG disclosure enhancements); see also section II.A.3 (discussing 
proposed annual report ESG disclosure requirements).
    \210\ See Investment Company Reporting Modernization, Investment 
Company Act Release No. 31610 (May 20, 2015) [80 FR 33590 (June 12, 
2015)] (``Investment Company Reporting Modernization Release'').
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    Specifically, we are proposing to add proposed Item C.3(j) of Form 
N-CEN that asks questions tailored to ESG funds' strategies and 
processes. A fund that indicates that it incorporates ESG factors would 
then be required to report, among other things: (i) the type of ESG 
strategy it employs (i.e., integration, focused, or impact) as those 
strategies are defined in proposed Item 4(a)(2)(i) of Form N-1A and 
proposed Item 8.2.e of Form N-2, as applicable; (ii) the ESG factor(s) 
it considers (i.e., E, S, and/or G);and (iii) the method it uses to 
implement its ESG strategy (i.e., tracking an index, applying an 
inclusionary and/or exclusionary screen, proxy voting, engaging with 
issuers, and/or other).\211\ In responding to proposed Item C.3(j) of 
Form N-CEN, an ESG-Impact Fund would be required to report that it is 
both an ESG-Focused Fund and an ESG-Impact Fund.
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    \211\ Proposed Item C.3(j)(i) through (iii) of Form N-CEN.
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    The proposed amendments to Form N-CEN would also collect 
information regarding whether a fund considers ESG-related information 
or scores provided by ESG providers in implementing its investment 
strategy.\212\ If so, the fund would be required to provide the legal 
name and legal entity identifier (``LEI''), if any, or provide and 
describe other identifying number of each such ESG provider.\213\ A 
fund would also be required to report whether the ESG provider is an 
affiliated person of the Fund.
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    \212\ Proposed item C.3(j)(iv) of Form N-CEN.
    \213\ See supra at text preceding footnote 25 (discussing ESG 
service provides and the role they play in providing ESG information 
regarding companies).
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    Requiring a fund to report information regarding its consideration 
of information from an ESG provider would help the Commission, 
investors, and other market participants understand any differences in 
how funds with similar investment strategies rely on ESG providers in 
implementing those strategies. The information on Form N-CEN also would 
allow analysis of the extent to which funds rely on information 
provided by a particular ESG provider, such as the number of funds, or 
amount of AUM, that may rely on information provided by that provider. 
Additionally, we believe that requiring funds to disclose whether an 
ESG provider is an affiliated person of the fund would assist 
Commission,

[[Page 36693]]

investors, and other market participants in evaluating conflicts of 
interest that could exist when an ESG provider is also an affiliated 
person of the fund.\214\
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    \214\ See International Organization of Securities Commissions 
(``IOSCO''), Environmental, Social and Governance (ESG) Ratings and 
Data Products Providers: Consultation Report, at 35, available at 
CR02/2021 Environmental, Social and Governance (ESG) Ratings and 
Data Products Providers (iosco.org) (discussing the potential 
conflicts of interest of ESG providers and the need to appropriately 
manage such conflicts).
---------------------------------------------------------------------------

    The proposed amendments to Form N-CEN would also require a fund to 
report whether the fund follows any third-party ESG frameworks.\215\ If 
so, the fund would be required to provide the full name of such 
frameworks.\216\ This information would help the Commission, investors 
and other market participants to classify funds based on the ESG 
frameworks they follow in order to understand and assess trends in the 
market better.
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    \215\ Proposed item C.3(j)(vi) of Form N-CEN.
    \216\ See supra footnote 8 (discussing the various climate and 
sustainability frameworks that have developed over time).
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    Form N-CEN currently requires any fund that tracks the performance 
of an index to identify itself as an index fund and provide certain 
information about the index, and so this requirement currently applies 
to ESG funds that track an index. We are proposing amendments to Form 
N-CEN that would require all index funds to report the name and LEI, if 
any, or provide and describe other identifying number of the index the 
funds track.\217\ We believe that this information will help the 
Commission, investors, and other market participants to monitor trends 
in ESG investing through reference to indexes. Additionally, because we 
believe that these amendments would be helpful for all index funds to 
understand better the use of indexes in the industry more generally, we 
are proposing to require all funds to identify the indexes they track.
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    \217\ See proposed Item C.3(b)(i) of Form N-CEN.
---------------------------------------------------------------------------

    We request comment on our proposed amendments to Form N-CEN, 
including the following issues.
    162. Should funds be required to report the proposed census-type 
information regarding their incorporation of ESG factors into their 
investment strategy on Form N-CEN? Would this information be helpful to 
investors and other market participants? How would investors and other 
market participants use this information?
    163. Should we, as proposed, use the definitions of the terms 
``Integration Fund'' and ``ESG-Focused Fund'' as they appear in 
proposed Item 4(a)(2)(i) of Form N-1A? Would this approach make it 
easier for funds to comply with this reporting requirement? Should we 
adopt a different definition of these terms?
    164. Should we, as proposed, require ESG-Focused Funds to further 
identify themselves as Impact Funds, if relevant? Should we, as 
proposed, use the definition of the term ``Impact Fund'' as it appears 
in Item 4(a)(2)(i)(B) of Form N-1A? Would this approach make it easier 
for funds to comply with the proposed reporting requirement on Form N-
CEN? Should we adopt a different definition for the term ``Impact 
Fund''?
    165. Should we, as proposed, require ESG funds to indicate whether 
they consider E, S, or G factors? Should we, as proposed, allow them to 
check all that apply? Alternatively, should we require them to select 
an ESG factor only if the fund considers it to a material degree? If 
so, how should we define materiality?
    166. Should we, as proposed, require ESG funds to indicate what 
method the fund uses to implement its ESG strategy, including by 
tracking an index, applying an inclusionary and/or exclusionary screen, 
proxy voting, or engaging with issuers? Should we, as proposed, allow 
funds to check all that apply? Are there any other types of investment 
strategies that funds may use not reflected in the proposed list? Would 
investors and other market participants find this information useful? 
Are there ways we can make this information more useful? For example, 
for each of the methods of ESG strategy implementation, should we 
require funds to further indicate which E, S, or G factor, or a factor 
within E, S, or G, they consider within each method?
    167. Should we, as proposed, require funds to report whether they 
consider ESG information or scores from ESG providers and the full name 
and LEI, if any, or provide and describe other identifying number of 
the ESG provider? Are there ways we can enhance the usefulness of this 
information? For example, as discussed above, funds vary in the level 
of their reliance on ESG providers. Therefore, should we require funds 
to disclose the name of their ESG provider only if they rely on 
information to a material extent? If so, how should we define material?
    168. Should we, as proposed, require funds to report whether the 
ESG provider is an affiliated person of the fund? Are there other types 
of conflicts of interest that we should require funds to report? For 
example, should we require funds to report whether an ESG provider 
provides other, non-ESG related, services?
    169. Should we define the term ``ESG consultants or other ESG 
service providers'' on Form N-CEN? If so, what definition should we 
adopt?
    170. Should we, as proposed, require all index funds to report the 
name and LEI, if any, or provide and describe other identifying number 
of their index on Form N-CEN? Would ESG funds that seek to track an 
index consider themselves to be both ESG funds and index funds on Form 
N-CEN? Are there funds that consider an ESG index as part of their 
investment strategy but do not identify themselves as an index funds 
because they do not track the index? Is there any additional 
information regarding indexes that we should collect specifically for 
ESG funds?
    171. Should we, as proposed, require funds to report whether they 
follow any third-party ESG framework(s) and the name(s) of any such 
entities, as applicable? Should funds be required to report any other 
information, such as a link to the website of the framework? In light 
of the proliferation of such frameworks, would this information be 
useful to investors and other market participants? Are there ways to 
enhance the information provided? For example, should we allow funds to 
report this information only if they follow such frameworks to a 
certain extent? If so, how should we set such threshold for reporting?
2. Form ADV Part 1A Reporting
    We are proposing amendments to Form ADV Part 1A designed to collect 
information about an adviser's uses of ESG factors in its advisory 
business. These proposed amendments would expand the information 
collected about the advisory services provided to separately managed 
account clients and reported private funds. We would apply the proposed 
additions to separately managed account reporting in Item 5 to only 
investment advisers registered or required to be registered with the 
Commission, and would apply the proposed additions to Items 6 and 7 
(e.g., other business activities and private fund reporting) to those 
advisers and exempt reporting advisers. We believe it is appropriate to 
continue to collect information from both types of advisers for Items 
that each are currently required to complete.\218\ These proposed items 
are designed to improve the depth and quality of the information we 
collect on investment advisers and to facilitate our risk monitoring

[[Page 36694]]

initiatives, which also serves to benefit current and prospective 
advisory clients. Moreover, because Form ADV is available to the public 
on our website, these amendments also are intended to provide advisory 
clients and the public additional information regarding advisers' ESG 
investing.
---------------------------------------------------------------------------

    \218\ Exempt reporting advisers must complete the following 
Items of Part 1A: 1, 2, 3, 6, 7, 10, and 11, as well as 
corresponding schedules.
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(a) ESG Data for Separately Managed Account Clients and Private Funds
    We are proposing amendments to Form ADV Part 1A to collect 
information about advisers' uses of ESG factors for their separately 
managed account (``SMA'') clients and reported private funds. We are 
proposing amendments to Item 5.K. (Separately Managed Account Clients) 
and corresponding sections of Schedule D, which currently require 
advisers to provide information about their advisory businesses with 
respect to SMA clients.\219\ These amendments would collect aggregated 
information for an adviser's applicable SMA clients. We are proposing 
similar amendments to private fund reporting in Section 7.B.(1) of 
Schedule D to collect information from private fund advisers about 
their uses of ESG factors in managing each reported private fund. This 
information would be similar to the information we are proposing to 
collect on Form N-CEN regarding ESG factors and include, for example, 
type of strategy (i.e., integration, ESG-focused, and ESG impact).
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    \219\ For purposes of reporting on Form ADV, we consider 
advisory accounts other than those that are pooled investment 
vehicles (i.e., registered investment companies, business 
development companies, and pooled investment vehicles that are not 
investment companies (i.e., private funds)) to be separately managed 
accounts. See 2016 Adopting Release [81 FR 81870 (Nov. 18, 2016)], 
at text preceding footnote 8. See also Form ADV Part 1A Item 5.K(1) 
(describing separately managed account clients).
---------------------------------------------------------------------------

    We are proposing to focus this collection of information from 
advisers with respect to their SMA clients and private funds, rather 
than from advisers with respect to their registered investment 
companies and BDCs, because registered investment companies and BDCs 
would report similar ESG-related information, including on Forms N-CEN 
and in the fund prospectus.\220\ We believe that collecting this 
information would provide the Commission and current and prospective 
advisory clients with important information about advisers' 
consideration of ESG factors in their advisory businesses, including 
the specific factors they consider, the types of ESG-related strategies 
they employ, and potential conflicts of interest with related person 
ESG providers.\221\ As discussed above, there is a current lack of 
consistent and comparable information among advisers that say they 
consider one or more ESG factors. This information would provide us 
with comparability across advisers and advance our regulatory goal of 
gaining a more complete understanding of advisers' considerations of 
ESG factors in their separately managed account and private fund 
management businesses. We believe the proposed new reporting 
requirements would improve our ability to understand the ESG landscape 
and assess trends among investment advisers in this emerging and 
evolving area, and their processes for incorporating ESG into their 
investment strategies. We believe that this census-style disclosure 
would complement the proposed tailored narrative disclosure in the 
brochure and wrap fee program brochure discussed above. For example, 
the Commission, clients and other market participants could use this 
information to identify advisers that incorporate ESG factors into 
their investment strategies and categorize advisers based on the type 
of ESG strategy they employ.
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    \220\ Advisers to registered investment companies and BDCs would 
be required to respond to the proposed new question in Item 5 of 
Form ADV, reporting whether they seek to follow any third-party ESG 
framework(s) in connection with their advisory services.
    \221\ See Brochure Adopting Release, supra footnote 188, at text 
accompanying n.74 (describing significant investment strategies or 
methods of analysis in the context of a Form ADV brochure Item about 
risk disclosure as providing a threshold for disclosure that 
``captures those methods of analysis or strategies that will be 
relevant to most clients'').
---------------------------------------------------------------------------

    Type(s) of ESG-related strategy or strategies. We propose to 
require an adviser to disclose whether it considers ESG factors as part 
of one or more significant strategies (as defined above) in the 
advisory services it provides to its separately managed account 
clients, including in its selection of other investment advisers and/or 
as part of their advisory services when requested by separately managed 
account clients (together with significant strategies, for purposes of 
this release, ``SMA strategies'').\222\ If so, our proposal would 
require the adviser to indicate for its SMA strategies whether it 
employs an integration or ESG-focused approach, and if ESG-focused, 
whether it also employs an ESG-impact approach. Under our proposal, an 
adviser must select all three approaches, if it offers all three.\223\ 
These advisers would also report whether they incorporate one or more 
of E, S, and/or G factors into their SMA strategies. Similarly, if an 
adviser considers any ESG factors as part of one or more significant 
investment strategies or methods of analysis in the advisory services 
it provides to a reported private fund, the adviser would report 
whether it employs in its management of that private fund an ESG-
integration or ESG-focused approach, and if ESG-focused, whether it 
also employs an ESG-impact approach. It would also report whether it 
incorporates one or more of E, S, and/or G factors (and which 
factor(s)). This information would categorize general approaches to 
incorporating ESG to help Commission staff understand industry trends, 
as well as prepare for, conduct, and implement our risk-based 
examination program.
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    \222\ See Proposed Form ADV Part 1A Item 5.K. Responses to this 
question would refer to the adviser's separately managed account 
clients in the aggregate (other than when the adviser has only one 
separately managed account client).
    \223\ For example, if an adviser has some SMA strategies that 
are ESG integration, and others that are ESG-focused and ESG-impact, 
the adviser would select all three strategies. An adviser with only 
one SMA strategy, however, would select either ESG-integration or 
ESG-focus (and if it selects ESG-focus, it would also select ESG-
impact, if applicable). This is because we believe that ESG-
integration and ESG-focused strategies are distinct investment 
advisory strategies that would not be employed together in one 
strategy.
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(b) Third-Party ESG Framework(s)
    We also propose to require advisers to report whether they follow 
any third-party ESG framework(s) in connection with their advisory 
services.\224\ If so, the adviser would be required to report the name 
of the framework(s).\225\ This information would inform the Commission 
(and current and prospective advisory clients) that the adviser follows 
certain framework(s), if applicable. We believe that requiring the name 
of the framework would be useful to the Commission and clients as these 
frameworks are not uniform and some may apply only to very specific 
investment types. They can also range in complexity from a set of 
aspirational principles to, for example, highly prescriptive financial 
industry benchmarks for assessing and managing environmental and social 
risk for infrastructure projects. Requiring this information would 
provide Commission staff with additional data to assess and evaluate 
trends in this industry. Moreover, current and prospective clients 
could use this information to find advisers that follow ESG

[[Page 36695]]

frameworks that match their expectations for ESG investing.
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    \224\ See Proposed Form ADV Part 1A Item 5.M.
    \225\ See supra footnote 8 (discussing that many financial 
institutions sign on to climate and other sustainability frameworks 
in an effort to integrate ESG considerations and reporting into 
their business practices, offerings, and proxy voting).
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    We request comment on all aspects of the proposed reporting of an 
adviser's consideration of ESG factors for SMA clients and reported 
private funds and reporting their uses of third-party ESG framework(s), 
including the following items.
    172. Should advisers be required to report to the Commission on 
Form ADV Part 1A the proposed census-type information regarding their 
incorporation of ESG factors for SMA clients and reported private 
funds, as proposed? Would this information be helpful to current and 
prospective clients and other market participants? How would clients 
and other market participants use this information?
    173. Would the information required to answer the proposed 
questions in Item 5.K, 5.L, and Section 7.B.(1) and corresponding 
schedules be readily available to advisers? If not, why?
    174. Should we, as proposed, use the terms ESG ``integration'', 
ESG-``focused'', and ESG-``impact'' that are the same as we proposed 
for the brochure and similar to the terms we proposed to define for 
funds? Would this approach make it easier for advisers to comply with 
this reporting requirement? Alternatively, should we describe these 
terms differently for Part 1A reporting? If so, how and why?
    175. Should we, as proposed, require advisers that consider ESG 
factors for their SMA clients and private funds to indicate whether 
they consider E, S, or G factors, and permit them to check all that 
apply? Alternatively, should we require them to select an ESG factor 
only if the adviser's strategy or method of analysis considers it to a 
material degree? If so, how should we define materiality?
    176. Is there any different or additional information we should 
require about SMAs and private funds in these Items and corresponding 
schedules, and is there any proposed information we should not require? 
For example, should we require advisers to additionally report in Part 
1A, as we are proposing to require for funds in Form N-CEN, whether 
they engage in any of the following to implement their ESG strategies: 
tracking an index, applying any inclusionary and/or exclusionary 
screen, or engaging with issuers? Would these activities be applicable 
to advisers' SMA strategies and private funds, and would this 
information disclosed in the Part 1A census-style format provide the 
Commission and clients with valuable information about the adviser? If 
required, would this information for SMA strategies and/or each 
reported fund reveal non-public information regarding an adviser's SMA 
strategy and/or a private fund's trading strategies, analytical or 
research methodologies, trading data, and/or computer hardware or 
software containing intellectual property?
    177. If we should require disclosure of advisers' uses of ESG 
indexes, should we require additional information such as the name and 
LEI, if any, or provide and describe other identifying number of their 
index? Are there advisers that consider an ESG index as part of their 
significant strategies but do not wholly track the ESG index? Is there 
any additional information regarding indexes that we should collect 
specifically on Part 1A for advisers that consider ESG factors, and if 
so, what?
    178. Should we collect different amounts or types of information 
from advisers about their uses of ESG factors in SMA strategies and 
management of their reported private funds depending on whether the 
adviser uses an integration or ESG-focused approach? Or, as proposed, 
should we require the same amount and type of information for 
integration or ESG-focused approaches? If we should require different 
amounts of information, what should those differences be, and should we 
further differentiate the information we collect about ESG-impact 
strategies from the information we collect about ESG-focused 
strategies?
    179. Should we collect different amounts or types of information 
from advisers about their uses of ESG factors in SMA strategies 
depending on whether advisers consider ESG factors (i) as part of their 
significant strategies versus (ii) only (or primarily) when requested 
by clients? Or, as proposed, should our questions cover both, together? 
Should we require separate reporting about advisers' uses of ESG 
factors for certain SMA strategies versus others?
    180. As proposed, should we require all advisers to report whether 
the adviser follows any third-party ESG framework(s), and if so, to 
report the name of each framework? Are there ways to enhance the 
information provided? For example, should we allow advisers to report 
this information only if they follow such frameworks to a certain 
extent? If so, how should we set such threshold for reporting? Should 
we also require advisers report this information as it relates 
specifically to their SMA clients and/or reported private funds, or, as 
proposed, should we require advisers to provide this information as it 
relates to any part of their advisory business (without specifying 
which part)?
    181. Should we, similar to our proposal for funds, additionally 
require advisers to report whether they use any ESG providers for their 
SMA clients and private funds? If so, should we require advisers to 
report the full name and LEI, if any, or provide and describe other 
identifying number of the ESG provider, and/or whether the provider is 
an affiliate of the adviser or its management persons? Would this 
information provide the Commission with valuable information about the 
adviser and its use of ESG providers, in addition to the information we 
are proposing to collect about an adviser's related-person ESG 
providers and other business activities as an ESG provider (discussed 
below in Items 6 and 7)? If so, should we require advisers to disclose 
the name of their ESG provider only if they rely on the ESG provider to 
a material extent? If so, how should we define material?
    182. Should we, similar to our proposal for funds, additionally 
require advisers to report on Part 1A whether they consider one or more 
ESG factors as part of the adviser's proxy voting policies and 
procedures? Should we require advisers to indicate which E, S, or G 
factor, or a factor within E, S, or G, they consider as part of their 
proxy voting policies and procedures?
    183. Would any of our proposed disclosures reveal non-public 
information regarding an adviser's SMA strategy and/or a private fund's 
trading strategies, analytical or research methodologies, trading data, 
and/or computer hardware or software containing intellectual property? 
If so, how? Would our proposed disclosures otherwise have the potential 
to harm clients and investors in private funds or subject them to 
abusive market practices? If so, should we collect this information 
another way, such as through Form PF for advisers to private funds? If 
so, what information should we collect on Form PF versus Form ADV Part 
1A?
    184. Do commenters agree that both advisers registered or required 
to be registered with the Commission and exempt reporting advisers 
should complete the proposed new questions in Section 7.B.(1) of 
Schedule D about their reported private funds, since both are currently 
required to report on private funds in Part 1A? If not, why not?
(c) Additional Information About Other Business Activities and 
Financial Industry Affiliations
    We also propose to require advisers to disclose whether they 
conduct other business activities as ESG providers or

[[Page 36696]]

have related persons that are ESG providers by amending Items 6 and 7 
of Part 1A (and Sections 6.A. and 7.A. of Schedule D). For each related 
person ESG provider, the adviser would be required to complete the 
relevant items in Section 7.A of Schedule D, which requires, for 
example, the related person's SEC File Number (if any) and additional 
information about the adviser's control relationship (if any) with the 
related person. We believe that the disclosures would better allow us 
to assess the potential conflicts of interest and risks created by 
relationships between advisers and affiliated ESG providers. We also 
believe that it would assist the public in better understanding 
advisers' conflicts of interests when related persons offer ESG 
provider services, or when the adviser offers its own ESG provider 
services to others.
    We believe that this proposed expansion of Items 6 and 7 would 
provide us with a more complete picture of the ESG-related activities 
of an adviser and its related persons. The proposed reported 
information would enable us to identify affiliated financial service 
businesses in the evolving ESG advisory marketplace. The additional 
information on related persons would allow us, clients and other market 
participants to link disparate pieces of information that we have 
access to concerning an adviser and its affiliates as well as 
identifying whether the adviser controls the related person or vice 
versa. Therefore, it would allow the Commission to understand better 
advisers' conflicts of interest in the field of emerging ESG providers 
and give clients and potential clients additional information about 
potential conflicts of interest to utilize in making their investment 
decisions.
    We request comment on all aspects of the proposed new reporting 
about any related person ESG provider and an adviser's other business 
activities as an ESG provider, including the following items.
    185. Should we, as proposed, require both advisers registered or 
required to be registered with the Commission and exempt reporting 
advisers to report the proposed information in Items 6 and 7 of Form 
ADV Part 1A (and the corresponding Schedules) about other business 
activities as an ESG provider or any related person that is an ESG 
provider, as both are currently required to complete these Items? Or, 
should we specify that only advisers registered or required to be 
registered with the Commission should complete this proposed addition 
to the Items?
    186. Should we, instead of our proposed amendments to Items 6 and 
7, require advisers to disclose the proposed information only if the 
adviser actually uses the services of the related person ESG provider 
(or provides its ESG provider services to its own advisory clients)? If 
so, should we require this information only if the adviser uses the 
services in its advisory business to a material extent and/or to a 
threshold percentage of clients? If so, how should we define material 
and/or what threshold should we use, or should we impose a different 
type of reporting threshold for this information (and if so, what)?
    187. Are there other types of financial services providers in the 
ESG marketplace that we should specifically include in the lists 
contained in Items 6 and 7?
    188. Is the information advisers need to complete the proposed 
additional questions contained in Section 7.A. readily available for 
related person ESG providers? Are there other questions not currently 
included in Section 7.A. that we should ask to determine additional 
conflicts of interest advisers face through ESG related persons or 
through conducing other business activities as an ESG provider? For 
example, should we require advisers to report whether a related person 
ESG provider provides other, non-ESG related, services?

D. Compliance Policies and Procedures and Marketing

    Under the Advisers Act and Investment Company Act compliance rules, 
each adviser registered or required to be registered under the Advisers 
Act and each registered fund must have, and annually review, policies 
and procedures reasonably designed to prevent violations of applicable 
laws.\226\ The Advisers Act Compliance Rule requires advisers to 
consider their fiduciary and regulatory obligations under the Advisers 
Act and to formalize policies and procedures reasonably designed to 
address them.\227\ Similarly, the Company Act Compliance Rule requires 
a fund to adopt and implement compliance policies and procedures 
reasonably designed to prevent violations of the Federal securities 
laws by the fund, including policies and procedures providing for its 
oversight of compliance of its service providers, subject to approval 
by the fund's board of directors.\228\ Among other things, the 
Commission has stated that advisers' and funds' compliance policies and 
procedures must address the accuracy of disclosures made to clients, 
investors and regulators, as well as portfolio management processes, 
including consistency of portfolios with investment objectives and 
disclosures by the adviser and/or fund.\229\ Funds and advisers must 
annually review the adequacy and effectiveness of such compliance 
policies and procedures.\230\ ESG strategies, including integration, 
ESG-focused and impact strategies, will necessarily require different 
levels and types of compliance policies and procedures.
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    \226\ See 17 CFR 275.206(4)-7 (``Advisers Act Compliance Rule'') 
and 17 CFR 270.38a-1 (``Company Act Compliance Rule'').
    \227\ See Compliance Programs of Investment Companies and 
Investment Advisers, Release No. IA-2204 (Dec. 17, 2003) [68 FR 
74714 (Dec. 24, 2003)] at text accompanying n.11.
    \228\ Id. at nn.24-31 and accompanying text.
    \229\ Id. at text accompanying nn.17 through 23 and text 
accompanying n.37.
    \230\ Id. at nn.70-71 and accompanying text.
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    Our staff has observed a range of compliance practices, however, 
that do not appear to address effectively advisers' incorporation of 
ESG factors into their advisory services.\231\ In light of these 
observations, as well as the comprehensive nature of our proposed ESG-
related amendments to required disclosures, we believe it would be 
appropriate and beneficial to reaffirm existing obligations under the 
compliance rules when advisers and funds incorporate ESG factors. 
Specifically, as with all disclosures, advisers' and funds' compliance 
policies and procedures should address the accuracy of ESG-disclosures 
made to clients, investors and regulators. They should also address 
portfolio management processes to help ensure portfolios are managed 
consistently with the ESG-related investment objectives disclosed by 
the adviser and/or fund.
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    \231\ See, e.g., Risk Alert, Division of Examinations (Apr. 9, 
2021), available at esg-risk-alert.pdf (sec.gov) (discussing, for 
example, firms that claimed to have formal processes in place for 
ESG investing, but have a lack of policies and procedures related to 
ESG investing, and compliance programs that did not appear to be 
reasonably designed to guard against inaccurate ESG-related 
disclosures and marketing materials). This Risk Alert represents the 
views of the staff of the Division of Examinations. It is not a 
rule, regulation, or statement of the Commission. The Commission has 
neither approved nor disapproved its content. The Risk Alert, like 
all staff statements, has no legal force or effect: it does not 
alter or amend applicable law, and it creates no new or additional 
obligations for any person.
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    Advisers may wish to consider the following specific examples of 
effective ESG-related disclosure, policies, procedures and practices. 
If an adviser discloses to investors that it considers certain ESG 
factors as part of an integration strategy, the adviser's compliance 
policies and procedures should be reasonably designed to ensure the 
adviser manages the portfolios

[[Page 36697]]

consistently with how the strategy was described to investors (e.g., 
actually considering the ESG factors in the way it says it considers 
them). If a registered fund discloses to investors that it adheres to a 
particular global ESG framework, its policies and procedures should 
include controls that help to ensure client portfolios are managed in 
accordance with that framework. Similarly, if an adviser uses ESG-
related positive and/or negative screens on client portfolios, the 
adviser should maintain adequate controls to maintain, monitor, 
implement, and update those screens. Relatedly, if an adviser has 
agreed to implement a client's ESG-related investing guidelines, 
mandates, or restrictions, the adviser's compliance policies and 
procedures should be designed to ensure these investment guidelines, 
mandates, or restrictions are followed. If an adviser discloses to 
investors that ESG-related proxy proposals will be independently 
evaluated on a case-by-case basis, the adviser should adopt and 
implement policies and procedures for such evaluation.\232\ In 
addition, if an adviser advertises to its clients that they will have 
the opportunity to vote separately on ESG-related proxy proposals, the 
adviser must provide such opportunities to its clients to the extent 
applicable and should maintain internal policies and procedures 
accordingly.
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    \232\ Id.
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    In addition, current regulations seek to prevent false or 
misleading advertisements by advisers, including greenwashing, by 
prohibiting material misstatements and fraud. The provision at 17 CFR 
275.206(4)-8 prohibits advisers to pooled investment vehicles from 
making false or misleading statements to existing or prospective 
investors in such pooled investment vehicles (e.g., investors in a 
registered investment company or private fund).\233\ The Marketing Rule 
prohibits an adviser from, directly or indirectly, distributing 
advertisements that contain any untrue statement of a material fact, or 
omitting to state a material fact necessary in order to make the 
statement made, in the light of the circumstances under which it was 
made, not misleading.\234\ Therefore, it generally would be materially 
misleading for an adviser materially to overstate in an advertisement 
the extent to which it utilizes or considers ESG factors in managing 
client portfolios. For example, if an adviser advertisement asserts 
that it applies a negative screen to oil and gas stocks in client 
portfolios, but it fails to apply such a screen in practice it would be 
materially misleading. Similarly, it generally would be materially 
misleading if an adviser stated in its marketing materials that it has 
substantially contributed to the development of specific governance 
practices, or reduction in carbon emissions, at its portfolio company, 
if the adviser's actual roles in the development or reduction in 
emissions were limited or inconsequential.
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    \233\ See 17 CFR 275.206(4)-8 (``Advisers Act rule 206(4)-8'').
    \234\ 17 CFR 275.206(4)-1 (``Marketing Rule''). See Final Rule: 
Investment Adviser Marketing, Release No. IA-5653 (Dec. 22, 2020) 
[86 FR 13024 (Mar. 5, 2021)] (``Marketing Rule Adopting Release''). 
The amended rule became effective on May 4, 2021, and has an 
eighteen-month transition period between effectiveness and Nov. 4, 
2022, when compliance is required for all firms. Prior to 
effectiveness of the amendments, and in some instances until Nov. 4, 
2022, the previous version of the rule prohibited any advertisement 
which contained any untrue statement of a material fact, or which 
was otherwise false or misleading.
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E. Compliance Dates

    We propose to provide a transition period after the effective date 
of the amendments, if adopted, to give funds and advisers sufficient 
time to comply with the ESG disclosure requirements for investment 
company companies and investment advisers. Accordingly, we propose that 
the compliance date of any adoption of this proposal for the following 
items would be one year following the effective date, which would be 
sixty days after the date of publication in the Federal Register: (i) 
the proposed disclosure requirements in prospectuses on Forms N-1A and 
N-2, (ii) the proposed disclosure requirements for UITs on Form N-8B2; 
(iii) the proposed regulatory reporting on Form N-CEN, and (iv) the 
proposed disclosure requirements and regulatory reporting on Form ADV 
Parts 1 and 2.
    We propose that the compliance date of any adoption of the proposed 
disclosures in the report to shareholders and filed on Form N-CSR would 
be 18 months following the effective date, which would be sixty days 
after the date of publication in the Federal Register. Extending the 
compliance date for the proposed annual report further out from the 
proposed prospectus disclosure would allow funds to determine the right 
level of detail to provide in the proposed prospectus before 
implementing the result-oriented disclosure required by the proposed 
annual reports. It will also provide extra time for affected funds to 
develop any needed procedures for gathering data necessary to comply 
with the GHG metrics, proxy voting, and engagement reporting 
requirements if adopted.
    We request comment on the compliance dates outlined above.
    189. Should we, as proposed, provide a one-year transition for 
affected funds to come into compliance with the proposed prospectus and 
registrations statement requirements if adopted? Should the period be 
shorter or longer? Should the transition period be the same for open-
end funds, closed-end funds, and UITs, as proposed?
    190. Should Integration Funds and ESG-Focused Funds have the same 
compliance period as one another, as proposed?
    191. Should we, as proposed, provide an 18-month transition for 
affected funds to come into compliance with the proposed disclosure 
requirements in the annual report? Should the proposed annual report 
requirements have different transition periods from one another? 
Specifically, do funds need more or less time than proposed to gather 
data to produce (i) the required disclosures for Impact Fund 
objectives, (ii) voting and engagement metrics, or (iii) GHG metrics?
    192. Is six months, as proposed, the appropriate amount of time 
between the effective date of the proposed prospectus disclosures and 
the proposed disclosures in the report to shareholders for affected 
funds?
    193. Should we, as proposed, provide a one-year transition period 
for affected funds to come into compliance with the proposed N-CEN 
Reporting requirements? Should the proposed N-CEN requirements have the 
same transition period as the proposed prospectus requirements, as 
proposed?
    194. Should we, as proposed, provide a one-year transition for 
affected advisers to come into compliance with the proposed disclosure 
and reporting requirements in Form ADV Parts 1 and 2? Should the period 
be shorter or longer? Should the transition period, as proposed be the 
same for ADV Parts 1 and 2?

III. Economic Analysis

A. Introduction

    The Commission is mindful of the economic effects, including the 
costs and benefits, of the proposed amendments. Section 2(c) of the 
Investment Company Act provides that when the Commission is engaging in 
rulemaking under the Act and is required to consider or determine 
whether an action is consistent with the public interest, the 
Commission shall also consider whether the action will promote 
efficiency, competition, and capital formation, in addition to the 
protection of investors. Similarly,

[[Page 36698]]

whenever the Commission engages in rulemaking and is required to 
consider or determine whether an action is necessary or appropriate in 
the public interest, section 202(c) of the Advisers Act requires the 
Commission to consider, in addition to the protection of investors, 
whether the action would promote efficiency, competition, and capital 
formation. The analysis below addresses the likely economic effects of 
the proposed amendments, including the anticipated and estimated 
benefits, costs, and the effects on efficiency, competition, and 
capital formation. The Commission also discusses the potential economic 
effects of certain alternatives to the approaches taken in this 
proposal.
    Many of the benefits and costs discussed below are difficult to 
quantify. For example, it is difficult to quantify the efficiency 
benefits produced from reducing investors' search costs and the 
associated welfare gains from better alignments between investors' 
investment objectives and selected ESG funds or advisers. Also, in some 
cases, data needed to quantify these economic effects are not currently 
available and the Commission does not have information or data that 
would allow such quantification. For example, we anticipate the 
enhanced transparency and consistency in ESG disclosures would provide 
more complete and accurate information available to investors and 
prospective investors about ESG investing. However, we lack data that 
would allow us to quantify the value of more complete information in 
ESG disclosures, which varies across investors and also depends on the 
degree to which any particular investor may derive non-pecuniary 
benefits from ESG investing. While the Commission has attempted to 
quantify economic effects where possible, much of the discussion of the 
economic effects is qualitative in nature. The Commission seeks comment 
on all aspects of the economic analysis, especially any data or 
information that would enable a quantification of the proposal's 
economic effects.

B. Economic Baseline

    The economic baseline against which we measure the economic effects 
of this proposal, including its potential effects on efficiency, 
competition, and capital formation, is the state of the world as it 
currently exists.
1. Current Regulatory Framework
    As discussed above, funds and registered advisers are subject to 
disclosure requirements concerning their investment strategies.\235\ 
Funds must provide disclosures in their prospectus including material 
information on investment objectives, strategies, risks, and 
governance, and a discussion of fund performance in their annual 
reports. Certain of these fund prospectus disclosures are subject to 
Inline XBRL tagging requirements, while others are not.\236\ Fund 
annual reports are only subject to Inline XBRL tagging requirements to 
the extent they are filed by seasoned closed-end funds and include 
tagged prospectus disclosures incorporated into their Form N-2 
registration statements by reference.\237\ Registered advisers are 
required to provide information about their advisory services in 
narrative format on Form ADV Part 2 describing their firm's methods of 
analysis and investment strategies, fees, conflicts, and personnel; 
these disclosures are not tagged in Inline XBRL or any other machine-
readable data language.\238\
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    \235\ See supra section I.A.3.
    \236\ With respect to open-end fund registration statements 
filed on Form N-1A, only those disclosures included in Items 2-4 of 
Form N-1A (i.e., the prospectus risk/return summary, which includes 
a discussion of investment objectives, principal investment 
strategies, and principal risks) are required to be tagged in Inline 
XBRL. See General Instruction C.3.g.i of Form N-1A; 17 CFR 
232.405(b)(2)(i); Inline XBRL Adopting Release, supra footnote 185. 
Similarly, for registered closed-end funds and BDCs that file on 
Form N-2, the discussion of investment strategies and principal 
risks, as well as other specified prospectus disclosures, will be 
required to be tagged in Inline XBRL no later than Feb. 2023. See 
General Instruction I.2 of Form N-2; 17 CFR 232.405(b)(3)(iii); 
Closed-End Fund Offering Reform Adopting Release, supra footnote 
186. Unit investment trust registration statements filed on Forms N-
8B-2 and S-6 are not currently subject to tagging requirements.
    \237\ See General Instruction I.3 of Form N-2.
    \238\ Registered advisers must file brochures and amendments 
electronically through the Investment Adviser Registration 
Depository (``IARD'') system as a text-searchable (non-machine 
readable) PDF. See 17 CFR 275.203(a)(1); General Instruction 5 of 
Form ADV Part 2.
---------------------------------------------------------------------------

    General disclosures about ESG-related investment strategies would 
fall under these disclosure requirements, but there are no specific 
requirements about what a fund or adviser following an ESG strategy 
must include. The names rule requires that a fund adopt a policy to 
invest at least 80 percent of the value of its assets in the type of 
investment suggested by its name and, although current fund practices 
are mixed, many funds adopt such a policy when the fund's name 
indicates that the fund's investment decisions incorporate one or more 
ESG factors.\239\ Further, funds and advisers (both registered 
investment advisers and exempt reporting advisers) are currently not 
required to report to the Commission ESG-specific information on Forms 
N-CEN and Form ADV Part 1A.\240\ Rather, Form N-CEN currently requires 
any fund, including an ESG fund, that tracks the performance of an 
index to identify itself as an index fund and provide certain 
information about the index,\241\ but Form N-CEN does not require 
reporting on funds' ESG-specific strategies and processes. Similarly, 
registered advisers and exempt reporting advisers are required to 
report certain information about their advisory business on Form ADV 
Part 1A, but are currently not required to report uses of ESG factors 
in their advisory business and investment strategies, including with 
respect to an adviser's reported private funds and separately managed 
accounts.
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    \239\ See Investment Company Names, Investment Company Act 
Release No. 24828 (Jan. 17, 2001) [66 FR 8509 (Feb. 1, 2001)].
    \240\ See supra section II.C. Form N-CEN and Form ADV Part 1A 
are each submitted using an XML-based structured data language 
specific to that Form.
    \241\ See supra section II.C.1.
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2. Affected Parties
(a) Registered Investment Companies and BDCs
    As of the end of December 2020, there were 13,248 open-end funds 
reporting an aggregate $30,013 billion in average total net assets and 
691 closed-end funds reporting an aggregate $305 billion in average 
total net assets.\242\ There also were 94 BDCs reporting an aggregate 
$66 billion in total net assets and 5,818 UITs with $1,116 billion in 
total net assets.\243\
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    \242\ These estimates are based on Form N-CEN filings, Item 
C.19, as of Dec. 31, 2020.
    \243\ The estimates for BDCs are based on Forms 10K/10Q filings 
and Morningstar Direct data as of Dec. 31, 2020. The estimates for 
UITs are based on Form S-6 as of Dec. 31, 2021. As insurance 
companies' separate accounts, which are organized as UITs, would not 
be subject to the proposed rules, the estimate mentioned above would 
not include them. See supra footnote 98 (for more information).
---------------------------------------------------------------------------

    The proposed rules would define categories of funds: Integration, 
ESG-Focused, and Impact Funds (a subset of ESG-Focused funds that seek 
to achieve a specific ESG impact or impacts), and provide specific 
requirements for each category. While many funds provide information 
about how they consider ESG factors in their prospectus documents or 
shareholder reports, information about ESG factors at the fund level is 
not consistently disclosed. As a result, it is difficult to determine 
accurately how many funds would fall into each category.
    Determining the number of Integration Funds is particularly 
difficult, as these funds only consider ESG factors as part of a 
broader

[[Page 36699]]

investment strategy. According to one commenter, today virtually all 
asset managers have incorporated ESG considerations to some degree, or 
have plans to do so, across their investment strategies.\244\
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    \244\ See Morningstar Comment Letter attachment, Morningstar US 
Sustainable Fund Landscape 2020. This report, however, noted that 
those firm-level commitments have yet to make a significant impact 
at the fund level.
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    We do, however, attempt to estimate the number of funds that the 
proposed rule would consider ESG-Focused Funds (including Impact 
Funds). We do this by using the fund name as a proxy for the fund's 
investment strategy. Based on an analysis of fund names, we estimate 21 
closed-end funds and 35 UITs had names that imply an ESG strategy.\245\ 
We estimate that there were 208 open-end mutual funds with $114 billion 
in net assets and 125 ETFs with $250 billion in net assets, and thus a 
total of 333 open-end funds with $364 billion in net assets, with fund 
names suggesting an ESG focused strategy as of July 2021.\246\ Further, 
we estimate the share of funds with names suggesting an ESG focused 
strategy were about 3 percent of the total number of mutual funds and 
ETFs, and represented approximately 1 percent of total assets at the 
end of 2020.\247\
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    \245\ The estimates for closed-end funds are based on an 
analysis of Form N-PORT filings as of Nov. 30, 2021. The estimates 
for UITs are based on an analysis of Morningstar Direct data as of 
Dec. 31, 2020.
    \246\ The estimated number of funds that have an ESG strategy is 
based on analysis of mutual funds and ETFs with names containing 
``ESG,'' ``Clean,'' ``Environ(ment),'' ``Impact,'' ``Responsible,'' 
``Social,'' or ``Sustain(able).'' This analysis is based on 
Morningstar data as of July 31, 2021. Some mutual funds and ETFs may 
not have fund names containing these ESG-related terms, although 
they incorporate ESG factors in their investment strategies. In this 
respect, this estimate may undercount the number of funds with ESG 
strategies, however, some funds with names containing ESG terms may 
consider ESG factors, along with many other factors, in their 
investment decisions. In this respect, this estimate may then over 
count the number of funds with ESG strategies. See also comment 
letter from Morningstar to Chair Gensler (June 9, 2021) in response 
to Acting Chair Allison Lee's Climate RFI 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. In this report, Morningstar estimated there were 
392 sustainable funds in 2020, following its own definition of 
sustainable funds.
    \247\ This is somewhat consistent with other analysis that 
examined the share of global assets under management by sustainable 
funds relative to the overall market capitalization. Although this 
share has been generally in an upward trend, the share was 
approximately 2.3 percent in 2020. See International Monetary Fund 
Global Financial Stability Report: Markets in the time of Covid-19, 
Climate Change: Physical Risks and Equity Price Chapter 5 (Apr. 
2020). Another paper estimated about 3 percent of U.S. mutual funds 
were sustainable funds. In this paper, sustainable funds were 
classified via pattern search on mutual funds names. See Bertrand 
Candelon, Jean-Baptiste. Hasse, Quentin. Lajaunie, ESG-Washing in 
the Mutual Funds Industry? From Information Asymmetry to Regulation, 
Risks, 9, 199 (2021) (``Candelon''). These studies estimate the size 
of funds likely implementing ESG-Focused strategies (in other words, 
make ESG factors a central feature of their investment strategies). 
The number and asset size of ESG-integration funds, funds that 
consider ESG factors along with other factors, would be larger than 
those of ESG-Focused Funds.
---------------------------------------------------------------------------

    ESG-Focused mutual funds and ETFs have recently seen sharp 
increases in net flows, leading to substantial increases in assets 
under management. As summarized in table 1, net flows rose by 61 
percent in 2018, 252 percent in 2019, and 472 percent in 2020. Flows 
into ESG-Focused ETFs experienced even more pronounced growth, rising 
by 52 percent in 2018, 298 percent in 2019, and 680 percent in 
2020.\248\
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    \248\ Our analysis of Morningstar data is consistent with a 
trend observed in a Morningstar report, Sustainable Funds U.S. 
Landscape Report: More Funds, More Flows, and Impressive Returns in 
2020, Morningstar Manager Research (Feb. 10, 2021) (This report was 
attached in a comment letter from Morningstar to Chair Gensler (June 
9, 2021)), available at https://www.sec.gov/comments/climate-disclosure/cll12-8899329-241650.pdf.

   Table 1--Annual Growth Rate of Net-Flows to Funds With ESG-Focused
                               Strategies
------------------------------------------------------------------------
               Fund type                    2018       2019       2020
------------------------------------------------------------------------
Mutual Funds...........................        82%       185%        49%
ETFs...................................         52        298        680
Mutual Funds and ETFs..................         63        252        472
------------------------------------------------------------------------

    To understand the asset holdings of the funds whose names imply an 
ESG strategy, we analyzed data from Form N-PORT filings.\249\ According 
to this analysis on Form N-PORT filings, corporate equities represent 
83 percent of assets held by these funds, while corporate debt 
represents the second largest investment type, accounting for 6 percent 
of assets held by these funds.
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    \249\ Form N-PORT is filed by a registered management investment 
company, or an exchange-traded fund organized as a unit investment 
trust, or series thereof (``Fund''). A money market fund (``money 
market fund'') under rule 2a-7 under the Investment Company Act of 
1940 (15 U.S.C. 80a) (``Act'') (17 CFR 270.2a-7) or a small business 
investment company (``SBIC'') registered on Form N-5 (17 CFR 239.24, 
274.5) are excluded. The analysis included 321 funds with names 
containing ``Sustainable,'' ``Responsible,'' ``ESG,'' ``Climate,'' 
``Carbon,'' or ``Green'' and used data as of Sept. 2021.
---------------------------------------------------------------------------

    Above, we estimated the number of funds that the proposed rules 
would consider ESG-Focused Funds, using the name as a proxy for the 
investment strategy. Additionally, we reviewed databases from several 
ESG providers and how they classify funds that consider ESG factors in 
their investment strategy or approach. Although it is difficult to 
precisely map the scope of ``ESG-Focused Funds'' onto various 
definitions for ESG funds as employed by ESG providers, in general, it 
appeared that ESG providers use broad definitions to classify ESG 
funds. This means that not all funds identified by ESG providers as ESG 
funds would be considered ESG-Focused Funds under the proposal. Some 
funds following ESG principles as indicated by ESG providers may be 
considered Integration Funds under the proposal.\250\ Furthermore, we 
found variations in funds classified as ESG funds across ESG providers. 
As a result, a fund classified as an ESG fund by one ESG provider is 
not necessarily classified as an ESG fund by another provider.\251\ For 
instance, one ESG provider identified 781 mutual funds and ETFs as ESG 
funds as of February 2022,\252\ while another ESG provider identified 
423 mutual funds and ETFs as ESG funds as

[[Page 36700]]

of December 2021.\253\ Another ESG provider identified 425 mutual funds 
and ETFs as funds with certain ESG attributes as of February 2022.\254\ 
A combined total of 1,028 mutual funds and ETFs were classified as ESG 
funds by at least one of the three ESG providers.
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    \250\ Under the proposal, 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 in: (1) selecting investments, or 
(2) its engagement strategy with the companies in which it invests. 
One ESG provider, MSCI, defines funds with an ESG Policy as funds 
that have adopted investment policies that consider some ESG 
criteria. It is not clear how significantly ESG criteria are used.
    \251\ This is consistent with other studies suggesting 
inconsistencies across ESG providers in general. See infra (for more 
detailed discussion).
    \252\ MSCI identifies funds with an ESG Policy. The funds with 
an ESG Policy are defined as funds that have adopted investment 
policies that consider some ESG criteria, including; environmental, 
social or governance concerns, religious beliefs, inclusive employee 
policies, or environmentally friendly investments. The designation 
is attributed to a fund based on what is stated in the fund's 
investment strategy in the fund prospectus.
    \253\ Morningstar identifies sustainable investment funds--ESG 
funds overall. These ESG funds overall are defined as funds that 
incorporate ESG principles into investment process or through 
engagement activities.
    \254\ Bloomberg identifies funds with certain ESG attributes. 
For purposes of this review, we considered active funds with the 
following general attribute(s): ESG, Clean Energy, Climate Change, 
Environmentally Friendly, or Socially Responsible.
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    According to one report, fund managers incorporate environmental, 
social, and governance factors fairly evenly, but within the broad 
topic of environmental factors the specific issues considered are more 
concentrated, while for social and governance factors the specific 
issues incorporated in their investment analysis and decision-making 
processes are much more diverse.\255\ In particular, ``climate change/
carbon'' was by a wide margin the most commonly listed specific ESG 
issue considered by fund managers in asset-weighted terms. $4.18 
trillion in assets fell under fund managers who listed this criterion, 
a growth of 39 percent from 2018 to 2020, and an amount in 2020 that is 
71% more than any other specific issue.\256\ The particular prevalence 
of climate change/carbon-related factors being incorporated in 
investment analysis and decision-making processes by fund managers also 
aligns with survey-based evidence from institutional investors.\257\
---------------------------------------------------------------------------

    \255\ According to the US SIF, sustainable investing assets are 
managed using investment strategies such as ESG incorporation, 
shareholder advocacy, and overlapping strategies. See US SIF, 
Sustainable Investing Basics (2020), available at https://www.ussif.org/sribasics (``US SIF'') and the executive summary of 
the Report on US Sustainable and Impact Investing Trends at https://www.ussif.org/files/US%20SIF%20Trends%20Report%202020%20Executive%20Summary.pdf.
    \256\ Other issues include ``anti-corruption'' ($2.44 trillion), 
``board issue'' ($2.39 trillion), ``sustainable natural resources/
agriculture'' ($2.38 trillion), ``executive pay'' ($2.22 trillion).
    \257\ See Philipp Krueger, Zacharias Sautner, and Laura T. 
Starks, The Importance of Climate Risks for Institutional Investors, 
33 (3) Rev. Fin. Stud. 1067-1111 (2020) (``Krueger'').
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(b) Private Funds
    As of the end of December 2020, registered investment advisers 
reported 41,938 private funds with a combined gross asset value of 
$17,585 billion.\258\ We estimate that 243 of these funds, or fewer 
than one percent, had names suggesting ESG investments.\259\ Exempt 
reporting advisers (ERAs) reported to advise 23,053 private funds with 
a combined gross asset value of $5,679 billion.\260\ We estimate that 
144 of these funds, or fewer than one percent, had names suggesting ESG 
investments.\261\ In 2021, a number of private funds launched a 
collaboration project to standardize ESG metrics, including GHG 
emissions, and provide a mechanism for comparative reporting for the 
funds. This voluntary reporting framework in the private fund industry 
now represents $8.7 trillion in assets under management and over 1,400 
underlying portfolio companies as of January 2022.\262\
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    \258\ These estimates are based on an analysis of Form ADV 
Schedule D filings as of Dec. 31, 2020.
    \259\ We identified private funds with names containing ``ESG,'' 
``Clean,'' ``Environ(ment),'' ``Impact,'' ``Responsible,'' 
``Social,'' or ``Sustain(able)'' as having an ESG focus.
    \260\ These estimates are based on Form ADV Schedule D filings 
as of Dec. 31, 2020. Some private funds have two different 
investment advisers, a RIA and an ERA. Those private funds could be 
double-counted, because the private funds are reported by the RIA 
and also by the ERA. Feeder funds who report a master fund on Form 
ADV are removed to avoid double-counting.
    \261\ We identified private funds with names containing ``ESG,'' 
``Clean,'' ``Environ(ment),'' ``Impact,'' ``Responsible,'' 
``Social,'' or ``Sustain(able)'' as having an ESG focus. One survey 
of global investors and their advisors found that 51 percent of 
general partners (GPs) from North America used an ESG risk factor 
framework when evaluating potential portfolio companies in 2021. The 
same survey reported that 45 percent of GPs from North America 
required portfolio companies to focus on financially material ESG 
factors. Examining only Venture Capitals (VCs), 49 percent of the 
global VC GP respondents have implemented the consideration of 
sustainable practices at the portfolio company level. Some of these 
GP respondents may be considered implementing Integration 
strategies, not necessarily Focused strategies. Furthermore, these 
figures might be biased upward as the individuals interested in ESG 
related issues are more likely to respond to this survey, as 
acknowledged in the report. See PitchBook, Sustainable Investment 
Survey 2021 (Sept. 17, 2021). According to another report, 645 
impact funds closed between 2006 and Mar. 2021 in the North America, 
which is somewhat comparable to our estimated number of private 
funds with ESG-Focused strategies. See PitchBook, Analyst Note: 
Impact Funds by Reason and Region (July 27, 2021).
    \262\ This private fund collaboration group has aligned on an 
initial core set of six ESG categories: greenhouse gas emissions, 
renewable energy, board diversity, work-related injuries, net new 
hires, and employee engagement. See Private Equity Industry's First-
Ever ESG Data Convergence Project Announces Milestone Commitment of 
Over 100 LPs and GPs, Carlyle (Jan. 28, 2022), available at https://www.carlyle.com/media-room/news-release-archive/private-equity-industrys-first-ever-esg-data-convergence-project-announces-over-100-lps-gps; see also ESG Data Convergence Project, Institutional 
Limited Partners Association, available at https://ilpa.org/ilpa_esg_roadmap/esg_data_convergence_project/.
---------------------------------------------------------------------------

(c) Investment Advisers
    As of December 2020, 13,812 registered investment advisers 
(``RIAs'') oversaw over $110 trillion in regulatory assets under 
management (``RAUM''). As of December 2020, we identified 10,120 RIAs 
(73 percent) that provided advisory services to SMA clients, managing 
about $43 trillion in assets.\263\ Currently, investment advisers 
describe their significant investment strategies or analytical methods 
including information about any incorporation of ESG factors in Form 
ADV Part 1A and Part 2A (brochures). However, ESG factors are not 
consistently disclosed across investment advisers, and practices 
regarding ESG disclosures vary substantially.
---------------------------------------------------------------------------

    \263\ These estimates are based on Form ADV filings as of Dec. 
31, 2020.
---------------------------------------------------------------------------

    As of December 2020, approximately one in three RIAs, or 4,949 RIAs 
total, provided advisory services to private funds and oversaw nearly 
$18 trillion in regulatory assets. Of these 4,949 RIAs, 3 percent 
advised private funds with names containing ESG terms.\264\ According 
to Form ADV Part 1A filings, there existed 4,791 exempt reporting 
advisers (ERAs). Approximately 2 percent of ERAs provided advisory 
services to private funds with names containing ESG terms.\265\
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    \264\ Based on reporting from Form ADV Schedule D it includes 
private funds ``ESG,'' ``Clean,'' ``Environ(ment),'' ``Impact,'' 
``Responsible,'' ``Social,'' or ``Sustain(able)'' in its name. Some 
private funds may not have fund names containing these ESG-related 
words, although they focus on ESG factors in their investment 
strategies. In this regard, the estimate would undercount private 
funds focusing on ESG factors, however, some private funds with 
names containing ESG terms may consider ESG factors equally with 
many other factors in their investment decisions. In this respect, 
this estimate may overestimate the number of private funds focusing 
on ESG factors.
    \265\ The limitations discussed in footnote above are also 
applied here. Furthermore, some private funds obtain advice both 
from registered investment advisers and ERAs.
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3. Investor Interest in ESG Funds
    In this section, we discuss various comment letters, reports, and 
academic articles examining investors' interest in ESG funds and 
investing behaviors of investors in such funds. The definitions of ESG 
funds and ESG investing used in these comment letters, reports and 
articles vary and generally do not line up exactly with the definitions 
of ESG fund categories under the proposed rules. In the discussion 
below, however, we use the terminologies as defined in these comment 
letters, reports, and articles. Therefore, the observations discussed 
below may not translate precisely to the set of funds subject to the 
proposed rules.
(a) Evidence From Investor Surveys
    A review of several surveys suggest that investor demand for ESG 
funds and investments has increased for several

[[Page 36701]]

reasons and such investor demand is expected to continue to grow. In 
one survey, a majority (56 percent) of U.S. investment professionals 
responded that they consider ESG information in investment decisions 
because ESG information is material to investment performance.\266\ 
Another survey found that 62 percent of institutional investors cited 
focusing on long-term investment outcomes as a reason for ESG 
investing.\267\ According to another survey, institutional investors 
mentioned protecting their own reputations as a reason why they 
incorporate climate risks in their investment process.\268\
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    \266\ See Amir Amel-Zadeh, and George Serafeim, Why and How 
Investors Use ESG Information: Evidence from a Global Survey, 
Harvard Business School (Working Paper No. 17-079) (Feb. 2017). This 
is a survey of senior investment professional at large global 
financial institutions. In this survey, 33% of U.S. investment 
professionals responded that they consider ESG information because 
of growing demands from clients or stakeholders.
    \267\ See Robert G. Eccles, Mirtha D. Kastrapeli, and Stephanie 
J. Potter, How to Integrate ESG into Investment Decision-Making: 
Results of a Global Survey of Institutional Investors, 29(4) J. 
Applied Corporate Fin. 125 (2017). Similarly, a GAO report found 
that most institutional investors interviewed for the report stated 
that they seek ESG information to better understand risks that could 
affect companies' long-term financial performances. See U.S. Gov't 
Accountability Office, Report to the Senator Mark Warner, 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.
    \268\ See Krueger, supra footnote 257. While this survey was 
conducted to institutional investors globally, U.S. institutional 
investors were most represented in the survey. In addition to the 
protection of investor's own reputation (30%), institutional 
investors cited ``moral/ethical obligation (27.5%),'' ``legal 
obligation or fiduciary duty (27%),'' ``beneficial to investment 
returns (25%),'' and ``reduction of overall portfolio risks (24%),'' 
as reasons why they incorporate climate risks in their investment 
process.
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    Survey evidence suggests that retail investors are also interested 
in ESG investing. One survey found 83 percent of U.S. retail investors 
reported a preference for investing in companies that are leaders in 
environmentally responsible practices.\269\ In another survey, a 
majority (51 percent) of U.S. retail investors said the ESG-related 
performance of the company influenced their investment decisions.\270\ 
Moreover, three-quarters of U.S. retail investors reported that they 
have increased or plan to increase their investment in ESG 
investments.\271\ In addition, U.S. asset managers forecast high demand 
for such investments in the next two to three years, particularly among 
younger investors.\272\ Should these younger investors retain their 
interest in ESG investing, this suggests that assets in ESG strategies 
may grow as assets are gradually transferred from the older to the 
younger generation.\273\
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    \269\ See Consumer Federation of America Comment Letter; see 
also Cerulli Associates, Global Retail Investors and ESG: 
Responsible Investing Converges with Accelerated Environmental and 
Social Imperatives (Apr. 2021), available at https://info.cerulli.com/rs/960-BBE-213/images/2021_ESG_White_Paper.pdf.
    \270\ See GlobeScan, Retail Investors' Views of ESG (2021), 
available at https://3ng5l43rkkzc34ep72kj9as1-wpengine.netdna-ssl.com/wp-content/uploads/2021/12/GlobeScan-Radar-2021-Retail_Investors_Views_of_ESG-Full-Report.pdf.
    \271\ Id.
    \272\ See Cerulli Associates, Global Retail Investors and ESG: 
Responsible Investing Converges with Accelerated Environmental and 
Social Imperatives (Apr. 2021), available at https://info.cerulli.com/rs/960-BBE-213/images/2021_ESG_White_Paper.pdf. In 
this white paper, millennials are defined as individuals with ages 
between 24 and 39 in 2020, while Generation Z refers to individuals 
with age 23 or younger. Baby boomers refer to individuals with ages 
between 56 and 74 in 2020. In this survey, 84% (70%) of asset 
managers anticipated high demands for ESG investing from millennial 
clients (Generation Z) in the next two to three years. In contrast, 
only 14% of asset managers anticipated high demands for ESG 
investing from baby boomers.
    \273\ See Consumer Federation of America Comment letter; see 
also Cerulli Associates, Global Retail Investors and ESG: 
Responsible Investing Converges with Accelerated Environmental and 
Social Imperatives (Apr. 2021), available at https://info.cerulli.com/rs/960-BBE-213/images/2021_ESG_White_Paper.pdf.
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(b) Evidence From Mutual Fund Flows
    In addition to evidence from surveys, investors are displaying a 
demand for investment strategies focusing on ESG. In particular, 
compared to 25 years ago, relatively more investment dollars are now 
directed to sustainable investing assets.\274\ Similarly, several 
commenters suggested that the number of ESG funds has increased over 
time.\275\ For example, one commenter stated that the number of ESG 
funds have increased by 18 percent for the past 15 months, from 
December 2019 to March 2021.\276\ According to another commenter, the 
number of sustainable open-end funds and ETFs has increased nearly 
fourfold over the past ten years.\277\ At least 30 new sustainable 
funds have been launched each year since 2015, with 71 new fund 
launches in 2020. As a result, a total of 244 new sustainable funds 
have been launched since 2015.\278\ Additionally, 58 existing funds, 25 
funds in 2020 alone, have changed their investment strategies to become 
sustainable funds since 2015.\279\
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    \274\ See US SIF Report on US Sustainable and Impact Investing 
Trends 2020 (2020), available at https://www.ussif.org/files/US%20SIF%20Trends%20Report%202020%20Executive%20Summary.pdf.
    \275\ See also section I.A.1.
    \276\ See ICI Comment Letter.
    \277\ See Morningstar Comment Letter (attachment), Morningstar 
US Sustainable Fund Landscape (2020).
    \278\ See Morningstar Comment Letter (attachment), Morningstar 
US Sustainable Fund Landscape (2020). See supra footnote 283. (For 
detailed discussion about the definition of ``sustainable funds.'')
    \279\ Most of these funds also changed their names to accurately 
reflect changes in investment strategies as well.
---------------------------------------------------------------------------

    In addition to a proliferation in the number of ESG-related funds, 
increased investor demand for ESG-related investments can be seen in 
the increase in fund flows toward ESG-related mutual funds relative to 
the fund flows toward other mutual funds. According to a comment 
letter, in 2020, net flows to sustainable funds reached $51.1 billion 
($17.4 billion to sustainable open-end funds and $33.7 billion to 
sustainable ETFs).\280\ Net flows to sustainable funds have steadily 
increased since 2016, but most notably since 2019. In 2016, 2017, and 
2018, net flows to sustainable funds were around $5 billion per year. 
In 2019, net flows reached $21.4 billion. In 2020, overall open-end 
funds have suffered net outflows of $289 billion. Even then, 
sustainable open-end funds have still received net inflows of $17.4 
billion.\281\
---------------------------------------------------------------------------

    \280\ See Morningstar Comment Letter attachment, Morningstar 
U.S. Sustainable Fund Landscape (2020). According to this report, 
while many funds mention ESG factors briefly somewhere in their 
prospectus, often in a less-prominent ``Additional Information'' 
section, the sustainable funds make their commitment clear and 
prominent in their prospectus, often in ``Principal Investment 
Strategies'' section of the fund's prospectus with enough details.
    \281\ See Morningstar Comment Letter attachment, Morningstar 
U.S. Sustainable Fund Landscape (2020).
---------------------------------------------------------------------------

    Investor interest in ESG funds is further consistent with academic 
studies which show that flows in these funds respond to ESG-related 
information. For example, one empirical study on mutual fund flows 
found that both retail and institutional mutual fund investors 
responded to sustainability reports: mutual funds that received the 
highest sustainability rating from a third-party ESG provider have 
experienced significant net inflows, whereas funds that received the 
lowest sustainability rating from the same ESG provider have 
experienced substantial net outflows.\282\ Another study found that 
``socially responsible investment'' (SRI) \283\ funds

[[Page 36702]]

with a stronger public-facing profile, such as funds listed on a 
website of a major independent organization committed to sustainable 
investing, received higher inflows than other SRI funds or other 
funds.\284\ Other studies suggest that a disproportionate share of 
funds flow into SRI mutual funds when climate risk is particularly 
salient, for example, after environmental disasters.\285\ Additionally, 
other studies found that SRI funds have more persistent flows, less 
volatility in flows, and are generally less sensitive to past 
performance compared to other funds.\286\
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    \282\ See Samuel M. Hartzmark and Abigail B. Sussman, Do 
Investors Value Sustainability? A Natural Experiment Examining 
Ranking and Fund Flows, 74 (6) J. Fin. 2789, 2789-2837 (2019). 
Investors' responses were mostly concentrated in two extreme rating 
categories, the lowest and the highest, and investors responded more 
to discrete measures rather than continuous measures. All these are 
consistent with literature finding the importance of salient 
information in investment decisions.
    \283\ This is the terminology used in this and other studies. 
While there are some differences across studies, socially 
responsibility investment refers to an investment process that 
integrates environmental, social and corporate governance 
considerations in investment decision making.
    \284\ See J[eogon]drzej Bia[lstrok]kowski and Laura T. Starks, 
SRI Funds: Investor Demand, Exogenous Shocks and ESG Profiles, 
University of Canterbury, Department of Economics and Finance 
(Working Papers in Economics 16/11) (2016). Authors examined SRI 
funds that are members of US SIF and thus listed on US SIF's 
website. These SRI funds were found to receive higher inflows than 
other SRI funds or non-SRI funds.
    \285\ See also J[eogon]drzej Bia[lstrok]kowski and Laura T. 
Starks, SRI Funds: Investor Demand, Exogenous Shocks and ESG 
Profiles, University of Canterbury, Department of Economics and 
Finance (Working Papers in Economics 16/11) (2016).
    \286\ See Luc Renneboog, Jenke ter Horst, & Chendi Zhang, Is 
Ethical Money Financially Smart? Nonfinancial Attributes and Money 
Flows of Socially Responsible Investment Funds, 20 J. Fin. 
Intermediation 562, 562-588 (2011).
---------------------------------------------------------------------------

    Part of this investor demand, as reflected by fund flows, could be 
because investors may have a particular preference toward ESG 
investments, as some studies suggest. \287\ Consistent with this view, 
some studies suggest that SRI investors are less sensitive to financial 
performance compared to other investors and are willing to forgo 
financial performance to incorporate their social preferences.\288\ 
Another study suggests similar results about SRI investors in venture 
capital funds, finding that investors who previously invested in Impact 
Funds are more likely to invest in Impact Funds again, even though 
Impact Funds, on average, did not outperform.\289\ This study further 
found that SRI investors reinvest in Impact Funds due to their non-
pecuniary preferences, not their inaccurate beliefs about financial 
performance.
---------------------------------------------------------------------------

    \287\ See Lubos Pastor, Robert F. Stambaugh, and Lucian A. 
Taylor, Sustainable Investing in Equilibrium, 142 J. Fin. Econ. 550, 
550-571 (2021). Sadok El Ghoul and Aymen Karoui, Does Corporate 
Social responsibility Affect Mutual Fund Performance and Flows? 77 
(C) J. Banking & Fin. 53, 53-63 (2017). See also J[eogon]drzej 
Bia[lstrok]kowski and Laura T. Starks, SRI Funds: Investor Demand, 
Exogenous Shocks and ESG Profiles, University of Canterbury, 
Department of Economics and Finance (Working Papers in Economics 16/
11) (2016); Karen L. Benson and Jacquelyn E. Humphrey, Socially 
Responsible Investment Funds: Investor Reaction to Current and Past 
Returns, 32 (9) J. Banking & Fin. 1850, 1850-1859 (2008); Luc 
Renneboog, Jenke ter Horst, & Chendi Zhang, Socially Responsible 
Investments: Institutional Aspects, Performance, and Investor 
Behavior, 32 (9) J. Banking & Fin. 1723, 1723-1742 (2008).
    \288\ See Arno Riedl and Paul Smeets, Why Do Investors Hold 
Socially Responsible Mutual Funds? 72 J. Fin. 2505, 2505-2550 
(2017).
    \289\ See Brad M. Barber, Adair Morse and Ayako Yasuda, Impact 
Investing, 139 (1) J. Fin. Economics 162, 162-185 (2021). In this 
paper, 159 funds were considered Impact Funds by applying a strict a 
criterion that the fund must state dual objectives--investments made 
with the intention to generate positive, measurable social and 
environmental impact alongside a financial return--in its 
motivation. Even though Impact Funds on average do not beat the 
market ex post, the impact investors invest in Impact Funds, thus 
suggesting that main results mostly reflect investors' preferences 
rather than investors' inaccurate beliefs that Impact Funds would 
outperform non-Impact Funds.
---------------------------------------------------------------------------

4. Institutional Investor Engagement With Companies on ESG-Related 
Issues
    In addition to considering ESG-related issues when selecting 
portfolio investments, some institutional investment managers also 
engage directly with portfolio companies on these issues. Most 
institutional investors, including asset managers, engage with 
portfolio companies.\290\ Fewer than 20 percent of institutional 
investors responded that they did not engage with portfolio 
companies.\291\ Institutional investors usually engage with portfolio 
companies through multiple channels. Investors most often use private 
channels such as discussing with portfolio companies' management teams 
the financial implications of climate risks (43 percent) or proposing 
certain actions to portfolio companies on climate risk issues (30 
percent) at shareholder meetings. Many institutional investors have 
engaged with portfolio companies more publicly as well. For example, 30 
percent of institutional investors indicated that they voted against a 
management proposal over climate risk issues at annual meetings, and 
about the same share (30 percent) of institutional investors submitted 
shareholder proposals on climate risk issues.\292\
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    \290\ See Krueger, supra footnote 257. In this study, 
institutional investors include asset managers (23%), banks (22%), 
pension funds (17%), insurance companies (15%), mutual funds (8%), 
and other institutions (15%).
    \291\ Id. See also Joseph A. McCahery, Zacharias Sautner, and 
Laura T. Starks, Behind the Scenes: The Corporate Governance 
Preferences of Institutional Investors, 71 J. Fin. 2905, 2905-32 
(2016).
    \292\ See Krueger, supra footnote 257.
---------------------------------------------------------------------------

    Global hedge fund managers reported that the most common method of 
shareholder engagement was to engage privately with portfolio companies 
on ESG issues (74 percent), followed by proxy voting (34 percent).\293\ 
In contrast, only 25 percent of hedge fund managers reported public 
engagements and 13 percent divestment.\294\
---------------------------------------------------------------------------

    \293\ See KPMG, Sustainable Investing: Fast-Forwarding Its 
Evolution (Feb. 2020), available at https://assets.kpmg/content/dam/kpmg/xx/pdf/2020/02/sustainable-investing.pdf.
    \294\ Id.
---------------------------------------------------------------------------

    However, one report suggests global asset managers do not 
comprehensively disclose proxy voting records and shareholder 
engagement activities.\295\ For instance, this report found that 55 
percent of the assessed asset managers disclosed a record of proxy 
votes they cast in annual general meetings of portfolio companies and 
only 17 percent published reasons for their voting decisions.\296\ 
Further, 36 percent of the assessed asset managers disclosed no 
information about their ESG-related engagement activities 
publicly.\297\
---------------------------------------------------------------------------

    \295\ See Felix Nagrawala and Krystyna Spinger, Point of No 
Returns: A Ranking of 75 of the World's Largest Asset Managers' 
Approaches to Responsible Investment, ShareAction (Mar. 2020), 
available at https://shareaction.org/wp-content/uploads/2020/03/Point-of-no-Returns.pdf (``ShareAction''). This study includes 75 
global asset managers. Asset managers from the U.S. were capped at 
20 to represent other regions. Voting data was partially provided by 
Proxy Insight and sent to asset managers for verification. See also 
IOSCO, Recommendations on Sustainability-Related Practices, 
Policies, Procedures and Disclosure in Asset Management: 
Consultation Report (June 2021), available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD679.pdf.
    \296\ See ShareAction, supra footnote 295.
    \297\ See ShareAction, supra footnote 295.
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5. Current Practices
    Some funds and advisers voluntarily provide ESG-related information 
to their investors, including by adhering to third-party frameworks and 
as part of voluntary disclosures of financed emissions. To provide this 
information, funds and advisers rely on various sources, including 
disclosures by corporate issuers, data from ESG providers, and index 
providers. This section discusses these practices in detail.
(a) Disclosures by Funds and Investment Advisers on Their Use of ESG 
Information
    Some asset managers make ESG-related information available at the 
fund level. For instance, some funds already provide information about 
ESG factors in the prospectus or other documents. However, currently 
ESG information is not required to be disclosed in a consistent and 
standardized manner.\298\ Different funds may use different terminology 
to describe ESG investing

[[Page 36703]]

strategies, which could be confusing to investors.
---------------------------------------------------------------------------

    \298\ See Morningstar Comment Letter (for more detailed 
discussion about the state of corporate issuers' disclosures); see 
also section III.B.5.d.
---------------------------------------------------------------------------

    In addition, the inconsistency and lack of transparency in current 
disclosures may make it challenging to discern in which particular ESG 
strategy funds and advisers are engaged. Another concern with the 
absence of consistency and transparency in the current disclosures is 
that it creates a risk that funds and advisers may exaggerate their ESG 
strategies or the extent to which their investment products or services 
take into account ESG factors in order to attract business--a practice 
often referred to as ``greenwashing.'' \299\ A review of several 
academic papers reveals that there is no universally accepted 
definition of ``greenwashing.'' \300\ However, many studies find that 
greenwashing has negative impacts on consumers, including increased 
confusion, skepticism, and lost trust.\301\
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    \299\ See, e.g., IOSCO, Sustainable Finance and the Role of 
Securities Regulators and IOSCO: Final Report 3 (10) (Apr. 2020) 
available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD652.pdf. While greenwashing is most closely associated with 
the environmental component of ESG, we will also use the term more 
broadly for social and governance factors as well.
    \300\ See Lucia Gatti, Peter Seele, and Lars Rademacher, Grey 
Zone in--Greenwash Out. A Review of Greenwashing Research and 
Implications for the Voluntary-Mandatory Transition of CSR, 4(1) 
Int'l J. Corporate Soc. Responsibility 1, 1-15 (2019). After 
reviewing 94 academic papers, authors find no consensus about the 
definition of ``greenwashing.'' Some studies define greenwashing as 
false advertisement or misleading claims. Others define greenwashing 
as claims that are not substantiated by third-party certification or 
evidence. Another group defines greenwashing as claims that are not 
typically false but rather selective disclosures of positive 
information and obscuration of negative information.
    \301\ See Hendy Mustiko Aji and Bayu Sutikno, The Extended 
Consequence Of Greenwashing: Perceived Consumer Skepticism, 10(4) 
Int'l J. Bus. & Info. 433, 433-468 (2015); Imran Rahman, Jeongdoo 
Park, and Christina Geng-qing Chi, Consequences Of ``Greenwashing'': 
Consumers' Reactions To Hotels' Green Initiatives, 27(6) Int'l J. 
Contemporary Hospitality Mgmt. 1054, 1054-1081 (2015); NE Furlow, 
Greenwashing In The New Millennium, 10(6) J. Applied Bus. & Econ. 
22, 22-25(2010); Yu-Shan. Chen and Ching-Hsun Chang, Greenwash And 
Green Trust: The Mediation Effects Of Green Consumer Confusion And 
Green Perceived Risk, 114 J. Bus. Ethics 489, 489-500 (2013).
---------------------------------------------------------------------------

    Funds and advisers may exaggerate or overstate the ESG qualities of 
their strategies, while labeling and marketing themselves in a manner 
that makes it difficult for investors to distinguish them from funds 
and advisers that are truly committed to and engaged in the particular 
ESG strategies that interest them. Indeed, academic work suggests that 
fund marketing approaches that take advantage of current popular 
investment styles lead to abnormal positive inflows, even when their 
actual strategies go unchanged.\302\ Similar findings also have been 
shown specifically in the context of ESG-related claims.\303\ Several 
empirical studies compare the distribution of ESG scores of ESG funds 
with those of non-ESG funds. They find the distributions of ESG scores 
between ESG funds and non-ESG funds overlap substantially. Further, ESG 
funds do not exhibit, on average, better ESG scores than non-ESG funds. 
In some cases, ESG funds have lower ESG scores than non-ESG funds.\304\ 
Examining inflows of ESG funds, these studies find ESG funds with low 
ESG scores attract flows as much as ESG funds with high ESG scores, or 
ESG funds with low ESG scores attract higher flows than non-ESG funds 
with similarly low ESG scores, suggesting the limited ability of 
investors to assess ESG-related claims made by funds accurately.\305\
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    \302\ See Michael J. Cooper, Huseyin Gulen, and Panambur 
Raghavendra Rau, Changing Names with Style: Mutual Fund--Name 
Changes and Their Effects on Fund Flows, 60 J. Fin. 2825, 2825-2858 
(2005); Susanne Espenlaub, Imtiaz ul Haq, and Arif Khurshed, It's 
All in The Name: Mutual Fund Name Changes After Sec Rule 35d-1, 84 
J. Banking & Fin. 123, 123-34 (2017).
    \303\ See Sadok El Ghoul and Aymen Karoui, What's in a (Green) 
Name? The Consequences Of Greening Fund Names On Fund Flows, 
Turnover, And Performance, 39 Fin. Research Letters 101620 (2021). 
Candelon, supra footnote 247.
    \304\ These studies examined hedge funds and mutual funds that 
are UN PRI signatories or self-designated ESG mutual funds. See 
Candelon, supra footnote 247; Hao Liang, Lin Sun, Lin; & Melvin Teo, 
Greenwashing: Evidence From Hedge Funds, Research Collection Lee 
Kong Chian School Of Business 1-68 (2021); Rajna Gibson Brandon, 
Simon. Glossner, Phillip Krueger, Pedro Matos, and Tom Steffen, . Do 
Responsible Investors Invest Responsibly? ECGI Finance (Working 
Paper No. 712/2020) (June 2021). In addition, the UN PRI signatories 
in the U.S. do not seem to improve their fund-level ESG scores after 
joining the PRI. See Soohun Kim and Aaron Yoon, Analyzing Active 
Mutual Fund Managers' Commitment to ESG: Evidence from the United 
Nations Principles for Responsible Investment Management Science 
(Forthcoming) (2021). Another study finds no significant 
relationship between mutual funds' ESG ratings and ESG information 
communicated by fund managers. See Candelon, supra footnote 247.
    \305\ See Markku Kaustia and Wenjia Yu, Greenwashing in Mutual 
Funds (Sept. 30, 2021). Available at SSRN: https://ssrn.com/abstract=3934004. Liang, Hao; Sun, Lin; and Teo, Melvyn, 
Greenwashing: Evidence From Hedge Funds 1-68. Research Collection 
Lee Kong Chian School of Business (2021) Rajna Gibson Brandon, 
Simon. Glossner, Phillip Krueger, Pedro Matos, and Tom Steffen, Do 
Responsible Investors Invest Responsibly? (Ecgi Finance Working 
Paper No. 712/2020) (June 2021); Soohun Kim and Yoon, Aaron, 
Analyzing Active Mutual Fund Managers' Commitment to ESG: Evidence 
from the United Nations Principles for Responsible Investment 
(Forthcoming), Management Science (2021). See also Markku Kaustia 
and Wenjia Yu (2021) (finding that: Self-designated ESG mutual funds 
with low ESG ratings no longer attract institutional investors later 
years, although those funds continue to attract retail investors. 
Similar disconnections between funds' actual investment styles and 
funds' classifications are examined in other studies outside of ESG 
investment space.); Chen Huaizhi, Lauren Cohen, and Umit G. Gurun, 
Don't Take Their Word For It: The Misclassification of Bond Mutual 
Funds, 76 J. Fin. 1699 (2021).
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(b) Third-Party Disclosure Frameworks
    Some funds follow third-party ESG frameworks as part of the funds' 
investment process and for developing ESG-related disclosures to be 
included in regulatory filings or public reports. Currently, multiple 
reporting frameworks exist globally including the UN PRI, the Carbon 
Disclosure Project (``CDP''), the Sustainability Accounting Standards 
Board (SASB), the Global Reporting Initiative (GRI), the Climate 
Disclosure Standards Board (CDSB), the International Integrated 
Reporting Council (IIRC), and the TCFD recommendations.\306\ These 
third-party reporting frameworks have been developed with slightly 
different underlying objectives.\307\ However, in 2020, CDP, CDSB, GRI, 
IIRC, and SASB announced their commitment to align their reporting 
frameworks and develop a comprehensive ESG reporting framework.\308\ 
Furthermore, several jurisdictions have announced their

[[Page 36704]]

official reporting requirements for domestic organizations to be 
aligned with the TCFD recommendations.\309\ TCFD suggested several 
metrics that funds can use to calculate the GHG emissions of their 
investments, including, among others, the WACI and carbon footprint 
metrics.
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    \306\ The TCFD recommended disclosures cover four core elements: 
Governance, Strategy, Risk Management and Metrics and Targets. Each 
element has two or three specific disclosures to be made in the 
organization's mainstream report (i.e. annual financial filings). 
These are meant to generate comparable, consistent and decision-
useful information on climate-related risks. The TCFD provides both 
general, and in some cases, sector-specific guidance for each 
disclosure, while simultaneously framing the context for disclosure, 
and offering suggestions on what and how to disclose in the 
mainstream report.
    \307\ See Int'l Platform on Sustainable Fin., State and Trends 
of ESG Disclosure Policy Measures Across IPSF Jurisdictions, Brazil, 
and the US (Nov. 2021), available at https://ec.europa.eu/info/sites/default/files/business_economy_euro/banking_and_finance/documents/211104-ipsf-esg-disclosure-report_en.pdf. According to 
this study, some reporting standards such as SASB were developed 
primarily for satisfying the information needs of capital market 
participants, while others, such as GRI, are to balance the 
information needs of diverse stakeholder groups.
    \308\ See Statement of Intent to Work Together Towards 
Comprehensive Corporate Reporting. Summary of Alignment Discussions 
Among Leading Sustainability and Integrated Reporting Organizations, 
CDP, CDSB, GRI, IIRC and SASB.'' Impact Management Project, World 
Economic Forum and Deloitte (Sept. 2020), available at https://29kjwb3armds2g3gi4lq2sx1-wpengine.netdna-ssl.com/wp-content/uploads/Statement-of-Intent-to-Work-Together-Towards-Comprehensive-Corporate-Reporting.pdf According to this report, GRI, SASB, CDP, 
and CDSB, along with the TCFD recommendations guide the overwhelming 
majority of quantitative and qualitative sustainability disclosures 
including climate-related reporting. The same report states that the 
IIRC provides the integrated reporting framework that connects 
sustainability disclosure to reporting on financial and other 
capitals. Framework includes 6 capitals: financial, manufactured, 
intellectual, human, social and relationship, and natural.
    \309\ Eight jurisdictions--Brazil, the European Union, Hong 
Kong, Japan, New Zealand, Singapore, Switzerland, and the United 
Kingdom--announced the TCFD-aligned reporting requirements. 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.
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    In 2018, the UN PRI incorporated a set of indicator questions based 
on TCFD recommendations into its reporting framework.\310\ TCFD 
reported that in 2021, out of a total of 5,058 asset managers and asset 
owners in the U.S., approximately 10 percent (517) of asset managers 
and asset owners reported to the UN PRI on climate-related indicators 
based on its review of climate related disclosures.\311\ In 2020, out 
of 340 U.S. asset managers reporting to the UN PRI, about 83 percent 
(283 asset managers) privately made climate disclosures, while 17 
percent (57 asset managers) made their reports public.\312\ Among four 
TCFD disclosure elements, U.S. asset managers reporting to the UN PRI 
exhibited low reporting rates in metrics elements \313\ and only 12 
percent of U.S. asset managers disclosed GHG emissions and the related 
risks.\314\ To measure, monitor, and manage portfolio emissions, U.S. 
asset managers most commonly used carbon footprint (32 percent) and 
exposure to carbon-related assets (32 percent), closely followed by 
portfolio footprint (30 percent) and carbon intensity (30 percent). The 
least used approach by asset managers was the WACI (21 percent) metric, 
which the TCFD recommends asset managers and asset owners disclose for 
one of its four core elements, Metrics and Targets.\315\ However, the 
TCFD reported that in 2021, the WACI was the metric most frequently 
used by asset owners reported to the UN PRI, although it was still the 
least used by asset managers.\316\ A survey of central banks indicated 
that most of them calculate several carbon emission metrics in line 
with the recommendations of the TCFD. Carbon footprint is the metric 
that central banks most often (33 percent) monitored.\317\
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    \310\ See Principles for Responsible Inv., Climate Change 
Snapshot 2020 (July 17, 2020), available at https://www.unpri.org/climate-change/climate-change-snapshot-2020/6080.article.
    \311\ 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.
    \312\ If at least one climate related indicator is made public, 
it is considered public disclosure. See Principles for Responsible 
Investment, Climate Change Snapshot 2020 (July 17, 2020), available 
at https://www.unpri.org/climate-change/climate-change-snapshot-2020/6080.article.
    \313\ TCFD recommendations cover four core elements: Governance, 
Strategy, Risk Management and Metrics and Targets. See Task Force on 
Climate-Related Financial Disclosures, 2021 Status Report (Oct. 14, 
2021) (For more details), available at https://www.fsb.org/wp-content/uploads/P141021-1.pdf.
    \314\ See Principles for Responsible Investment, Climate Change 
Snapshot 2020 (July 17, 2020), available at https://www.unpri.org/climate-change/climate-change-snapshot-2020/6080.article.
    \315\ Id. (In this report, ``carbon intensity'' relates to a 
company's physical carbon performance and describes the extent to 
which its business activities are based on carbon usage for a 
defined Scope and fiscal year The WACI is a metric that the TCFD 
recommended asset managers and asset owners disclose for one of its 
four core elements, Metrics and Targets.)
    \316\ This information includes all asset owners including U.S. 
asset owners that report to PRI in 2021. 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. 
(The information specifically about U.S. asset managers in 2021 is 
not available in this report.)
    \317\ See Network for Greening the Fin. Sys. (``NGFS''), A Call 
for Action: Climate Change as a Source of Financial Risk 11 (Apr. 
2019), available at https://www.ngfs.net/sites/default/files/medias/documents/synthese_ngfs-2019_-_17042019_0.pdf.
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(c) Disclosures Related to Financed Emissions by Certain Financial 
Institutions
    As of October 2021, the PCAF has global members encompassing 163 
financial institutions with $51.4 trillion in assets. Among these PCAF 
members, 4 asset managers representing $9 trillion assets, are 
headquartered in the United States.\318\ Asset managers that are 
committed to PCAF or other third-party frameworks voluntarily measure 
and disclose financed emissions.\319\ Financed emissions of an asset 
manager include greenhouse gas emissions aggregated across 
portfolios.\320\ However, an asset manager's disclosed financed 
emissions may be incomplete and not cover all managed portfolios. In 
2020, one international organization conducted a survey of global 
financial institutions to establish a baseline for the current state of 
certain climate change considerations in the financial sector.\321\ Of 
the institutions that participated in this survey, 51 percent responded 
that they analyze their portfolios' impacts on the climate.\322\ 
Approximately 25 percent of respondents, or 84 financial institutions 
including asset managers, reported their financed emissions. However, 
among these financial institutions' calculated financed emissions, 
financial institutions most frequently responded that the financed 
emissions calculations covered less than 10 percent of a respondent's 
portfolio assets.\323\
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    \318\ See P'ship for Carbon Acct. Fins. (PCAF), Financial 
Institutions Taking Action: Overview of Financial Institutions (see 
table), available at https://carbonaccountingfinancials.com/financial-institutions-taking-action#financial-institutions-taking-action (``PCAF''). The U.S. Financial Institutions represent 
commercial banks, investment banks, development banks, insurers, and 
asset owners/managers.
    \319\ See CDP Report, supra footnote 119.
    \320\ Financial institutions indirectly contribute to GHG 
emissions through their lending, investments and insurance 
underwriting. Under the GHG Protocol, these emissions are classified 
as indirect Scope 3 emissions in Category 15, which are often 
referred to as financed emissions or portfolio emissions.
    \321\ See CDP Report, supra footnote 119. According to this 
report, a total of 332 financial institutions (banks, insurers, 
asset owners and asset managers) participated in this survey. Of 
these 332 financial institutions, 74 institutions are from North 
America. However, this report does not have detailed information 
about how many of these 74 institutions are asset managers in the 
U.S.
    \322\ The report indicated that a total of 332 global financial 
institutions responded to this questionnaire. Out of those 332 
institutions, 133 institutions were in Europe, (85 institutions were 
in Asia Pacific, and 78 institutions were in North America. 25 
institutions were in Middle-East and Africa and 15 institutions were 
in Latin America. These 332 financial institutions from six 
continents had combined assets of over $109 trillion. Financial 
institutions include banks, insurers, asset managers, and asset 
owners. Id.
    \323\ See CDP Report, supra footnote 119.
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    Based on this same survey, inconsistency exists not just in the 
portfolio coverage, but also in the metrics reported based on the 
methods of aggregation. While the WACI, the metric recommended by the 
TCFD, was most commonly disclosed, portfolio carbon footprint, overall 
carbon intensity, and exposure to carbon-related assets were also 
commonly reported among asset owners and managers.
(d) Disclosures by Corporate Issuers
    Funds and investment advisers may rely on the limited ESG data 
currently reported by corporate issuers when reporting the extent of 
their own ESG-related activities.\324\ One study estimates that, among 
S&P 500 companies, 54 percent published some form of ESG data in 
2020.\325\ This same study reports that the vast majority--97 percent--
have some form of assurance or verification.\326\ One commenter cited

[[Page 36705]]

disclosure rates of between 60 and 70% among environmental (E), social 
(S) and governance (G) factors for issuers in the United States and 
Canada.\327\
---------------------------------------------------------------------------

    \324\ See ICI Comment Letter.
    \325\ See S&P 500 and ESG Reporting, Center for Audit Quality 
(Aug. 9, 2021), available at https://www.thecaq.org/sp-500-and-esg-reporting. In 2020, 271 companies published ESG data, which 
increased from 188 companies in 2019.
    \326\ Of those 264 companies, 31 companies had assurance from 
accounting firms, while 235 companies had assurance from other 
providers such as consulting firms. Id. Similarly, 99 out of the 100 
largest U.S. companies by market capitalization provided some form 
of sustainability disclosures, 71 obtained some level of assurance, 
and 11 obtained this assurance from an audit firm or affiliated 
firm. See International Federation of Accountants (``IFAC''), The 
State of Play in Sustainability Assurance (2021), available at 
https://www.ifac.org/knowledge-gateway/contributing-global-economy/discussion/state-play-sustainability-assurance.
    \327\ Disclosure rates related to environmental factors are 66 
percent in the U.S. and Canada, social factors are 67 percent, 
governance factors are 65 percent. See Morningstar, Corporate 
Sustainability Disclosures (June 7, 2021). (Morningstar comment 
letter attachment report states that the disclosure rates are 
measured by the Sustainalytics company database.)
---------------------------------------------------------------------------

    Among environmental factors, according to one commenter, more than 
half of S&P 500 companies report Scope 1 and 2 emissions, with fewer 
reporting Scope 3 emissions.\328\ We also analyzed 6,644 annual reports 
(10-Ks, 40-Fs, and 20-Fs) submitted from late 2019 until the end of 
2020 and found that 33 percent contain some form of disclosure related 
to climate change, with a greater proportion coming from larger firms 
and those in high-emission industries.\329\ Commenters indicated that 
the quality of these disclosures and the degree to which these 
disclosures are standardized vary.\330\
---------------------------------------------------------------------------

    \328\ See ICI Comment Letter; IEA, Number of Companies in the 
S&P 500 Reporting Energy- and Emissions-Related Metrics (updated May 
26, 2020), available at https://www.iea.org/data-and-statistics/charts/number-of-companies-in-the-s-and-p-500-reporting-energy-and-emissions-related-metrics.
    \329\ This is generally consistent with a survey that found 34 
percent of public companies disclose information regarding climate 
related risks, GHG emissions, or energy sourcing in their SEC 
filings. Of those companies disclosing in their SEC filings, the 
vast majority (82 percent) disclose it under Item 105 of Regulation 
S-K, Risk Factor. See U.S. Chamber of Commerce Center for Capital 
Markets Competiveness, 2021 Survey Report: Climate Change & ESG 
Reporting from the Public Company Perspective (2021), available at 
https://www.centerforcapitalmarkets.com/resource/climate-change-public-company-perspective-esg-reporting-climate-change-public-company-perspective/. A total of 436 public companies participated 
in this survey, representing a broad range of industries that 
covered small to large market capitalization.
    \330\ See Morningstar Comment Letter.
---------------------------------------------------------------------------

    Some companies elect to disclose sustainability or ESG information 
outside of their SEC filings. A majority (52 percent) of public 
companies that participated in a survey indicate that they already 
publish a sustainability, ESG, or similar report, with more companies 
planning to publish their first reports in the near future.\331\ Of 
those companies already publishing a sustainability report, most (86 
percent) publish it as a separate report on their company website.\332\
---------------------------------------------------------------------------

    \331\ See Climate Change & ESG Reporting from the Public Company 
Perspective (2021).
    \332\ See Climate Change & ESG Reporting from the Public Company 
Perspective (2021).
---------------------------------------------------------------------------

    The share of companies voluntarily publishing sustainability or ESG 
reports varies significantly by size and by sector. Large-cap companies 
and companies in high emission sectors such as energy and utility are 
more likely than others to publish reports. For instance, among the 
Russell 1000 index companies, 92 percent of large companies (in terms 
of market capitalization) published sustainability or ESG reports in 
2020.\333\ In contrast, about half of small-cap companies published 
such reports.\334\ Examining various sectors, nearly all companies in 
the utility and energy sectors published sustainability or ESG reports 
in 2020, whereas about half of companies in the communication sector 
published such reports.\335\
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    \333\ Large companies refer to the largest half of the Russell 
1000 index companies by market capitalization, which are generally 
the same companies comprising the S&P 500 index. See 2021 S&P 500 + 
Russell 1000 Sustainability Reporting in Focus, Governance & 
Accountability Institute, Inc. (2021), available at https://www.ga-institute.com/2021-sustainability-reporting-in-focus.html.
    \334\ Id. (small companies refer to the smaller half of the 
Russell 1000 index companies).
    \335\ Id.
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    To the extent that ESG-related disclosures by funds rely on the 
information disclosed by corporate issuers, the reliability and quality 
of ESG disclosures by corporate issuers influence the reliability and 
quality of ESG disclosures by funds as well. Some commenters suggested 
third-party assurance would improve the reliability of ESG disclosures 
by corporate issuers, and thus indirectly improve the quality and 
reliability of funds' ESG disclosures.\336\ These commenters further 
suggest that assurance would provide investors with confidence in the 
disclosed information, and thus increase the utility of 
disclosures.\337\ Examining current practices of corporate issuers 
obtaining assurance on climate or ESG related disclosures, according to 
one survey, 28 percent of public companies obtain third-party audits or 
assurances.\338\ Regarding these climate or ESG disclosures, there are 
some discrepancies by size of companies. Forty-four percent of the 
larger half of the Russell 1000 index companies sought external 
assurance for non-financial ESG disclosures in 2020, whereas only 18 
percent of the smaller half of the Russell 1000 index companies did 
so.\339\ Even among the companies that obtained external assurance on 
ESG disclosures, 2 percent for small-cap companies and 3 percent for 
large-cap companies obtained the assurance on the entire sustainability 
reports. Approximately half of the companies with external assurance 
(48 percent for large-cap companies, 56 percent for small-cap 
companies) obtained assurance on GHG emissions only. In terms of the 
level of assurance, 90 percent of companies with external assurance 
obtained limited or moderate assurance, whereas 7 percent of companies 
obtained reasonable assurance.\340\
---------------------------------------------------------------------------

    \336\ See ICI Comment Letter, Securities Industry and Financial 
Markets Association (SIFMA) Asset Management Group Comment Letter, 
Morningstar Comment Letter.
    \337\ Id.
    \338\ See Climate Change & ESG Reporting from the Public Company 
Perspective (2021).
    \339\ See Governance & Accountability Institute, Inc., supra 
footnote 333.
    \340\ Id.
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    There also exist Federal and state-level reporting rules related to 
GHG emissions. At the Federal level, the EPA's 2010 Mandatory Reporting 
of Greenhouse Gases Rule requires large emitters and suppliers of 
fossil fuels that meet certain conditions to disclose their emissions 
to the GHG Reporting Program,\341\ which are then made public through 
their website.\342\ However, the EPA's GHG Reporting Program (EPA 
GHGRP) does not require disclosures at the corporate issuer level. 
Further, the EPA GHGRP does not require disclosure of emissions sources 
outside the United States. One study suggests that EPA GHGRP usually 
covers between 30 percent and 50 percent of a company's carbon scope 1 
emissions, so the aggregated facility level emissions are not strongly 
correlated with the overall Scope 1 emissions.\343\ At least 16 states 
and Puerto Rico have enacted legislation mandating some form of GHG 
emissions reporting.\344\
---------------------------------------------------------------------------

    \341\ See 40 CFR part 98. See also EPA Fact Sheet: Greenhouse 
Gases Reporting Program Implementation. The EPA rule applies to all 
facilities that directly emit more than 25,000 metric tons of carbon 
dioxide equivalent (CO2e) per year (i.e., Scope 1 
emissions) and to all suppliers of certain products that would 
result in over 25,000 metric tons CO2e if those products 
were released, combusted, or oxidized (i.e., a component of Scope 3 
emissions). The EPA estimates that the required reporting under the 
EPA rule covers 85-90% of all GHG emissions from over 8,000 
facilities in the United States.
    \342\ The EPA provides emissions data at the facility level and 
the ultimate parent level, the latter of which represents an 
aggregation of facility-level data. The data is made public each 
year through the EPA website.
    \343\ See Timo Busch, Matthew Johnson, and Thomas Pioch, 
Corporate Carbon Performance Data: Quo Vadis, 26 J. Indus. Ecology 
350 (2020) (``Busch''). See also Network for Greening the Fin. Sys. 
(``NGFS''), Progress Report on Bridging Data Gap (May 2021), 
available at https://www.ngfs.net/sites/default/files/medias/documents/progress_report_on_bridging_data_gaps.pdf.
    \344\ See Greenhouse Gas Emissions Reduction Targets and Market-
based Policies, National Conference of State Legislatures (``NCSL'') 
(Sept. 22, 2021). The same report indicates that other states, such 
as New Mexico, North Carolina, and Pennsylvania, have recently 
committed to statewide GHG reduction goals through executive action, 
but do not currently have binding statutory targets.

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[[Page 36706]]

(e) Use of ESG Providers and ESG Indices by Asset Managers
    The market for ESG ratings and data has grown considerably over the 
past few years due in part to a lack of consistent disclosure at the 
corporate issuer level, and the increasing interest of investors in ESG 
funds and investing.\345\ One report estimates there are over 150 ESG 
providers globally.\346\ Each of these providers has its own 
definitions and data sources.\347\ Some studies estimate there are 10 
to 15 major ESG rating and data providers worldwide.\348\
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    \345\ IOSCO, IOSCO Consults on ESG Ratings and Data Providers 
(Media Release) (July 26, 2021), available at https://www.iosco.org/news/pdf/IOSCONEWS613.pdf.
    \346\ See KPMG, supra footnote 293.
    \347\ Id.
    \348\ See European Comm'n, Directorate-Gen. for Fin. Stability, 
Fin. Servs. & Capital Mkts. Union, Study on Sustainability-Related 
Ratings, Data and Research, (Jan. 6, 2021) (Report prepared by 
SustainAbility) available at https://data.europa.eu/doi/10.2874/14850. In this study, major ESG rating and data providers include 
Bloomberg, CDP, FTSE Russell, ISS-ESG, MSCI, Refinitiv, RepRisk, 
RobecoSAM, Sustainalytics, and Vigeo Eiris.
---------------------------------------------------------------------------

    Among E, S, and G factors, some assess environmental data to be 
better aligned across ESG providers than social and governance 
data.\349\ For instance, data on scope 1 and 2 carbon emissions are 
relatively consistent across ESG providers, although data on scope 3 
emissions are somewhat inconsistent. Some attribute this discrepancy to 
the fact that a larger number of companies report scope 1 and 2 
emissions compared to scope 3 emissions.\350\ ESG providers generate 
large datasets based on data from corporate reports. When companies do 
not report emissions data, ESG providers use their own estimation 
methods and fill in these missing data.\351\ Compared to company 
reported data, estimations across ESG providers are relatively less 
consistent.\352\ Some suggest that different estimation methodologies 
used across ESG providers contribute to the inconsistency across ESG 
providers.\353\
---------------------------------------------------------------------------

    \349\ Id.
    \350\ Id. See also Patrick Bolton and Marcin Kacperczyk, Do 
Investors Care About Carbon Risk? National Bureau of Economic 
Research (2020). Authors suggest that Scope 3 emissions are 
estimated using an input-output matrix, while the data on scope 1 
and scope 2 emissions are widely reported.
    \351\ See Busch, supra footnote 343.
    \352\ Id. See also NGFS, Progress Report on Bridging Data Gap 
(May 2021), available at https://www.ngfs.net/sites/default/files/medias/documents/progress_report_on_bridging_data_gaps.pdf, supra 
footnote 343. It is worth noting that company-reported data on scope 
3 emissions are relatively inconsistent across ESG providers, 
compared to company-reported data on scope 1 and 2.
    \353\ See NGFS, Progress Report on Bridging Data Gap (May 2021), 
available at https://www.ngfs.net/sites/default/files/medias/documents/progress_report_on_bridging_data_gaps.pdf, supra footnote 
343.
---------------------------------------------------------------------------

    Investment advisers and fund managers often collect, digest, and 
evaluate information on ESG factors other than that disclosed by 
corporate issuers to incorporate in their investment decisions. 
Therefore, many advisers and fund managers currently rely on 
information from ESG providers pertaining to issuers in their 
analysis.\354\ Even if managers and advisers decide to conduct the 
analyses in-house, due to the lack of existing ESG data and 
inconsistency in existing ESG disclosures from corporate issuers, 
properly incorporating ESG factors in portfolios and investment 
strategies may require significant resources.\355\ Many asset managers 
use ESG ratings and ESG data by contracting with multiple ESG providers 
because the scope, coverage, specialization, and expertise of ESG 
providers differ.\356\ Asset managers also use ESG providers for 
different purposes to varying degrees.\357\ Some asset managers use ESG 
ratings to incorporate ESG factors in their investment decisions, while 
others use ESG data and build their own internal rating methodologies. 
In addition, some asset managers use ESG ratings to guide their 
engagement with portfolio companies. Institutional investors use ESG 
ratings to assess their exposure to ESG risks and monitor their 
external asset managers.
---------------------------------------------------------------------------

    \354\ See Investment Adviser Association Comment Letter; OECD 
Business and Finance Outlook 2020 Chapter 4.
    \355\ See OECD Business and Finance Outlook 2020, Chapter 4.
    \356\ See IOSCO, IOSCO Consults on ESG Ratings and Data 
Providers (Media Release) (July 26, 2021), available at https://www.iosco.org/news/pdf/IOSCONEWS613.pdf, supra footnote 345. Not 
only asset managers rely on services from ESG providers. A majority 
(58 percent) of central banks currently use or consider to use the 
data provided by external ESG providers. Of those central banks that 
use services from ESG providers, two thirds (67 percent) use more 
than one ESG provider. See Network for Greening the Financial 
System, Progress report on the implementation of sustainable and 
responsible investment practices in central bank's portfolio 
management, Dec. 2020.
    \357\ See IOSCO, IOSCO Consults on ESG Ratings and Data 
Providers (Media Release) (July 26, 2021), available at https://www.iosco.org/news/pdf/IOSCONEWS613.pdf, supra footnote 345.
---------------------------------------------------------------------------

    Among asset managers that rely on quantitative data with respect to 
their ESG analyses, a majority use market indexes tracking ESG factors 
in some way.\358\ Asset managers in the United States use ESG indexes 
most frequently for investment strategies, followed by benchmarking and 
measurement purposes.\359\ In 2020, there were 2.96 million indexes 
globally.\360\ Objectives, scope and strategies vary across ESG 
indices, ranging from low-carbon solutions to ESG tilting.\361\ In 
addition, one third of U.S. asset managers in a survey strongly agreed 
that the indexes improved their ability to compare ESG 
performances.\362\
---------------------------------------------------------------------------

    \358\ Index Indus. Ass'n (``IIA''), Measurable Impact: Asset 
Mangers on the Challenges and Opportunities of ESG Investment (2021) 
(IIA 2021 International Survey of Asset Managers), available at 
http://www.indexindustry.org/wp-content/uploads/2021/07/IIA-ESG-Executive-Summary-2021-vFINAL.pdf.
    \359\ See IIA, Measurable Impact: Asset Mangers on the 
Challenges and Opportunities of ESG Investment (2021) (IIA 2021 
International Survey of Asset Managers), available at http://www.indexindustry.org/wp-content/uploads/2021/07/IIA-ESG-Executive-Summary-2021-vFINAL.pdf, supra footnote 358; Figure 21; NGFS, 
Progress report on the implementation of sustainable and responsible 
investment practices in central banks' portfolio (Dec. 2020) (for 
the use of ESG indexes in general), available at https://www.ngfs.net/sites/default/files/medias/documents/sri_progress_report_2020.pdf.
    \360\ See IIA, Index Industry Association's Third Annual Survey 
Finds 2.96 Million Indexes Globally, available at http://www.indexindustry.org/2019/10/15/index-industry-associations-third-annual-survey-finds-2-96-million-indexes-globally/.
    \361\ ESG tilting is also referred to as index-adjusted 
weighting in that companies are selected or reweighted by comparing 
the ESG characteristics of a firm to those of its peers. See NGFS, 
Progress Report on Bridging Data Gap (May 2021), available at 
https://www.ngfs.net/sites/default/files/medias/documents/progress_report_on_bridging_data_gaps.pdf, supra footnote 343.
    \362\ See IIA, Measurable Impact: Asset Mangers on the 
Challenges and Opportunities of ESG Investment (2021) (IIA 2021 
International Survey of Asset Managers), available at http://www.indexindustry.org/wp-content/uploads/2021/07/IIA-ESG-Executive-Summary-2021-vFINAL.pdf, supra footnote 358.
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C. Benefits, Costs and Effects on Efficiency, Competition, and Capital 
Formation of the Proposed Rule and Form Amendments

    The proposed rules' ESG disclosure framework requires several 
different types of ESG disclosures from funds and advisers that are 
tailored to a given fund's or adviser's ESG features. In this section, 
we first discuss the general economic benefits associated with more 
precise and comparable ESG disclosures by funds and advisers. We then 
discuss the economic effects associated with each of the specific 
disclosure requirements of this proposal, including benefits, costs, 
and effects on efficiency, competition, and capital formation.
1. General Economic Benefits of ESG Disclosure
    As discussed in previous sections, there has been substantial 
demand from investors for ESG-related strategies. Also as discussed, 
investors' ability to obtain

[[Page 36707]]

information may be impeded by the inconsistent and at times favorably-
biased nature of reporting on ESG strategies by funds and advisers. 
Opaque ESG-related statements in the current environment make it 
difficult for some investors to discern funds' and advisers' degree of 
commitment to such strategies.\363\ Even when funds provide 
quantitative disclosures, such as financed emissions, there currently 
is substantial inconsistency among funds as to when metrics are 
reported, the proportion of the portfolio covered, and the method of 
aggregation.\364\ Investor and client interest in ESG strategies 
necessitates comparable and reliable ESG-related information. This 
interest has not been met as a result of key market failures that 
appear to have led to deficiencies in current ESG-reporting practices. 
Below we describe examples of frictions that may lead to these market 
failures in more detail and how a mandatory reporting regime may thus 
produce benefits for investors and clients.\365\
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    \363\ See section III.B.5.a.
    \364\ See section III.B.5.d.
    \365\ See Beyer, Cohen, Lys, and Walther, The Financial 
Reporting Environment: Review of The recent Literature, J. ACCT. 
ECON. 296-343 (2010) for a more technical and detailed discussion of 
these and other additional assumptions.
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(1) Funds and Advisers May Be Able and Willing To Present Information 
Inconsistently
    Funds or advisers may have incentives to make a strategy look as 
good as possible (for example, as a result of selective choice of 
metrics or methods of computation, exaggeration, obfuscation, or 
``greenwashing''). But such decisions might impose a negative 
externality on other funds' and advisers' investors and clients. For 
example, if a fund or adviser includes favorably-biased claims in its 
disclosures, these disclosures could increase flows into and value of 
investments of investor or client funds, but also prevent investors and 
clients overall from understanding which funds are actually engaging in 
the strategies they would prefer to undertake. In a setting where 
investors or clients are unable to distinguish exaggerated claims at 
all, this results in what is referred to as a cheap talk equilibrium, 
where no useful information is discernable.\366\ In this scenario, a 
mandatory reporting regime would be beneficial to investors and clients 
to the extent that disclosures in the current environment are either 
unverifiable, difficult to verify, or exaggerated.\367\
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    \366\ See Vincent Crawford and Joel Sobel, Strategic Information 
Transformation, 50 Econometrica 1431, 1431-1451 (1982).
    \367\ Even if investors or clients are somewhat able to discern 
potentially misleading statements as they become larger, but 
imperfectly so or only after incurring time or monetary costs, 
theoretical work still suggests that in equilibrium funds and 
advisers might be incentivized to still apply a positive bias to 
their disclosures, so that mandatory disclosures and standards would 
improve the information conveyed to investors and clients. See E. 
Einhorn, and A. Ziv, Biased Voluntary Disclosure, Review of 
Accounting Studies 420-442 (2012).
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    The benefits of mandatory disclosure become even more pronounced if 
funds or advisers not only have discretion in disclosure (both in 
disclosing or not and the method of disclosure), but also have 
incentives that are misaligned with their clients' or investors' 
interests--i.e., in the presence of agency problems.\368\ For example, 
agency problems may arise if funds are rewarded more for good 
performance than they are punished for bad performance. The empirical 
mutual fund literature provides some evidence that this is the case, 
where funds with superior performance are rewarded with large inflows, 
while poor performing funds see limited outflows.\369\ In this case, 
funds may have a greater incentive to avoid disclosing negative 
information, instead focusing on the most positive aspects of their 
fund.\370\ This can further incentivize embellished disclosures and 
therefore reduce useful information available to investors and clients.
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    \368\ Agency problems are conflicts of interest between 
investors or clients (i.e., the principals) and funds or advisers 
(i.e., the agents), respectively.
    \369\ See Erik R. Sirri and Peter Tufano, Costly Search and 
Mutual Fund Flows, 53(5) Journal of Finance 1589-1622 (1998).
    \370\ See Nikolai Roussanov, Hungxun Ruan, and Yanhao M. Wei, 
Marketing Mutual Funds, Jacobs Levy Equity Management Center for 
Quantitative Financial Research Paper (2020).
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    When funds or advisers use inconsistent methods in reporting 
disclosures, the resulting lack of standardization can be costly for 
investors and clients, who may be unable to accurately compare across 
funds or advisers as a result. While agency problems, as noted above, 
can exacerbate these inconsistencies, such irregular reporting can 
arise any time there are multiple reasonable, but distinct and not 
easily comparable, approaches in presenting information chosen by 
different sets of funds or advisers--as appears to be the case in the 
current environment for ESG-related disclosures. Standardization limits 
such inconsistencies, allowing investors to identify funds and clients 
that are closely aligned with their investment objectives and therefore 
facilitating more efficient capital allocation. Standardization that 
enhances transparency and comparability of such disclosures is also 
likely to promote competition among investment advisers and funds.
(2) Investors/Clients May Have Varying Preferences for and Expectations 
About Such Disclosures
    Finally, voluntary disclosures may not provide all relevant 
information if funds and advisers are uncertain of investor or client 
responses to such disclosures. If, for example, investors have varied 
preferences, such that funds are uncertain about whether investors will 
consider a given disclosure to be good or bad news, then not all funds 
will choose to disclose, resulting in potentially beneficial private 
information that is not revealed.\371\ Even in a setting where 
preferences of potential clients might be similar, as may be the case 
for ESG-focused funds, responses to disclosures may still be uncertain, 
because investors may interpret the same information differently. This 
may be the case when there are varying levels of sophistication among 
investors in their ability to understand disclosures and/or different 
prior expectations.\372\
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    \371\ See Jeroen Suijs, Voluntary Disclosure of Information When 
Firms Are Uncertain of Investor Response, 43 J. Acct. & Econ. 291, 
391-410 (2007); Bond, Philip, and Yao Zeng, Silence is Safest: 
Information Disclosure When the Audience's Preferences are 
Uncertain, forthcoming Journal of Financial Economics (2022).
    \372\ See Ronald A. Dye, Investor Sophistication and Voluntary 
Disclosures, 3 Rev. Acct. Stud. 261, 261-287 (1998).
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    As discussed above, fund managers and investment advisers currently 
expend significant resources to search, collect, and process ESG-
related data under the existing voluntary disclosure regime. The 
following sections discuss the benefits and costs of the proposed rules 
against this baseline.\373\
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    \373\ As specified in section III.B, the economic baseline 
against which we measure the economic effects of this proposal, 
including its potential effects on efficiency, competition, and 
capital formation, is the state of the world as it currently exists. 
Accordingly, we do not include the recently proposed Climate 
Disclosure Rule in our baseline. To the extent the recently proposed 
Climate Disclosure Rule is adopted as currently proposed, we provide 
additional analysis below that discusses how the Climate Disclosure 
Rule may affect the incremental costs and benefits of certain 
provisions under this proposal. See Proposed Rule on the Enhancement 
and Standardization of Climate-Related Disclosures for Investors, 
(Apr. 11, 2022) [87 FR 21334 (April 11, 2022)], available at https://www.federalregister.gov/documents/2022/04/11/2022-06342/the-enhancement-and-standardization-of-climate-related-disclosures-for-investors.
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2. Investor and Client Facing Disclosures
    We are proposing several amendments to disclosures furnished to

[[Page 36708]]

investors or clients, including fund prospectuses, annual reports, and 
Form ADV Brochures (Form ADV Part 2A, including Appendix 1, the Wrap 
Fee Program Brochure), with the aim of providing investors and clients 
with more meaningful information concerning ESG factors. This section 
analyzes the anticipated benefits and costs associated with these 
amendments in detail.
    By providing a comprehensive framework on key features of ESG funds 
and investment advisers, the proposed requirements would increase the 
amount of information related to how funds and advisers consider ESG 
factors available to investors and make ESG disclosures easily 
comparable across funds and advisers. As a result, investors would be 
able to more easily identify funds and advisers that most closely align 
with their investment objectives.
(a) Enhanced ESG Disclosure for Fund Prospectus
(1) Benefits
    The proposed amendments would require additional disclosure by 
open-end funds (including ETFs) and closed-end funds (including BDCs) 
that consider one or more ESG factors. The level of detail required by 
the proposed enhanced disclosure would depend on the extent to which a 
fund considers ESG factors in its investment process. This disclosure 
structure tailors the amount of the disclosure to the specific needs of 
the investors in a particular fund; investors in funds that more 
extensively incorporate ESG factors may need more detailed ESG-related 
information to assess the fund performance compared to funds that 
consider ESG factors along with many other factors.
    The proposed rule's disclosure framework achieves this by requiring 
different degrees and types of disclosure across two main types of ESG 
funds: Integration Funds and ESG-Focused Funds (including Impact 
Funds). Within ESG-Focused Funds, the framework tailors its 
requirements depending on how funds implement ESG strategies such as 
tracking a specific ESG index, applying an inclusionary or exclusionary 
screen, seeking to achieve a specific impact, voting proxies, and 
engaging with issuers on ESG matters.
    Generally speaking, Integration Funds are funds that consider one 
or more ESG factors as part of a broader investment process that also 
incorporates non-ESG factors. Under the proposed rule, funds that meet 
the proposed definition of ``Integration Fund'' would provide more 
limited disclosures relative to ESG-Focused Funds. Specifically, 
Integration Funds would be required to summarize in a few sentences how 
the fund incorporates ESG factors into its investment selection 
process, including what ESG factors the fund considers. Open-end funds 
would provide this information in the summary section of the fund's 
prospectus, while closed-end funds, which do not use summary 
prospectuses, would disclose the information as part of the 
prospectus's general description of the fund. The proposal would 
further require 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. We believe these disclosures would improve investors' 
ability to process information and assist them in comparing across 
Integration Funds.
    The proposal would include specific additional disclosures 
regarding the role of GHG emissions for Integration Funds in the fund's 
statutory prospectus or later in a closed-end fund's prospectus. 
Certain investors have expressed particular demand for information on 
the role of GHG emissions in ESG investment selection processes,\374\ 
which can create an incentive for funds to overstate the extent to 
which portfolio company emissions play a role in the fund's strategy. 
We believe these disclosures would further assist investors in 
comparing across Integration Funds and make better informed choices of 
Integration Funds for their investments, given that Integration Funds 
might vary substantially in how they utilize GHG emissions metrics data 
or otherwise consider portfolio company GHG emissions.
---------------------------------------------------------------------------

    \374\ See CDP Report, supra footnote 119.
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    The requirements for Integration Funds to disclose information 
regarding ESG factors and GHG emissions are more limited than the 
requirements for ESG-Focused funds. We believe that these more limited 
requirements for Integration Funds would improve investors' ability to 
process information and assist them in comparing across Integration 
Funds while avoiding impeding informed investment decisions with 
overemphasized statements on the role of ESG factors in Integration 
Funds.
    ESG-Focused Funds, which include funds that employ several 
different ESG investment strategies as a significant or main 
consideration in selecting investments or in their engagement strategy 
with the companies in which they invest, would be required to provide 
more detailed information than Integration Funds. This information 
would be presented in a tabular format, in a standard order and 
consistent manner, across ESG-Focused Funds. By providing information 
prominently in the same location in each fund's prospectus, the 
proposed amendments could improve investors' understanding of an ESG-
Focused Funds' investment strategy and assist them in comparing 
different ESG-Focused Funds. Because each of the common ESG strategies 
applicable to the fund would be presented in a ``check the box'' style, 
investors could immediately identify the ESG strategies employed by 
each fund, which would further enhance the comparability across ESG-
Focused Funds.
    To facilitate investors' informed investment decision making, the 
proposed amendments would also require an ESG-Focused Fund to provide a 
more detailed and lengthier disclosure later in the prospectus. Under 
the proposal's layered disclosure approach in an electronic version of 
the prospectus, the fund would also be required to provide hyperlinks 
in the table to related, more detailed disclosure. This proposed 
approach would make full and detailed ESG-related information available 
to investors, allowing them to make more informed investment decisions.
    At the same time, the layered requirements would avoid overwhelming 
investors with information that any particular investor may not be 
interested in. If an investor wants more in-depth information about 
certain topics, the proposed layered approach would allow investors to 
selectively gather the information they need, thus enhancing the 
overall effectiveness and the utility of the disclosures.
    The proposed rules would require ESG-Focused Funds that apply 
inclusionary or exclusionary screens to explain briefly the factors the 
screen applies as well as to state the percentage of the portfolio, in 
terms of net asset value, to which the screen is applied and explain 
briefly why the screen applies to less than 100% of the fund's 
portfolio (excluding cash and cash equivalents held for cash 
management) if applicable. These proposed requirements would enhance 
investors' understanding about how ESG factors guide the fund's 
investment decisions and what kinds of investments a fund focuses on or 
avoids. This would facilitate investors' searches to identify funds 
closely aligned with the investors'

[[Page 36709]]

preferences on ESG investing, a potentially difficult task in the 
current environment of inconsistent disclosures. Furthermore, by 
providing the share of the portfolio selected with regards to a 
particular screen, investors would verify whether and to what extent 
that ESG factors are incorporated into the fund. Therefore, the 
proposed rules would reduce ambiguous or overstated claims and increase 
transparent and comparable information about ESG investing, which, in 
turn, would enable investors to easily verify ESG-related claims, 
compare across ESG-Focused Funds, and make better informed decisions.
    If an ESG-Focused Fund commits to any third-party frameworks, its 
prospectus would disclose what third-party frameworks the fund follows 
in its investments and how the framework applies to funds. This would 
enable investors to better understand how the fund's commitment to such 
ESG frameworks is reflected in its portfolios, and gauge how closely 
the fund is aligned with those ESG frameworks, which would guide 
investors in their searches to identify funds that better reflect 
investors' ESG investment objectives.
    If an ESG-Focused Fund tracks an index, its prospectus would 
describe the index and how the index utilizes ESG factors in 
determining its constituents. The proposed disclosures about the index 
that the fund tracks would likely benefit investors by providing 
insights into how the fund allocates capital and by providing an ESG-
specific benchmark against which similar funds can be compared. These 
disclosures could increase competition among ESG-Focused Funds that 
track an ESG-related index, facilitate efficient capital allocation, 
and further promote capital formation.
    In addition, under the proposed rules, if an ESG-Focused Fund uses 
an internal methodology or an ESG provider in evaluating, selecting, or 
excluding investments, it must provide an overview of how it 
incorporates ESG factors into its process for evaluating, selecting, or 
excluding investments. This requirement would benefit investors by 
allowing them to evaluate and monitor how funds use ESG criteria to 
construct their portfolios, which may be an important factor in some 
investors' investment decisions and may promote competition among ESG-
Focused Funds. Additionally, the proposed rules would enhance the 
efficiency of capital allocation by enabling investors to identify 
funds that are better aligned with investors' preferences.
    The proposed rules also require an ESG-Focused Fund that engages 
with issuers to provide qualitatively an overview of how it engages or 
expects to engage with its portfolio companies on ESG issues, including 
through the fund's voting of proxies and meetings with management. 
Shareholder engagement strategies have gained traction lately and many 
investors now view shareholder engagements as a crucial element in ESG 
investing.\375\ Specific information about funds' voting policies and 
voting records would likely assist investors in selecting funds and 
advisers, and enable an investor to effectively monitor funds and 
advisers in connection with whether they exercise voting rights in a 
manner aligned with the investor's objectives. This could increase 
competition among ESG-Focused Funds and further facilitate capital 
formation in ESG-Focused Funds that engage with issuers.
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    \375\ Jonathan B. Berk and Jules H. van Binsbergen, The Impact 
of Impact Investing, Stanford University Graduate School of Business 
Research Paper, George Mason Law & Economics (Research Paper No. 21-
26) (Aug. 21, 2021), available at https://ssrn.com/abstract=3909166 
or https://dx.doi.org/10.2139/ssrn.3909166.
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    With respect to Impact Funds, a type of ESG-Focused Fund, the 
proposed rules would require the fund to describe what impact(s) it 
seeks to achieve, how it will achieve the impact(s), how the fund 
measures progress, what key performance indicators are analyzed, what 
time horizon is used to analyze progress, and the relationship between 
the impact and financial returns. Investors seeking to achieve specific 
impacts would find this additional information particularly important 
because it would allow them to more easily identify and compare funds 
seeking the same impacts. This would lower investor search costs, which 
could promote competition among Impact Funds and increase capital 
formation.
    In aggregate, the proposed rule's tailored requirements would allow 
investors to differentiate between funds for which ESG is a major focus 
(under the proposed rule, ESG-Focused Funds), other funds for which ESG 
is one factor among many (under the proposed rule, Integration Funds), 
and funds that do not consider ESG as part of their investing 
strategies (non-ESG). This would allow investors to more efficiently 
select funds that are better aligned with their investment objectives. 
In addition, by structuring the proposed disclosure to clearly 
discriminate between funds that incorporate ESG factors to varying 
degrees, the proposal would reduce the risk that a fund overstates the 
extent to which it considers ESG factors in its investment process and 
would provide a more accurate description of the fund's investment 
processes to investors.
(2) Costs
    Integration Funds and ESG-Focused Funds would incur costs to comply 
with the proposed ESG-disclosures for fund prospectuses. In general, we 
anticipate that the compliance burden would be relatively lower for 
Integration Funds and higher for ESG-Focused and Impact Funds, as the 
latter funds would be subject to more detailed disclosure 
requirements.\376\ Compliance costs would be mitigated to the extent 
that some funds incorporating ESG factors may already disclose some 
form of ESG-related information. Further, these costs are ultimately 
borne by investors as funds are pass-through vehicles.
---------------------------------------------------------------------------

    \376\ For example, we estimate the annual direct costs 
attributable to information collection requirements in the proposed 
amendments to the open-end fund prospectus would be $1,319.50 per 
Integration Fund, while we estimate higher costs for ESG-Focused 
Funds, $9,084 per ESG-Focused Fund.
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    The proposed rules would require ESG-Focused Funds to disclose more 
detailed ESG-related information than Integration Funds. In preparing 
disclosures, attorneys and compliance professionals would review and 
familiarize themselves with requirements as specified in the proposed 
rules. Fund managers would review their current investment strategies 
and practices to gather any information needed for the proposed 
disclosures. Attorneys would review funds' disclosures to ensure that 
the disclosures satisfy all requirements of the proposed rules.\377\
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    \377\ Based on the results of the Paperwork Reduction Act 
(``PRA'') analysis provided for N-1A, it is estimated that the 
annual direct paperwork cost burdens attributable to information 
collection requirements in the proposed amendments to the open-end 
fund prospectus would be approximately $1,319.50 per Integration 
Fund, and $9,084 per ESG-Focused Fund. We estimate that the proposed 
amendments to the closed-end fund prospectus in Form N-2 filings 
would incur the same compliance costs per fund as the proposed 
amendments to Form N-1A.
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    Any increase in compliance costs are passed on to investors as 
funds are pass-through vehicles. Larger funds and funds that are part 
of larger fund complexes would experience economies of scale in 
complying with the proposed requirements compared to smaller funds and 
funds that are part of smaller fund complexes. Therefore, smaller funds 
and funds that are part of a smaller fund complex may potentially 
experience a competitive disadvantage relative to larger funds and fund 
families.

[[Page 36710]]

    Among funds incorporating ESG factors, some funds may already 
disclose ESG-related information, while other funds may not. Funds that 
already disclose some form of ESG-related information would incur lower 
compliance costs compared to the funds that currently do not disclose 
any ESG-related information. Similarly, among funds that already 
disclose some form of ESG information, funds whose disclosure elements 
are similar to the proposed requirements would incur relatively lower 
compliance costs compared to the funds whose current disclosures are 
not aligned with the proposal. In this regard, funds that already 
disclose some form of ESG-related information, and in particular funds 
whose current disclosures are closely aligned with the proposal, may be 
at a competitive advantage, relative to funds that currently do not 
disclose any ESG-related information.
    There may be costs associated with emphasizing ESG factors beyond 
other factors. This could distract investors, and could lead to an 
overemphasis on ESG investing, detracting from capital formation. Some 
funds may incur costs in determining which category a fund belongs to, 
as some may perceive an ambiguity in the proposed definitions or if the 
fund's current practices or investment strategies do not fit neatly 
with the proposed types of funds.
    The proposed rules may prompt some funds to change their current 
investment strategies and investment implementation practices. For 
instance, a fund may determine the disclosure requirements associated 
with operating as an ESG-Focused Fund under the proposal may be too 
costly given its current investment practices and strategies. 
Therefore, it may decide to not have ESG factors as the primary focus 
of its investment strategy. In this case, such a fund would incur costs 
in changing its current investment strategy, including adjusting its 
disclosure and marketing practices to reflect such a change. Due to 
lack of data, we cannot precisely estimate the magnitude of such 
potential adjustments. Nonetheless, a fund making these adjustments may 
incur substantial costs, as the fund would need to carefully review its 
current investment strategies and processes against the provisions in 
the proposed rules, identify areas requiring adjustment, and implement 
those adjustments.
    Some ESG funds may currently disclose ESG-related information that 
would not be required by the proposed rules and amendments. In response 
to the proposal, some of these funds may decide to disclose only the 
required information and discontinue their current practices of 
disclosing any additional information. This may be the case if there 
are ongoing costs to existing voluntary disclosures that the fund 
decides to shift toward covering the costs of mandatory disclosures 
under the proposed rule. If that happens, some investors may be 
negatively affected to the extent that they are familiar with, relying 
on, or otherwise prefer any discontinued information. However, even if 
so, this negative impact would be mitigated by the enhanced consistency 
and transparency in ESG disclosures and the potential reduction in 
overstated or exaggerated claims with regard to ESG funds.
(b) ESG Disclosures for Unit Investment Trusts
    The proposed rules also contain an amendment to the registration 
statement requirement for UITs to provide investors with clear 
information about how portfolios are selected based on ESG factors. The 
proposed amendment would require any UIT that provides exposures to 
portfolios that were selected based on one or more ESG factors to 
explain how those factors were used to select the portfolio 
securities.\378\ In contrast to the amendments that we are proposing 
for other types of funds, the level of detail required by the proposed 
amendment for UITs reflects their unmanaged nature.\379\ For example, 
we are not proposing to differentiate disclosure based on whether a 
UIT's selection process follows an integration model or an ``ESG-
Focused'' model as the portfolio is fixed, and these models will not be 
used for investment selection after the UIT shares are sold.
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    \378\ See proposed instruction to Item 11 of Form N-8B-2 under 
the Investment Company Act of 1940 (17 CFR 274.12).
    \379\ See supra footnotes 97-98 and accompanying text (stating 
that 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. 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).
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(1) Benefits
    Since investors can review the UIT's portfolio before investing, 
the proposed amendments would particularly benefit UIT investors by 
providing ESG-related information at the critical moment of portfolio 
selection. Given these features of UITs, the proposed amendments would 
benefit investors by lowering search costs and enabling investors to 
more effectively and efficiently identify UITs that align with their 
objectives, thus promoting competition among UITs, efficient allocation 
of capital, and capital formation by furthering investments in UITs.
(2) Costs
    UITs would incur one-time direct compliance costs at inception. 
These costs would primarily derive from gathering information, and 
preparing and subjecting to legal review the proposed disclosures. 
After establishment, there would be no recurring costs during the life 
of the UIT.\380\ Similar to our discussion of compliance costs for 
other funds in section III.C.2.a, we anticipate that larger UITs or 
those that are part of a larger fund family would experience economies 
of scale and that smaller UITs or those that are part of a smaller fund 
family may experience a competitive disadvantage.
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    \380\ Based on the results of the PRA analysis, the annual 
direct paperwork cost burdens attributable to information collection 
requirements in the proposed amendments to the Form N-8B-2 would be 
approximately $871.50 per UIT. We estimate the proposed amendments 
to the Form S-6 would incur the same compliance cost of $871.50 per 
UIT. Note that UITs would bear different costs related to the 
proposed Inline XBRL requirement than the other funds that would be 
subject to the requirement, because unlike those other funds, UITs 
are not currently filing any forms in Inline XBRL. See infra section 
IV.B.
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(c) ESG Disclosure for Fund Annual Reports
    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 Impact and ESG-Focused Funds in 
the MDFP or MD&A section of the annual report as applicable. 
Specifically, the proposed amendments would require Impact Funds to 
discuss the fund's progress on achieving its ESG-related impacts in 
both qualitative and quantitative terms during the reporting period, 
and the key factors that materially affected the fund's ability to 
achieve the desired impact.\381\ 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.\382\ Funds for which engagement with issuers on ESG 
issues

[[Page 36711]]

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.\383\ Finally, the 
proposal would also require environmentally focused funds to disclose 
the aggregated GHG emissions of the portfolio.\384\
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    \381\ 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].
    \382\ 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].
    \383\ 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].
    \384\ 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].
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(1) Disclosure Concerning Impacts, Proxy Voting, and Engagement
(a) Benefits
    In addition to the proposed amendments to fund prospectuses, the 
proposed amendments to fund annual reports provide additional ESG-
related information in the MDFP or MD&A section for Impact Funds and 
ESG-Focused Funds that engage with issuers through proxy voting or 
other means. We anticipate that these proposed amendments would 
generate benefits for prospective and current investors. Investors 
usually review and compare different fund prospectuses before selecting 
where to invest, meaning that prospectus disclosures particularly 
benefit investors actively involved in their search processes. In 
comparison, disclosures in fund annual reports would benefit both 
current and prospective investors by helping them monitor the ESG-
related progress and performance of funds over the reporting year.
    In this regard, the proposed amendments would benefit investors in 
Impact Funds by providing investors quantitative and qualitative 
information to contextualize and evaluate the fund's progress on 
achieving its intended impact, in addition to any risk-adjusted 
financial return. Such information would benefit investors by enhancing 
their understanding of the fund's actual progress in achieving its 
impact, as well as increasing transparency into the key factors that 
materially affected the fund's ability to achieve its impact. To the 
extent different Impact Funds use the same or similar key performance 
indicators to measure their progress in achieving a given impact, 
investors could more easily compare which funds have been more 
effective at achieving their ESG impact.
    In addition, the proposed amendments would require an ESG-Focused 
Fund for which proxy voting is a significant means of implementing ESG 
strategy to disclose information about how the fund used proxy voting 
to accomplish its ESG voting strategy. Specifically, the fund would be 
required to disclose the percentage of ESG-related voting matters 
during the reporting period for which the fund voted in furtherance of 
the initiative. The fund would be permitted to limit the disclosure to 
voting matters involving ESG factors that the fund incorporates into 
its investment decisions. Further, the fund would be required to 
provide a cross reference or hyperlink to the fund's full voting record 
filed on Form N-PX for investors who are interested in more granular 
information beyond the top-line percentage disclosed in the fund's 
annual shareholder report.\385\ By providing the information about ESG-
related voting matters in annual reports, investors would easily 
confirm whether the expectations they formed based on the prospectus 
are met, and assess how funds use proxy voting as a tool to achieve 
their stated ESG-related objectives. The proposed disclosure concerning 
proxy voting records could be particularly useful for investors because 
it would, as a quantitative measure, enhance the comparability across 
ESG-Focused Funds.
---------------------------------------------------------------------------

    \385\ 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.
---------------------------------------------------------------------------

    Under the proposed amendments, funds for which engagement with 
issuers through means other than proxy voting is a significant means of 
implementing their ESG strategy would be required to disclose the 
progress on any objectives of such engagement described in their 
prospectus. Further, such funds would be required to disclose the 
number or percentage of issuers with whom they held ESG engagement 
meetings related to one or more ESG issues and the total number of ESG 
engagement meetings. This type of information is, for the most part, 
not widely available, even though many investors view shareholder 
engagement as a crucial element in ESG investing as discussed in 
section III.C.2.a. Given this circumstance, the proposed disclosure 
requirements would fill this information gap, and enable investors to 
evaluate more comprehensively how funds would implement ESG strategies 
and accomplish their objectives, especially when the most common 
engagement method is private meetings with issuers, which are often not 
transparent to investors. Moreover, some regard effective engagements 
as a driver to enhance operational and financial performance.\386\ In 
this regard, increased transparency about engagement activities and 
proxy voting would enhance efficiency, promote competition and 
facilitate capital formation by equipping investors with necessary 
information to select funds that effectively engage with the issuers.
---------------------------------------------------------------------------

    \386\ See ShareAction, supra footnote 295.
---------------------------------------------------------------------------

    The proposed fund report disclosure requirements would allow 
investors to monitor the fund's progress toward stated ESG-related 
objectives over time easily as well as across competing funds by 
enhancing transparency and comparability. In this regard, the proposed 
amendments would promote competition among ESG-Focused Funds. In 
addition, the proposed disclosures would provide investors information 
to more efficiently identify funds better aligned with their ESG-
related preferences (e.g., funds pursuing the same ESG impacts), which 
would facilitate capital to be allocated in accordance with investors' 
ESG-related preference, thus, enhance the efficiency in capital 
allocation. Furthermore, the increased transparency about how funds 
achieve their stated ESG-related objectives would bolster capital 
formation by improving investor confidence in this space, and promote 
competition among ESG-Focused Funds.
(b) Costs
    The proposed amendments to fund annual reports would impose 
compliance costs on the subjected funds, although those costs will vary 
depending on the types and features of the particular fund. For 
example, Impact Funds would incur costs to disclose their progress 
toward their specific impact goals in both qualitative and quantitative 
terms. Similarly, funds that engage with issuers through proxy voting 
or other means would disclose detailed information such as how the fund 
voted on ESG issues and total number of engagement meetings on 
particular ESG-related matters. To meet these requirements, funds would 
need to gather their records on these issues, review and evaluate them 
in accordance with their stated goals or key performance indicators, 
and prepare disclosures in the report.\387\ Through these processes, a 
fund may more closely track and monitor its progress

[[Page 36712]]

over time. Some or all of the associated compliance costs may 
ultimately be passed on to investors through potentially higher 
expenses or fees.
---------------------------------------------------------------------------

    \387\ Based on the results of the PRA analysis, the annual 
direct paperwork cost burdens attributable to information collection 
requirements in the proposed amendments to the fund shareholder 
reports would be approximately $5,724 per fund for disclosure 
requirements related to Impact Funds. This is the same amount 
required for disclosure related to ESG voting matters and 
engagements.
---------------------------------------------------------------------------

    Under the proposal, certain ESG-Focused Funds would disclose their 
progress toward their stated impact goals and their records about proxy 
voting and engagements with issuers. These proposed requirements may 
incentivize funds to select impact goals that could easily produce more 
measurable progress in the near future or focus more on frequent 
meetings with portfolio companies instead of producing successful 
outcomes from the engagements. Furthermore, the proposed requirements 
for engagements may be more challenging for small funds if they do not 
have the right expertise and resources and if they do not usually gain 
traction with portfolio companies on their own, as suggested by one 
study.\388\ If so, those funds may be competitively disadvantaged 
compared to their peers with more resources or expertise.
---------------------------------------------------------------------------

    \388\ See KPMG, supra footnote 293. Some fund managers express 
their concern that adopting best practices especially around 
shareholder engagements could be expensive. Some fund managers, 
however, may also suggest that small or mid-sized fund managers 
could address this challenge by collaborating with other asset 
managers through organizations and initiatives such as Climate 
Action 100+.
---------------------------------------------------------------------------

(2) GHG Metrics Disclosures
(a) Benefits
    The proposed rules would also require environmentally focused funds 
to disclose GHG metrics--specifically, their carbon footprint and the 
WACI of their portfolio in the MDFP or MD&A section of the fund's 
annual report as applicable--unless the fund affirmatively states that 
it does not consider issuers' GHG emissions as part of its investment 
strategy.\389\
---------------------------------------------------------------------------

    \389\ See Proposed Item 27(b)(7)(i)(E) of Form N-1A (and related 
instructions); see also Proposed Instruction.4.(g)(1)(E) to Item 24 
of Form N-2. This proposed requirement would apply to ESG-Focused 
Funds that indicate that they consider environmental factors in 
response to Item C.3(j)(ii) on Form N-CEN (or, for BDCs, that would 
indicate that they consider environmental factors in response to 
that item if they were required to file Form N-CEN). See supra 
footnote 123 (with accompanying text) (discussing the proposed GHG 
emissions reporting requirements for environmentally focused funds). 
Carbon footprint is the total carbon emissions associated with the 
fund's portfolio, divided by the fund's market net asset value and 
expressed in tons of CO2e per million dollars invested in 
the fund, while WACI is the fund's exposure to carbon-intensive 
companies, expressed in tons of CO2e per million dollars 
of the portfolio company's total revenue.
---------------------------------------------------------------------------

    As mentioned previously, one report notes that ``climate change/
carbon'' was by a wide margin the largest asset-weighted ESG criterion 
among fund managers, with $4.18 trillion in assets as of 2020.\390\ 
However, in the current voluntary regulatory environment, financed GHG 
emissions disclosures by funds are inconsistently reported. For 
example, as discussed above, surveys of financed emission disclosures 
commonly report only a portion of a fund's portfolio.\391\
---------------------------------------------------------------------------

    \390\ See US SIF, supra footnote 256.
    \391\ See CDP Report, supra footnote 119. See also PCAF, supra 
footnote 318.
---------------------------------------------------------------------------

    Given this baseline, reporting transparent and consistent 
quantitative metrics would provide more meaningful information to 
investors interested in environmentally focused funds that consider 
issuers' GHG emissions as part of their investment strategy.\392\ In 
particular, the proposed GHG metrics would help investors interested in 
identifying and investing in environmentally focused funds to compare 
such funds based on quantitative information about the fund's portfolio 
emissions where the fund considers GHG emissions as part of its 
investment strategy. In addition, the proposed GHG metrics would 
address greenwashing concerns by providing a quantitative measure for 
comparing such funds, limiting the ability for some funds to exaggerate 
their practices for evaluating GHG metrics or the extent to which they 
take into account GHG emissions.
---------------------------------------------------------------------------

    \392\ As discussed in section II.A.3.d, among environmentally 
focused funds, only certain funds would be required to disclose GHG 
metrics of their portfolio in the MDFP section of the fund's annual 
report to shareholders. If a fund affirmatively states that it does 
not consider issuers' GHG emissions as part of its investment 
strategy, the fund would not be required to disclose GHG metrics. 
Hereafter, the funds subject to the proposed rules are referred to 
as certain environmentally focused funds.
---------------------------------------------------------------------------

    The proposed rules would require environmentally focused funds to 
disclose two GHG metrics, both of which are measured at the portfolio 
level, and thus make it easier for investors to compare and rank 
different funds. By requiring two GHG metrics instead of one, the needs 
of different investors would be better met as each metric is developed 
for slightly different purposes. Specifically, the portfolio carbon 
footprint metric would provide more critical information when investors 
determine where to invest in order to make impacts on emissions as it 
provides the information about the number of tons of CO2e 
per million dollars invested in the fund. This metric would also be 
useful for investors who are more interested in the total size of a 
fund's financed emissions, as it can be easily converted to absolute 
total carbon emissions by multiplying by the total size of the fund. 
Conversely, the WACI could be more useful for investors who are 
interested in a portfolio's exposure to carbon-intensive companies, so 
investors could easily identify funds that invest in more carbon 
efficient companies.
    We propose to cover a wide range of asset classes including 
derivatives in calculating GHG metrics. By including various types of 
assets including derivatives in GHG metrics, the proposal would reduce 
the incentive to invest in one asset class over another depending on 
the inclusion or exclusion of a particular asset class in GHG metrics. 
Otherwise, it may incentivize funds to hold equity exposure as 
derivative positions for high emission issuers to avoid disclosing the 
associated emissions, and thus affect capital allocations. Moreover, 
investors attempting to understand the climate-related risks and 
opportunities of their portfolio would need information on GHG 
emissions for derivatives too, since derivatives can inherit the risk 
profile of the underlying security. Moreover, as described in Section 
III.C.1, some investors may incur a non-pecuniary cost to holding non-
ESG investments. As such, information about derivatives positions would 
allow them to better ascertain where their portfolio concurs with their 
values.
    In addition to the above metrics, an environmentally focused fund 
would also be required to disclose the financed Scope 3 emissions of 
its portfolio companies, to the extent that Scope 3 emissions data are 
reported by the fund's portfolio companies.\393\ Scope 3 emissions 
would be disclosed separately for each industry sector in which the 
fund invests, and would be calculated using the carbon footprint 
methodology discussed above.\394\ Scope 3 emissions represent the 
largest portion of companies' emissions, in some cases, up to 99 
percent of total emissions of the company.\395\ In addition, portfolio

[[Page 36713]]

companies can organize their business activities in such a way that 
reduces Scope 1 and 2 emissions without reducing total emissions by 
increasing Scope 3 emissions instead.\396\ Therefore, the information 
about Scope 3 emissions could provide investors with a more complete 
picture of total emissions associated with the portfolio. However, 
Scope 3 emissions data are not widely available and are less 
consistent.\397\ The methodologies to capture Scope 3 emissions 
accurately are still evolving.\398\ Moreover, Scope 3 metrics would 
overcount the emissions due to the fund. Therefore, disclosing Scope 3 
emissions separately from Scope 1 and 2 emissions would provide 
investors with more reliable information without compromising its 
quality, while providing investors with the flexibility to factor in 
Scope 3 emissions, if relevant, in their investment decisions. 
Furthermore, by separately disclosing Scope 3 emissions, other 
measurements are free from the concern of over-counting. Because the 
comparability, coverage, and reliability of Scope 3 data varies greatly 
per sector,\399\ disclosing Scope 3 emissions by industry sector would 
allow investors to put Scope 3 data into proper context, and thus 
better understand the meaning of the data.
---------------------------------------------------------------------------

    \393\ See proposed Instruction 1(d)(x) of Item 27(b)(7)(i)(E) of 
Form N-1A; proposed Instruction 1(d)(x) of Item 24.4.g.(2)(B) of 
Form N-2.
    \394\ Funds would not be required to disclose their financed 
Scope 3 emissions using the WACI methodology.
    \395\ See Stanford Sustainable Finance Initiative Precourt 
Institute for Energy, Scope 3 Emissions: Measurement and Management, 
Apr. 2021. See also Science Based Targets, Value change in the Value 
Chain: Best Practices in Scope 3 Greenhouse Gas Management (Nov. 
2018). On average the Scope 3 emissions are 5.5 times the amount of 
combined Scope 1 and Scope 2 emissions. See BSR, Climate Action in 
the Value Chain: Reducing Scope 3 Emissions and Achieving Science-
Based Targets (2020), available at https://www.bsr.org/en/our-insights/report-view/scope-3-emissions-science-based-targets-climate-action-value-chain. On average, more than 75% of an industry 
sector's carbon footprint is attributed to Scope 3 sources. See 
Carlo Funk, Carbon Footprinting: An Investor Toolkit, State Street 
Global Advisors (Sept. 2020). For example, for Lego and Walmart, 
Scope 3 emissions constitute 75% and 90%, respectively, of total 
emissions. Herbie Huang, Shrikanth Narayanan, and Jayashankar M. 
Swaminathan, See also Carrot or Stick? Supplier Diversity and Its 
Impact on Carbon Emission Reduction Strategies (Working Paper) 
(2020), available at https://papers.ssrn.com/sol3/papers.cfm?abstractid=3559770). For another company, Scope 3 
emissions account for 97% of total emissions in 2017. See BHP, 
Addressing Greenhouse Gas Emissions Beyond Our Operations: 
Understanding the `Scope 3' Footprint of Our Value Chain (Aug. 
2018).
    \396\ Business entities can push their carbon emissions to other 
parts of supply chain. See Scope 3 Emissions: Measurement and 
Management, Stanford Sustainable Finance Initiative Precourt 
Institute for Energy, (Apr. 2021). See also see Science Based 
Target, Value Change in the Value Chain: Best Practices in Scope 3 
Greenhouse Gas Management (Nov. 2018). In its example, a company 
that outsources much of its manufacturing has a lot higher Scope 3 
emissions than its competing peer that less relies on outsourcing. 
Another study suggests a negative correlation between Scope 1 (or 2) 
emissions and Scope 3 emissions. See Xi Chen, Saif Benjaafar, and 
Adel Elomri, On the Effectiveness of Emission Penalties in 
Decentralized Supply Chains, 274 (3) European Journal of Operational 
Research 1155-1167 (2019).
    \397\ See section III.B.5 (for more details). See also supra 
footnotes 145 and 146.
    \398\ See Stanford Sustainable Finance Initiative Precourt 
Institute for Energy, Scope 3 Emissions: Measurement and Management 
(Apr. 2021). See also Science Based Targets, Value Change in the 
Value Chain: Best practices in Scope 3 Greenhouse Gas Management 
(Nov. 2018).
    \399\ See Partnership for Carbon Accounting Financials, The 
Global GHG Accounting & Reporting Standard for the Financial 
Industry (Nov. 18, 2020).
---------------------------------------------------------------------------

    The benefits discussed above are based on the current climate 
disclosure regime as compared to the proposed disclosure framework. To 
the extent that more corporate issuers disclose emissions in their 
regulatory filings with the Commission, the benefits to investors would 
be enhanced as funds would be able to base their disclosures on 
comprehensive and reliable data provided by corporate issuers.\400\ As 
discussed in section III.B.2, currently, almost 90% of the holdings of 
environmentally focused funds are in public equity or debt. Yet, the 
information about carbon emissions of public issuers is not evenly 
available across industries and size of issuers.\401\
---------------------------------------------------------------------------

    \400\ For example, if the proposed Climate Disclosure Rule were 
to be adopted as proposed, corporate issuers would be required to 
disclose certain GHG emissions metrics in their regulatory filings 
with the Commission. Such information could then be used by 
environmentally focused funds to calculate their GHG emission 
metrics under this proposal, if the proposal is adopted as proposed.
    \401\ See section III.B.5.
---------------------------------------------------------------------------

(b) Costs
    As discussed above, the subset of environmentally focused funds 
that consider emissions or climate-related factors would be subject to 
the proposed GHG metric requirements. Due to this limited scope, the 
aggregate compliance costs associated with the proposed GHG metrics 
requirements would not be substantial. However, at the fund level, 
funds that are subject to the proposed requirements would incur non-
negligible compliance costs. Some compliance costs would be one-time 
costs, while others would be on-going costs. For funds subject to the 
proposed GHG metrics requirements, attorneys and compliance 
professionals would conduct legal reviews of the proposed requirements 
and their current practices to identify areas for changes, which would 
be largely one-time costs.
    Funds subject to the proposed GHG metrics requirements may invest 
in companies that publicly disclose GHG emissions as well as companies 
that do not publicly disclose emissions. As discussed in section 
III.B.5, currently, some companies publicly disclose GHG emissions but 
the availability of this information varies by industry and the size of 
the company.\402\ For instance, the share of larger companies that 
publicly disclose GHG emissions is, on average, higher than the share 
of smaller companies disclosing emissions. For those companies that 
publicly disclose GHG emissions under the current regulatory regime, 
some disclose the information through regulatory filings with the 
Commission, while many others publish it in sustainability reports or 
on the company's website. Thus, funds would be required to review 
various sources to gather GHG emissions of portfolio companies.\403\ 
For those companies that do not publicly provide the information about 
GHG emissions, funds would be required to make a good-faith estimation 
of Scope 1 and Scope 2 emissions. Obtaining, gathering, and estimating 
emissions data of portfolio companies would be an essential component 
of costs that funds subject to this proposal would incur.\404\ Some 
fund managers would internally conduct these activities to obtain or 
estimate input emissions data, while others would base their estimates 
on inputs from ESG providers. Some would employ both, depending on 
existing resources and capabilities.
---------------------------------------------------------------------------

    \402\ See also ICI comment letter and Morningstar comment 
letter.
    \403\ Another regulator also identified that obtaining and 
gathering input data would be a key incremental cost in its cost 
benefit analysis of a proposed rule concerning climate-related 
disclosures by asset managers. See FCA Consultation Paper, supra 
footnote 134.
    \404\ Id. This is consistent with another regulator's (the FCA) 
assessment in analyzing costs and benefits of its regulations 
concerning climate-related disclosure by asset managers.
---------------------------------------------------------------------------

    Some financial institutions including asset managers may already 
rely on ESG providers for external support. For instance, a 
multinational financial institution reported that it relies on third-
parties for data acquisition and expert analysis to produce its 
climate-related disclosures that are aligned with various voluntary 
frameworks, such as the TCFD.\405\ Among financial institutions that 
already disclose financed emissions, approximately two thirds (67 
percent) reported that they spent less than $20,000 per year as 
external costs to measure financed emissions.\406\ If an institution 
already

[[Page 36714]]

utilizes external services to disclose GHG metrics, the incremental 
costs associated with obtaining additional external services to comply 
with the proposed requirements would be lower. Furthermore, since the 
above costs for external data providers are reported at the institution 
level, corresponding costs borne by a fund would be a fraction of these 
reported costs. Because emissions data are currently not located in one 
place, some institutions may elect to subscribe to data services, 
instead of expending internal resources, to gather portfolio companies' 
public emissions data.\407\ In addition, some may elect to hire 
external experts to complement their internal expertise or while they 
develop certain capabilities.\408\
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    \405\ As described in a case study, this unidentified financial 
institution is a multinational large cap financial institution based 
in Europe. Although it relies on services from third parties, it 
does not provide the information about costs associated with 
obtaining services from third-parties. This financial institution 
reports climate-related information in its Universal Registration 
Documents (URD), Integrated Report, and TCFD Report. See Lee Reiners 
and Karen E. Torrent, The Costs of Climate Disclosure: Three Case 
Studies on the Cost of Voluntary Climate-Related Disclosures, A 
Report of the Climate Risk Disclosure Lab at Duke Law's Global 
Financial Markets Center (Dec. 2021), available at https://climatedisclosurelab.duke.edu/wp-content/uploads/2021/12/The-Cost-of-Climate-Disclosure.pdf.
    \406\ Other responses include $20,000 to $50,000 (6 percent), 
$50,000 to $100,000 (11 percent), $100,000 to $200,000 (6 percent), 
more than $200,000 (11 percent). See PCAF Costs and Efforts of GHG 
Accounting for Financial Institutions (Dec. 21, 2021). The PCAF 
Secretariat has conducted a brief survey among financial 
institutions that had already completed at least one full disclosure 
cycle. A total of 18 PCAF signatories responded to this survey. A 
majority of respondents were banks (72 percent) with a small 
representation (11 percent) from asset managers. See Partnership for 
Carbon Accounting Financials comment letter.
    \407\ Another regulator, FCA, estimated that a large asset 
manager would appoint 4 full-time employees, while a medium asset 
manager would appoint 2.5 full-time employees for various activities 
(including sourcing relevant data). This estimate, however, would 
not be directly comparable in this analysis, because the UK's 
regulations about climate-related disclosures by assets managers are 
generally broader than this proposal. Additionally, the estimated 
burden hours are measured at the institutional level, meaning the 
estimated burden hours at the fund level would be smaller. See FCA 
Consultation Paper, supra footnote 134.
    \408\ Another regulator, FCA, estimated that an asset manager 
would incur an average subscription to third-party climate related 
data service of [pound]217,000 on an annual basis. Since the UK's 
regulations on asset managers would be different in various aspects, 
this estimate would not be directly applicable in this analysis.
---------------------------------------------------------------------------

    Instead of or in combination with obtaining services from external 
ESG providers, some funds may reallocate internal staff resources or 
hire new staff in response to the proposed GHG metrics requirements. 
According to a survey of financial institutions that already disclose 
financed emissions, a majority (56 percent) of financial institutions 
reported that their employees spent 50 to 100 days to measure financed 
emissions.\409\ These staff hours were reported at the institution 
level, thus the burden at the fund level would be lower. The increased 
staff hours could be devoted to various activities such as sourcing 
emission data, conducting analyses, and preparing disclosures. Many of 
these activities would occur on an ongoing basis, not just one-time, to 
comply with the proposal. However, once appropriate compliance systems 
and structures are established in the first year, many of these 
activities could be accomplished with fewer resources in the following 
years, and thus, funds would incur slightly lower compliance costs for 
the following years. In sum, funds subject to the proposal would incur 
higher compliance costs to calculate and disclose required GHG metrics. 
To the extent that funds would incur costs to comply with this 
proposal, larger fund families would likely experience economies of 
scale in complying with the proposed requirements compared to smaller 
fund families. The increased costs could ultimately be passed on to 
investors, to some degree, in certain environmentally focused funds in 
the form of higher expenses or fees.
---------------------------------------------------------------------------

    \409\ Other responses include less than 50 days (17 percent), 
100 to 200 days (6 percent), 200 to 400 days (17 percent), more than 
400 days (11 percent). See PCAF Costs and Efforts of GHG Accounting 
for Financial Institutions (Dec. 21, 2021).
---------------------------------------------------------------------------

    To the extent that some funds already calculate GHG metrics at the 
portfolio level and disclose them, high compliance costs could be 
mitigated. As discussed above, some funds voluntarily adhere to third-
party frameworks and are currently publicly disclosing GHG metrics. 
Such funds may be familiar with the two proposed GHG metrics as they 
are generally consistent with the standards developed by the PCAF (a 
measure similar to portfolio carbon footprint) and the TCFD (WACI). In 
addition, some multinational asset managers may disclose GHG metrics of 
funds they offer to clients in pursuant to other regulator's 
requirements.\410\ Accordingly, to the extent the GHG metric 
disclosures overlap, such funds would likely incur lower compliance 
costs attributable to the proposed GHG metrics requirement than other 
funds. For instance, a large multinational financial institution 
indicated that the costs to produce its first TCFD climate-related 
disclosure report did not exceed $100,000 at the institution 
level.\411\ The same financial institution reported that as a large 
institution that adheres to multiple frameworks, the costs to produce 
climate-related disclosures range between $250,000 and $500,000.\412\ 
However, for this particular financial institution, the annual cost, as 
a percentage of revenue, to produce voluntary climate disclosures is 
less than one tenth of one percent.\413\ The costs referenced above are 
not directly applicable in assessing the compliance costs associated 
with these proposed GHG metrics requirements because this proposal's 
scope and requirements are more narrowly tailored to certain funds with 
a climate related focus and also because the proposed requirements are 
applied at the fund level, not at the institution level. Similar to 
this financial institution, some U.S. asset managers adhere to third-
party frameworks and issue voluntary climate reports including GHG 
metrics of portfolios that they manage.\414\ These asset managers, and 
the funds managed by these asset managers, would incur lower 
incremental costs to comply with this proposal. In this regard, asset 
managers currently disclosing GHG metrics in accordance with a third-
party framework may have a competitive advantage over other asset 
managers.
---------------------------------------------------------------------------

    \410\ For instance, in Dec. 2021, the FCA introduced new rules 
and guidance for asset managers and certain FCA-regulated asset 
owners to make mandatory disclosures consistent with the TCFD's 
recommendations on an annual basis at the entity level and at the 
portfolio level. In particular, mandatory disclosures at the 
portfolio level include a core set of climate-related metrics. See 
FCA, PS21/24: Enhancing Climate-Related Disclosures by Asset 
Managers, Life Insurers and FCA-regulated Pension Providers (updated 
Dec. 17, 2021), available at https://www.fca.org.uk/publications/policy-statements/ps-21-24-climate-related-disclosures-asset-managers-life-insurers-regulated-pensions.
    \411\ See The Costs of Climate Disclosure: Three Case Studies on 
the Cost of Voluntary Climate-Related Disclosures, Duke Law School: 
Global Financial Markets Center (Dec. 2021).
    \412\ This financial institution reports climate-related 
information in its Universal Registration Documents (URD), 
Integrated Report, and TCFD Report. It adheres to SASB standards as 
well as TCFD recommendations.
    \413\ See The Costs of Climate Disclosure: Three Case Studies on 
the Cost of Voluntary Climate-Related Disclosures, Duke Law School: 
Global Financial Markets Center (Dec. 2021).
    \414\ See section III.B.5 (for detailed discussion).
---------------------------------------------------------------------------

    Separate from the increased compliance costs, if many 
environmentally focused funds rely on estimations due to the lack of 
publicly available emissions data, some investors may consider GHG 
metrics of such funds less reliable and may potentially invest less in 
environmentally focused funds.\415\ As discussed above, some asset 
managers rely on information provided by ESG providers. However, one 
report suggests that ESG providers often focus on large-cap companies, 
thus providing a limited coverage for

[[Page 36715]]

the carbon footprint.\416\ In particular, the absolute availability of 
Scope 1 emissions (percent of firms) in the U.S. was 10.8 percent.\417\ 
This limitation in the data may inadvertently limit the investment 
options in constructing portfolios and lead to overrepresentation of 
certain types of companies in portfolios. Thus, this could result in 
less reliable and less representative emission metrics. Therefore, fund 
managers may need to take extra steps to ensure that GHG metrics are 
reliable and consistent with good-faith estimations.\418\ To do so, 
fund managers may need to ensure that they rely on information from 
data services with adequate coverage per asset class, sound 
methodologies to estimate missing values, and quality assurance.\419\ 
Otherwise, this may direct capital to certain types of companies, which 
may lead to less efficient capital allocations.
---------------------------------------------------------------------------

    \415\ There are some research about the relationship between 
assurance on disclosed information and investment decisions. 
Professional investors attribute increased credibility to assured 
sustainability disclosures, which eventually lead to favorable 
investment decisions such as investing themselves in the company or 
recommending the purchase of shares to their clients. See Reiner 
Quick and Petra Inwinkl, Assurance on CSR Reports: Impact on the 
Credibility Perceptions of Non-Financial Information by Bank 
Directors, 28(5) Meditari Accountancy Research 833-862 (2020); see 
also Daniel Reimsbach, Rudiger Hahn, Anil G[uuml]rt[uuml]rk, 
Integrated Reporting and Assurance of Sustainability Information: An 
Experimental Study on Professional Investors' Information 
Processing, 27(3) European Accounting Review 559-581 (2017).
    \416\ See Int'l Platform on Sustainable Fin., supra footnote 
307.
    \417\ Id.
    \418\ Companies report their global GHG emissions to the CDP. 
Companies are further encouraged to report their global GHG 
emissions broken down into five sub-categories, (i) Activities, (ii) 
Business Units, (iii) Facilities, (iv) GHG types and (v) Regions. 
One study examined these voluntary disclosures to the CDP. According 
to this study, if companies follow the Precautionary Principle (`If 
in doubt, err on the side of the planet not on the side of the 
company') thus act ``in good faith,'' global GHG emissions would be 
larger than the sum of breakdowns. This study estimated the 
percentage of companies that violate a ``good-faith'' estimation 
principle (i.e. global GHG emissions are smaller than the sum of 
breakdowns). In 2019, 16.7 percent of companies failed to meet this 
test (i.e. reported global emissions are smaller than the sum of 
breakdowns), suggesting that companies did not act in good faith. It 
is worth noting that this study examined the corporate issuers' 
disclosures. Therefore, the findings of this study may not be 
applicable to funds' disclosures. See Sergio Garcia Vega, Andreas G. 
F. Hoepner, Joeri Rogelj, and Frank Schiemann, Carbon Disclosure 
Quality: Oil & Gas, UCD Michael Smurfit Graduate Business School 
(Nov. 2021).
    \419\ See NGFS, Progress Report on Bridging Data Gap (May 2021), 
available at https://www.ngfs.net/sites/default/files/medias/documents/progress_report_on_bridging_data_gaps.pdf, supra footnote 
343.
---------------------------------------------------------------------------

    Under the proposal, a wide range of asset classes including 
derivatives would be included in calculating GHG metrics. We understand 
funds may incur some costs to calculate the values of the derivatives 
to comply with this proposed requirement. However, we also understand 
ESG funds currently hold relatively small derivatives positions.\420\ 
Therefore, we anticipate costs associated with incorporating 
derivatives in GHG metrics would not be substantial.
---------------------------------------------------------------------------

    \420\ We analyzed data from form N-PORT to better understand 
asset holdings of funds with names containing ``Sustainable,'' 
``Responsible,'' ``ESG,'' ``Climate,'' ``Carbon,'' or ``Green'' as 
of Sept. 2021. According to this analysis, less than 1% of holdings 
are in derivative securities. Note that the data used in this 
analysis may undercount or over-count funds incorporating ESG 
factors in their investment strategies. For instance, some mutual 
funds and ETFs may not have fund names containing these ESG-related 
terms, although they incorporate on ESG factors in their investment 
strategies. In this respect, this estimate may undercount the number 
of funds with ESG strategies. Some funds with names containing ESG 
terms, however, may consider ESG factors along with many other 
factors in their investment decisions. In this respect, this 
estimate may then over-count the number of funds with ESG 
strategies.
---------------------------------------------------------------------------

    An environmentally focused fund would also be required to disclose 
the financed Scope 3 emissions of its portfolio companies, to the 
extent that Scope 3 emissions data is reported by the fund's portfolio 
companies.\421\ The proposal would also require funds to use Scope 3 
emissions that are reported by a portfolio company in the company's 
most recently filed regulatory report, if available. In the absence of 
reported Scope 3 emissions data from a portfolio company in a 
regulatory report, the fund would be required to use Scope 3 emissions 
information that is otherwise publicly provided by the portfolio 
company, such as a publicly available sustainability report published 
by the company. By requiring funds to disclose Scope 3 emissions only 
to the extent that Scope 3 emissions data are publicly available, funds 
would not have to estimate Scope 3 emissions of portfolio companies. 
Therefore, the compliance burden associated with this requirement would 
be somewhat alleviated. Otherwise, the compliance costs could be higher 
because most Scope 3 emissions data would be estimated and also funds 
may need to take extra steps to ensure the quality of Scope 3 
estimates. In addition, funds would be required to disclose Scope 3 
emissions using a portfolio carbon footprint metric alone, not the 
WACI, thus the compliance costs would be relatively contained while 
still providing useful information to investors.
---------------------------------------------------------------------------

    \421\ See proposed Instruction 1(d)(x) of Item 27(b)(7)(i)(E) of 
Form N-1A; proposed Instruction 1(d)(x) of Item 24.4.g.(2)(B) of 
Form N-2.
---------------------------------------------------------------------------

    While certain environmentally focused funds would be required to 
calculate and disclose GHG metrics, funds promoting social or 
governance related goals would not be required to provide these 
quantified metrics. As a result, compliance costs for S- or G-focused 
funds would be substantially lower than E-focused funds. To the extent 
that investors view S- and G-focused funds as substitutes for E-focused 
funds, the proposal may create a competitive disadvantage for the 
latter and comparatively disfavor growth in those funds. Similarly, the 
proposed rules may lead to the growth of the private funds over 
registered funds, as the proposed rules do not require environmentally 
focused private funds to calculate and disclose GHG metrics. In this 
regard, the proposed rules may affect capital allocations among E-, S- 
and G-focused funds and also capital allocation between registered 
funds and private funds within E-focused funds. However, some private 
funds have committed to voluntarily reporting GHG emissions of 
underlying portfolio companies.\422\ Therefore, to the extent that 
private funds report GHG emissions and other ESG-related data, concerns 
that the proposed requirements on registered funds may potentially 
direct more capital toward private funds and thus favor more growth in 
private funds, would be mitigated.
---------------------------------------------------------------------------

    \422\ See section III.B.2 (for more detailed discussion).
---------------------------------------------------------------------------

    By requiring certain metrics over other ones available in the 
market, the proposed rules may influence current voluntary industry 
practices and dissuade the industry from using or developing 
alternative metrics, and thus may discourage innovations in this area. 
While according to an international survey,\423\ the WACI was the most 
commonly disclosed metric, there are other metrics voluntarily 
disclosed by some financial institutions.\424\ However, we understand 
that the proposed GHG metrics have been gaining a wide acceptance in 
many market participants and third-party ESG frameworks have been 
coalescing around them.\425\ In this regard, we do not anticipate this 
choice of metrics to disrupt current market trends. Instead, it may 
solidify the existing trend toward reporting the two required metrics. 
Further, many common alternative metrics (e.g. carbon intensity) are 
simple variations of the two required metrics (e.g. portfolio carbon 
footprint) that would involve little additional data collection or 
effort to report. Nonetheless, under the proposal, funds currently 
providing the required metrics may have a slight competitive advantage 
over funds currently providing alternative metrics.
---------------------------------------------------------------------------

    \423\ See CDP Report, supra footnote 119.
    \424\ In an international survey of financial institutions, the 
metric most commonly disclosed by asset managers was the WACI (12%), 
followed by exposure to carbon-related assets, carbon intensity, 
other, and (Portfolio) carbon footprint, in descending order. Id.
    \425\ See discussion in section III.B.5.
---------------------------------------------------------------------------

    If more corporate issuers publicly disclose their emissions, it 
would reduce the compliance costs of this

[[Page 36716]]

proposal.\426\ Moreover, the data disclosed by corporate issuers 
through regulatory filings would be higher quality and more reliable. 
In addition, fund managers would be able to obtain most of the 
emissions data from one location through regulatory filings, thus 
reducing the time and resources used for collecting such data. As a 
result, if more corporate issuers disclose their emissions through 
regulatory filings with the SEC, fund managers would incur lower costs 
to obtain, process, and analyze the emissions data underlying such 
investments. In this regard, the costs for funds (and to their 
investors and clients, to the extent that such costs are passed down) 
to produce the proposed GHG metrics would be reduced to the extent that 
underlying emissions data would be more comprehensive, easier to 
obtain, better prepared for use, and easily verifiable.
---------------------------------------------------------------------------

    \426\ For example, if the Climate Disclosure Proposing Release 
were to be adopted as proposed, corporate issuers would be required 
to disclose certain GHG emissions metrics in their regulatory 
filings with the Commission. Such information could then be used by 
environmentally focused funds to calculate their GHG emission 
metrics under this proposal, if the proposal is adopted as proposed.
---------------------------------------------------------------------------

    Under the current regulatory regime, funds need to collect and 
compile underlying data themselves or rely on services from ESG 
providers.\427\ Therefore, smaller funds with fewer resources may be at 
a competitive disadvantage to larger funds with more resources. 
However, if more corporate issuers disclose their emissions through 
regulatory filings, it may enhance the competitiveness of smaller funds 
relatively more than larger funds.\428\
---------------------------------------------------------------------------

    \427\ See supra section III.B.5.e (for more detailed 
discussion).
    \428\ See supra section III.B.5.b.
---------------------------------------------------------------------------

(d) Inline XBRL
(1) Benefits
    The additional provision requiring Inline XBRL tagging of the new 
ESG disclosures in fund registration statements (filed on Forms N-1A, 
N-2, N-8B-2, and S-6) and in fund annual reports (filed on Form N-CSR 
or Form 10-K) would benefit investors by making the disclosures more 
readily available for aggregation, comparison, filtering, and other 
analysis, thus increasing transparency. XBRL requirements for public 
operating company financial statement disclosures have been observed to 
reduce information processing and agency costs, thus increasing 
transparency by infusing more company-specific information into the 
investment markets.\429\ Investors with access to XBRL analysis 
software may directly benefit from the availability of the fund ESG 
disclosures in Inline XBRL, whereas other investors may indirectly 
benefit from the processing of Inline XBRL disclosures by information 
intermediaries such as financial analysts.\430\ In that regard, XBRL 
requirements for public operating company financial statement 
disclosures have been observed to increase the number of companies 
followed by analysts, decrease analyst forecast dispersion, and, in 
some cases, improve analyst forecast accuracy.\431\ Should similar 
impacts on the informational environment of analysts arise from fund 
ESG disclosure tagging requirements, this would likely enhance the 
informational environment of fund investors (both retail and 
institutional) as well, because there is evidence that fund investors 
are influenced by analysts' assessments of funds, including their 
sustainability ratings.\432\
---------------------------------------------------------------------------

    \429\ See, e.g., Yu Cong, Jia Hao, and Lin Zou, The Impact of 
XBRL Reporting on Market Efficiency, 28 J. Info. Sys. 181 (2014) 
(finding support for the hypothesis that ``XBRL reporting 
facilitates the generation and infusion of idiosyncratic information 
into the market and thus improves market efficiency''); Yuyun Huang, 
Jerry T. Parwada, Yuan G. Shan, and Joey Yang, Insider Profitability 
and Public Information: Evidence From the XBRL Mandate (Working 
Paper) (2019) (finding XBRL adoption levels the informational 
playing field between insiders and non-insiders); Patrick A. 
Griffin, Hyun A. Hong, Joo-Baek Kim, and Jee-Hae Lim, The SEC's XBRL 
Mandate and Credit Risk: Evidence on a Link between Credit Default 
Swap Pricing and XBRL Disclosure, 2014 American Accounting 
Association Annual Meeting (2014) (finding XBRL reporting enables 
better outside monitoring of firms by creditors, thus leading to a 
reduction in firm default risk), Jeff Zeyun Chen, Hyun A. Hong, 
Jeong-Bon, and Kim Ji Woo Ryou, Information Processing Costs and 
Corporate Tax Avoidance: Evidence from the SEC's XBRL Mandate 40 J. 
Account. Pub. Pol. 2 (2021); (finding XBRL reporting decreases 
likelihood of firm tax avoidance because ``XBRL reporting reduces 
the cost of IRS monitoring in terms of information processing, which 
dampens managerial incentives to engage in tax avoidance 
behavior''); Jap Efendi, Jin Dong Park, and Chandra Subramaniam, 
Does the XBRL Reporting Format Provide Incremental Information 
Value? A Study Using XBRL Disclosures During the Voluntary Filing 
Program, 52 Abacus 259 (2016) (finding XBRL filings have larger 
relative informational value than HTML filings); Jacqueline L. Birt, 
Kala Muthusamy, Poonam Bir, XBRL and the Qualitative Characteristics 
of Useful Financial Information, 30 Account. Res. J. 107 (2017) 
(finding ``financial information presented with XBRL tagging is 
significantly more relevant, understandable and comparable to non-
professional investors''); Steven F. Cahan, Seokjoo Chang, Wei Z. 
Siqueira, Kinsun Tam, The Roles of XBRL and Processed XBRL in 10-K 
Readability, J. Bus. Fin. Account (2021) (finding 10-K file size 
reduces readability before XBRL's adoption since 2012, but increases 
readability after XBRL adoption, indicating ``more XBRL data 
improves users' understanding of the financial statements'').
    \430\ Other information intermediaries that have used XBRL 
disclosures may include financial media, data aggregators and 
academic researchers. See, e.g., N. Trentmann, Companies Adjust 
Earnings for Covid-19 Costs, But Are They Still a One-Time Expense?, 
The Wall Street Journal (2020) (citing XBRL research software 
provider Calcbench as research source); Bloomberg Lists BSE XBRL 
Data, XBRL.org (2018); Rani Hoitash and Udi Hoitash, Measuring 
Accounting Reporting Complexity with XBRL, 93 Account. Rev. 259-287 
(2018).
    \431\ See, e.g., Andrew J. Felo, Joung W. Kim, and Jeehae Lim, 
Can XBRL Detailed Tagging of Footnotes Improve Financial Analysts' 
Information Environment? 28 Int'l J. Account. Info. Sys. 45 (2018); 
Yuyun Huang, Yuan G. Shan, and Joey W. Yang, Information Processing 
Costs and Stock Price Informativeness: Evidence from the XBRL 
Mandate, 46 Aust. J. Mgmt. 110-131 (2020) (finding ``a significant 
increase of analyst forecast accuracy post-XBRL''); Marcus Kirk, 
James Vincent, and Devin Williams, From Print to Practice: XBRL 
Extension Use and Analyst Forecast Properties (Working Paper) (2016) 
(finding ``the general trend in forecast accuracy post-XBRL adoption 
is positive''); Chunhui Liu, Tawei Wang, and Lee J. Yao, XBRL's 
Impact on Analyst Forecast Behavior: An Empirical Study, 33 J. 
Account. Pub. Pol. 69-82 (2014) (finding ``mandatory XBRL adoption 
has led to a significant improvement in both the quantity and 
quality of information, as measured by analyst following and 
forecast accuracy''). But see Sherwood L. Lambert, Kevin Krieger, 
and Nathan Mauck, Analysts' Forecasts timeliness and Accuracy Post-
XBRL, 27 Int'l. J. Account. Info. Mgmt. 151-188 (2019) (finding 
significant increases in frequency and speed of analyst forecast 
announcements, but no significant increase in analyst forecast 
accuracy post-XBRL).
    \432\ See supra footnote 282 (and accompanying text). Similarly, 
retail investors in operating companies have generally been observed 
to rely on analysts' interpretation of company disclosures rather 
than reading the disclosures themselves. See, e.g., Alastair 
Lawrence, James P. Ryans, and Estelle Y. Sun, Investor Demand for 
Sell-Side Research, 92 Account. Rev. 123-149 (2017) (finding the 
``average retail investor appears to rely on analysts to interpret 
financial reporting information rather than read the actual 
filing''); Daniel Bradley, Jonathan Clarke, Suzanne Lee, and 
Chayawat Ornthanalai, Are Analysts' Recommendations Informative? 
Intraday Evidence on the Impact of Time Stamp Delays, 69 J. Fin. 
645-673 (2014) (concluding ``analyst recommendation revisions are 
the most important and influential information disclosure channel 
examined'').
---------------------------------------------------------------------------

    While the observations related to Inline XBRL tagging cited above 
are specific to operating company financial statement disclosures 
(including both quantitative and qualitative disclosures in face 
financial statements and footnotes), and not to non-financial statement 
disclosures from investment companies such as the proposed fund ESG 
disclosures, they indicate that the proposed Inline XBRL requirements 
could directly or indirectly provide investors with increased insight 
into ESG-related information (such as strategies, proxy voting 
policies, GHG metrics, et al.) at specific funds and across funds, 
asset managers, and time periods.
(2) Costs
    With respect to the Inline XBRL tagging requirements under the 
proposed amendments, these

[[Page 36717]]

requirements would result in additional compliance costs for funds that 
hold themselves out as implementing ESG strategies and marketing 
themselves to investors or clients as such, because such funds will be 
required to tag and review the newly required ESG disclosures in 
registration statements and annual reports before filing them with the 
Commission.\433\ Various XBRL and Inline XBRL preparation solutions 
have been developed and used by operating companies and investment 
companies to fulfill their structuring requirements, and some evidence 
suggests that, for smaller operating companies, XBRL compliance costs 
have decreased over time.\434\
---------------------------------------------------------------------------

    \433\ See infra section IV.E (summarizing the initial and 
ongoing burden estimates associated with the proposed tagging 
requirements for Forms N-1, N-2, N-8B-2, S-6, N-CSR, and 10-K. For 
current XBRL filers (i.e., funds other than unit investment trusts), 
we estimate the tagging requirements would impose an initial 
internal cost of $854 per fund (2.4 hours * $356 hourly wage rate = 
$854), an annual internal cost of $356 per fund (1 hour * $356 
hourly wage rate = $356), and an annual external cost of $50 per 
fund. For new XBRL filers (i.e., unit investment trusts), we 
estimate the tagging requirements would impose an initial internal 
cost of $4,272 per fund (12 hours * $356 hourly wage rate = $4,272), 
an annual internal cost of $1,780 per fund (5 hours * $356 hourly 
wage rate = $1,780), and an annual external cost of $1,000 per 
fund).
    \434\ An American Institute of Certified Public Accountants 
(``AICPA'') survey of 1,032 public operating companies with $75 
million or less in market capitalization in 2018 found an average 
cost of $5,850 per year, a median cost of $2,500 per year, and a 
maximum cost of $51,500 per year for fully outsourced XBRL creation 
and filing, representing a 45% decline in average cost and a 69% 
decline in median cost since 2014. See Michael Cohn, AICPA Sees 45% 
Drop in XBRL Costs for Small Companies, Accounting Today (Aug. 15, 
2018) available at https://www.accountingtoday.com/news/aicpa-sees-45-drop-in-xbrl-costs-for-small-reporting-companies. Note that this 
survey was limited to small operating companies; investment 
companies have substantively different tagging requirements, and may 
have different tagging processes as well. For example, compared to 
smaller operating companies, smaller investment companies are more 
likely to outsource their tagging infrastructure to large third-
party service providers. As a result, it may be less likely that 
economies of scale arise with respect to Inline XBRL compliance 
costs for investment companies than for operating companies. 
Additionally, a NASDAQ survey of 151 listed issuers in 2018 found an 
average XBRL compliance cost of $20,000 per quarter, a median XBRL 
compliance cost of $7,500 per quarter, and a maximum XBRL compliance 
cost of $350,000 per quarter in XBRL costs per quarter. See letter 
from Nasdaq, Inc. (Mar. 21, 2019), Request for Comment on Earnings 
Releases and Quarterly Reports, Release No. 33-10588 (Dec. 18, 2018) 
[83 FR 65601 (Dec. 21, 2018)]. Like the aforementioned AICPA survey, 
this survey was limited to operating companies.
---------------------------------------------------------------------------

    In addition, all registered open- and closed-end funds and BDCs are 
currently subject to Inline XBRL structured data requirements.\435\ As 
such, to the extent these funds comply with Inline XBRL compliance 
requirements internally rather outsourcing to an external service 
provider, they may already be familiar with Inline XBRL compliance 
software and may be able to leverage existing Inline XBRL preparation 
processes and/or expertise in complying with the proposed fund ESG 
disclosure requirements. This would limit the compliance costs arising 
from the proposed tagging requirements to only those costs related to 
selecting additional Inline XBRL tags for the new fund ESG disclosures 
and reviewing the tags selected. By contrast, unit investment trusts 
are not be subject to current or forthcoming Inline XBRL requirements 
in their Commission filings, so they would incur comparatively higher 
compliance costs as a result of the Inline XBRL tagging requirements 
under the proposed amendments.\436\ We anticipate that such compliance 
costs would be borne by the funds, and that the costs may ultimately be 
passed on to investors by way of higher expenses or fees.\437\
---------------------------------------------------------------------------

    \435\ See supra footnotes 184-186.
    \436\ See infra section IV.E. To the extent unit investment 
trusts are part of the same fund family as other types of funds that 
are subject to Inline XBRL requirements, they may be able to 
leverage those other funds' existing Inline XBRL tagging experience 
and software, which would likely mitigate the initial Inline XBRL 
implementation costs that unit investment trusts would incur under 
the proposal.
    \437\ See supra section III.C.2.a.
---------------------------------------------------------------------------

(e) Adviser Brochure (Form ADV Part 2A)
(1) Benefits
    The proposed amendments to the adviser brochure would benefit 
clients and prospective clients in a similar way that proposed 
disclosures by funds would benefit investors. The proposed amendments 
to adviser brochure (Form ADV Part 2A) are designed to provide clients 
with information that covers the same topics as the proposed 
requirements for funds considering ESG-related factors. Specifically, 
the additional information from the proposed amendments would allow 
clients and prospective clients to better evaluate the ESG-related 
services that advisers offer and thus increase comparability across 
advisers. Because adviser brochures usually encompass the entirety of 
an adviser's lines of businesses, the proposal would benefit clients 
and prospective clients by enhancing their understanding of how the 
advisers consider ESG factors when providing investment recommendations 
or making investment decisions. As a result, the proposed disclosures 
would help clients in selecting advisers that are aligned with their 
investment objectives.
    Additionally, the brochure discloses key aspects of the advisory 
relationship, including relationships with affiliates and third party 
ESG providers that may present conflicts of interest and affect the 
adviser-client relationship. This information would be particularly 
beneficial to prospective clients by allowing them to make an informed 
decision when they select advisers. Furthermore, disclosing conflicts 
of interest could itself lessen the severity of the agency problem in 
relationships between advisers and clients.\438\ The requirement to 
disclose potential conflicts of interests could enhance allocative 
efficiency by allowing investors to better match with advisers based on 
their preferences, and furthermore, increase competition among 
advisers. Additionally, it could promote competition among ESG 
providers in the dimensions of the quality and the reliability of the 
ratings and data that they provide to advisers and clients.
---------------------------------------------------------------------------

    \438\ See Sunita Sah and George Loewenstein, Nothing to Declare: 
Mandatory and Voluntary Disclosure Leads Advisors to Avoid Conflicts 
of Interest, 25.2 Psychological Science 575-584 (2014). This 
experimental study suggests that when an adviser needs to disclose 
conflicts of interest, the adviser eliminates conflicts of interest, 
thus the adviser could disclose only the absence of conflicts of 
interest.
---------------------------------------------------------------------------

(2) Costs
    Because the proposed amendments to the adviser brochure (Form ADV 
Part 2A) share many similarities with the proposed fund disclosures, 
many of the same cost elements associated with fund prospectuses and 
annual reports would be applicable for adviser brochures as well.\439\ 
If advisers provide multiple lines of ESG-related business services, 
those advisers would incur higher costs as they would be required to 
provide detailed disclosures encompassing their entire business. In 
this regard, the effects of size on compliance costs would be less 
clear for advisers, because advisers with complicated business 
structures may not achieve economies of scale in complying with the 
proposed rules. If larger advisers tend to provide multiple lines of 
ESG related services to various types of clients including SMA clients 
and private funds, the advantages of large size may be less applicable. 
Conversely, for smaller advisers providing more specialized

[[Page 36718]]

services to a certain clientele alone, the compliance cost increase 
would be accordingly low. Generally, compliance costs would be 
mitigated to the extent that some advisers incorporating ESG factors 
already disclose ESG-related information in their adviser brochure.
---------------------------------------------------------------------------

    \439\ Based on the results of the PRA analysis, the annual 
direct paperwork cost burdens attributable to information collection 
requirements in the proposed amendments to both Form ADV Part 2A and 
Part 1A would be approximately $912.75 per RIA, $83.85 per ERA, and 
$55.90 per private fund advised.
---------------------------------------------------------------------------

    In addition, the proposed requirements may lead advisers to conduct 
reviews of their policies and procedures governing ESG-related 
investment strategies and services, and refine their policies and 
procedures accordingly. For instance, an adviser may review its current 
policies and procedures concerning the procurement of the third-party 
ESG providers. As a result of such a review, an adviser may decide to 
modify its policies and procedures, and/or change its current practices 
concerning the procurement of ESG providers. Implementing these changes 
could increase compliance costs, which could ultimately, at least to 
some degree, be passed on to clients in the form of higher fees.
3. Regulatory Reporting
    As discussed above, we are proposing to amend Forms N-CEN and ADV 
Part 1A for funds and advisers, respectively, to collect census-type 
information about funds' and advisers' use of ESG factors and ESG 
providers. Because each of Form N-CEN and Form ADV Part 1A is submitted 
in a structured, XML-based data language specific to that Form, the 
proposed census-type information would be structured (i.e., machine-
readable).
(a) Form N-CEN
    We propose to amend Form N-CEN to add proposed Item C.3(j) that 
would ask questions tailored to an ESG fund's strategies and processes, 
including ESG factors it considers, ESG strategies employed, and, if 
applicable, whether it engages in proxy voting or engagement with 
issuers to implements its ESG strategy.\440\ The proposed amendments to 
Form N-CEN would also collect information regarding whether a fund 
considers ESG-related information or scores provided by ESG providers 
in implementing its investment strategy.\441\ If so, the fund would be 
required to provide the legal name and LEI, if any, or provide and 
describe any other identifying number of each such ESG provider. A fund 
would also be required to report whether the ESG provider is an 
affiliated person of the fund. Further, the proposed amendments to Form 
N-CEN would require a fund to report whether the fund follows any 
third-party ESG frameworks.\442\ Also, index funds would be required to 
report the name and legal identifier (if applicable) of the index the 
funds track.\443\
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    \440\ As discussed in section II.B.X., a fund would be required 
to indicate whether or not it incorporates ESG factors. A fund that 
does incorporate ESG factors would then be required to report, among 
other things: (i) the type of ESG strategy it employs (i.e., 
Integration, Focused, or Impact), (ii) the ESG factor(s) it 
considers (i.e., E, S, and/or G); (iii) the method it uses to 
implement its ESG strategy (i.e., tracking an index, applying an 
exclusionary and/or inclusionary screen, and/or engaging with 
issuers) and (v) if applicable, whether it considers ESG factors as 
part of its proxy voting policies and procedures. See Proposed Item 
C.3(j)(i) through (v) of Form N-CEN. The proposed amendments to Form 
N-CEN does not apply to BDCs because they do not file Form N-CEN. 
See supra footnote 166.
    \441\ Proposed item C.3(j)(iv) of Form N-CEN.
    \442\ Proposed item C.3(j)(vi) of Form N-CEN.
    \443\ See proposed Item C.3(b)(i) of Form N-CEN.
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(1) Benefits
    The proposed amendments to Form N-CEN would complement the proposed 
narrative forms of investor facing disclosures by collecting structured 
ESG-specific information designed to provide the Commission, investors, 
and other users of the data, such as ESG providers, with consistent and 
comparable data. The structured (i.e., machine-readable) nature of the 
information would enhance the ability of the Commission, investors, and 
other market participants to more effectively analyze data reported 
through Form N-CEN. For example, although ESG strategies and processes 
employed by the fund are disclosed in narrative forms in the fund's 
prospectus and annual report, the additional information collected 
through Form N-CEN would allow the Commission, investors and other 
market participants to easily identify and compare funds by the ESG 
factors the funds incorporate, the ESG strategies the funds employ, and 
whether ESG factors are considered as part of the funds' proxy voting 
policies and procedures. Investors and clients would benefit 
specifically as they could use this data from N-CEN, together with the 
narrative ESG information we are proposing in investor-and client-
facing disclosures, to make more informed decisions about their 
selection of funds or advisory services that consider ESG factors.
    The information collected on whether the ESG provider is an 
affiliated person of the fund would assist the Commission to more 
efficiently assess and monitor potential conflicts of interest and 
risks created by fund's relationship with an affiliated ESG provider, 
which would allow the Commission to respond more effectively if needed, 
or inform the Commission in regulatory policies, examinations, or 
enforcement actions. Such collection of information could also benefit 
investors and other market participants in monitoring conflicts of 
interest that could exist when an ESG provider is also an affiliated 
person of the fund.
    The information collected on use of ESG providers would benefit 
investors, other market participants, and the Commission in helping to 
better compare and analyze how ESG strategies differ across ESG 
providers. For instance, the proposed amendments to Form N-CEN would 
allow investors to more easily compare ESG providers and assess the 
effectiveness of strategies employed by funds using such providers. As 
a result, investors would be able to better select funds based on 
providers used, which could lead to increased competition among ESG 
providers. Moreover, such increased competition among ESG providers 
could encourage the development of new methodologies in ESG ratings and 
in indexes tracking ESG factors, which could stimulate more innovation 
in this area. Enhanced transparency and comparability among ESG 
providers and indexes would improve investors' confidence in these 
instruments, thus facilitate capital formation.
    Similarly, as in investor facing disclosures, an ESG-Focused Fund 
would be required to name any third-party ESG frameworks it follows 
under the proposed amendments to Form N-CEN. As part of an ESG 
strategy, this information would help the Commission, investors and 
other market participants to better understand and assess trends in the 
market based on the frameworks.
    In addition, we propose to amend Form N-CEN to require all funds 
tracking an index, including ESG-Focused Funds tracking a certain 
index, to report the name and LEI, if any, or provide and describe any 
other identifying number of the index the funds track. This proposed 
amendment would benefit the Commission, investors and other market 
participants because it would allow them to more efficiently identify 
the use of particular indexes across the fund industry.\444\
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    \444\ A LEI would provide more accurate identification of an 
index than using the name of the index alone, because different 
sources may use different variations on an index's name (e.g., 
different abbreviations or punctuation), whereas an index's LEI is 
unique and unchanging.
---------------------------------------------------------------------------

    We additionally believe investors would benefit as they could use 
this data from Form N-CEN, together with the narrative ESG information 
we are proposing in investor-facing disclosures, to make more efficient 
and informed decisions about their selection of funds

[[Page 36719]]

or advisory services that consider ESG factors, which would also 
promote competition and capital formation.
(2) Costs
    Funds that incorporate ESG factors into their investment strategies 
would incur costs associated with the proposed amendments to Form N-
CEN. The incremental cost associated with these requirements would not 
be substantial, however, because most of the information required to be 
reported on Forms N-CEN would be already collected, reviewed and 
prepared to comply with the proposed requirements of investor facing 
narrative disclosures. However, to the extent that the proposed 
amendments to Form N-CEN would require additional data elements not 
required in investor facing disclosures, the compliance costs of the 
proposed Form N-CEN amendments would increase, which could ultimately 
be passed on to investors to some degree in the forms of higher 
expenses or fees. For instance, all index funds would incur costs to 
provide the information about what index it tracks. Any ESG-Focused 
Funds relying on services from ESG providers would provide detailed 
information about ESG providers, such as legal name and LEI (if any), 
or provide and describe other identifying numbers of each such ESG 
provider. It would also show whether an ESG provider is an affiliated 
person of the fund. Thus, funds relying on multiple ESG providers would 
incur higher costs than funds that have no relationship with any ESG 
providers. In addition, larger fund families would likely experience 
economies of scale, which may create a competitive advantage for larger 
fund families compared to smaller fund families.\445\
---------------------------------------------------------------------------

    \445\ Based on the results of the PRA analysis, the annual 
direct paperwork cost burdens attributable to information collection 
requirements in the proposed amendments to Form N-CEN would be 
approximately $351 per fund for ESG related disclosure requirements 
and $157.50 per fund for index fund related requirements.
---------------------------------------------------------------------------

(b) Form ADV Part 1A Reporting
    As discussed above, we are proposing amendments to Form ADV Part 1A 
designed to collect information about an adviser's uses of ESG factors 
in its advisory business.\446\ Specifically, these proposed amendments 
would expand the information collected about the advisory services 
provided to SMA clients and private funds.
---------------------------------------------------------------------------

    \446\ See supra section II.C.2.
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(1) Benefits
    The information in Form ADV Part 1A would be generally the same as 
information we are proposing to collect on Form N-CEN regarding ESG 
factors, such as type of strategy (i.e., integration, focused, and 
impact). Also, like Form N-CEN, Form ADV Part 1A is submitted using a 
structured data language (specifically, an XML-based data language 
specific to Form ADV), so the new information would be structured 
(i.e., machine-readable). We believe collecting this information would 
provide the Commission and investors with important information about 
advisers' considerations of ESG factors in their advisory businesses, 
including the specific factors they consider, the types of ESG-related 
strategies they employ, the use of voluntary third-party frameworks, 
and whether they conduct other business activities as ESG providers or 
have related persons that are ESG providers that could indicate 
potential conflicts of interest.\447\
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    \447\ See supra section II.C.3.b.
---------------------------------------------------------------------------

    This information would increase comparability across advisers and 
advance our regulatory goal of gaining a more complete understanding of 
advisers' consideration of ESG factors in their SMA and private fund 
management businesses. We believe the proposed new reporting 
requirements would improve our ability to understand the ESG landscape 
and monitor trends among investment advisers in this emerging and 
evolving area. We also believe that the additional information would 
benefit current and prospective clients of SMAs and investors in 
private funds. In particular, SMA clients and investors in private 
funds would benefit from the proposed amendments to Form ADV Part 1A 
because they would be able to more efficiently select an adviser who 
meets their needs based on the additional information reported. This 
enhanced efficiency could in turn promote competition among advisers 
providing ESG-related services. Further, we believe the proposed 
reporting requirements would better allow the Commission to assess the 
potential conflicts of interest and risks created by relationships 
between advisers and affiliated ESG providers. We also believe that the 
proposed reporting requirements may assist the public in better 
understanding advisers' conflicts of interests when using the services 
of affiliated ESG providers, or when the adviser offers ESG provider 
services to others. This better understanding could increase public 
confidence in advisers' ESG-related service and further facilitate 
capital formation.
Costs
    Investment advisers that incorporate ESG factors into their 
investment strategies would incur costs associated with the proposed 
amendments to Form ADV Part 1A. To the extent that advisers incur 
higher costs, the increased costs would be, at least in part, passed on 
to clients of SMAs and private funds, thus investors. The incremental 
cost associated with these requirements would not be substantial, 
however, because most of the information required to be reported on 
Form and ADV Part 1A would be already collected, reviewed and prepared 
to comply with the proposed amendments to adviser brochures (Form ADV 
Part 2A). The proposed amendments to Form ADV Part 1A would require 
additional information that would not be disclosed in adviser 
brochures, such as the adviser's use of ESG strategies for SMA clients 
and private funds. These additional requirements would result in 
additional compliance costs. Therefore, advisers whose business models 
contain many SMA clients and private funds would experience higher 
increases in compliance costs associated with Form ADV Part 1A proposed 
amendments relative to advisers without any SMA clients and private 
funds.\448\
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    \448\ Based on the results of the PRA analysis, the annual 
direct paperwork cost burdens attributable to information collection 
requirements in the proposed amendments to both Form ADV Part 2A and 
Part 1A would be approximately $912.75 per RIA, $83.85 per ERA, and 
$55.90 per private fund advised.
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D. Reasonable Alternatives

1. Uniform Narrative Disclosure Requirements for ESG-Integration and 
Focused Funds
    The proposed amendments for registered funds are designed to 
require more or less detail about a fund's ESG investing depending on 
the extent to which a fund considers ESG factors in its investment 
process. Specifically, Integration Funds would provide more limited 
disclosures, whereas ESG-Focused Funds would be required to provide 
more detailed information.
    As an alternative, we could require Integration Funds to disclose 
the same level of detail about their ESG investing as ESG-Focused 
Funds. This option would, however, increase information processing 
costs for some investors as the distinction between Integration Funds 
and ESG-Focused Funds would be less salient. Thus, investors would sift 
through disclosures to determine whether a fund is an Integration or 
Focused Fund. Although some additional details about ESG investing

[[Page 36720]]

provided by Integration Funds could be useful for some investors, the 
option also could require Integration Funds to provide lengthy 
disclosures about ESG investing and lead to Integration Funds 
overemphasizing their ESG credentials. Under this option, an investor 
may assume the fund considers ESG factors similarly to an ESG-Focused 
Fund with disclosures of similar length and detail, making it more 
difficult for the investor to select a fund investment that meets the 
investor's expectations. We also considered requiring ESG-Focused Funds 
to provide the more detailed disclosures required by Impact Funds, but 
had similar concerns regarding such additional disclosures for 
investors.
2. More Standardized Disclosures
    The proposed disclosures for registered funds and advisers are 
designed to provide ESG-related information in narrative formats as 
well as standardized formats. For instance, all ESG-Focused Funds would 
provide--in an ESG Strategy Overview table in the fund's prospectus--
concise ESG-related disclosure, in the same format and same location in 
a tabular format. Part of the ESG Strategy Overview table would be 
further standardized by utilizing a ``check-box'' format, while the 
rest would rely on brief descriptions provided by funds. Facilitating a 
layered disclosure approach, lengthier disclosure or other information 
would be provided later in the prospectus. Similarly, advisers would 
provide census-type information on Form ADV Part 1A about their uses of 
ESG factors. Proposed amendments to the Form ADV brochure (Part 2A 
brochure and Appendix 1, the Wrap Fee Program Brochure) would include 
information in a narrative form about ESG practices from advisers that 
incorporate ESG factors as part of their advisory business.
    As an alternative, we could require more standardized disclosures 
(without any narrative descriptions) for funds and advisers, for 
instance, by utilizing one standardized tabular format in a ``check the 
box'' style. By having all information available in one location and in 
the same format, this alternative could further enhance the 
comparability across funds and advisers, respectively. However, this 
alternative approach may risk oversimplifying ESG-related information 
to fit in a pre-determined standardized format. For instance, funds and 
advisers would not be able to explain nuanced approaches or complex 
strategies if the information does not fit neatly within the 
standardized form. Under this approach, investors may lose details and 
nuances that could be valuable to their investment decisions. Further, 
ESG investing is still evolving in the market. As a result, if the pre-
determined standardized disclosure format becomes stale or outdated, 
the utility of the standardized disclosure could be further reduced. 
Considering these potential effects, we propose an approach that 
combines standardized disclosures with narrative disclosures, which 
could better assist investors by providing information consistently and 
concisely through standardized disclosures, while reserving the 
flexibility to contextualize ESG investing strategies and practices in 
descriptive, non-standardized disclosures.
3. Alternative Approach to Layered Disclosure for Funds
    We are proposing certain specified disclosures to go in the summary 
section of the prospectus or, for closed-end funds, information that 
would precede other disclosures in the same item, and then specifying 
that more detailed information be placed later in the prospectus. As an 
alternative, we considered placing all requirements in the statutory 
prospectus, e.g., Item 9 of Form N-1A, and not specifying the minimum 
information required in the summary section, including not requiring 
the use of the Strategy Overview Table. This alternative would leave 
the determination of what information should be included under the 
existing sections of the summary prospectus to the funds. However, we 
believe that such an approach could impede investors' ability to 
compare different ESG funds, as fund managers would make different 
choices about the placement of disclosures. Some funds might include 
less information than we are proposing in the summary section of the 
prospectus, while others might include more detailed disclosures than 
we are proposing, which might overwhelm some investors seeking a short, 
comparable overview.
4. More Granular Reporting for Advisers
    We are proposing to require advisers that consider ESG factors as 
part of their advisory business to provide enhanced ESG-related 
disclosures to current and prospective advisory clients in the adviser 
brochure, while also collecting information on advisers' use of ESG 
factors in their advisory business in Form ADV Part 1A. For example, we 
propose to require an adviser to provide a narrative description of the 
ESG factors it considers for each significant investment strategy or 
method of analysis for which it considers any ESG factors, including 
whether it utilizes internal or external methodologies, inclusionary or 
exclusionary screens, or relies on an index, in the adviser brochure.
    As an alternative, we considered requiring more detailed 
information from advisers who consider ESG factors or pursue ESG-
focused, or impact strategies. For example, we considered requiring 
these advisers to report aggregated ESG client holdings statistics and 
GHG metrics. However, unlike registered funds that generally pursue a 
single strategy across their portfolio, advisers may implement a 
variety of strategies for clients. Because ESG metrics under this 
option would be aggregated across various clients pursuing potentially 
disparate strategies, it would be difficult for advisers to provide 
detailed quantitative ESG reporting at the adviser level. The 
aggregation also would likely impede the utility of this type of 
information for both investors and the Commission because any 
aggregated ESG information reported by the adviser would reflect the 
combined holdings of all its clients, each of whom may have different 
investment objectives, time horizons, and approaches to ESG investing. 
Accordingly, we believe it is appropriate to propose the narrative 
disclosures in the adviser brochure while collecting more limited 
census data on advisers' ESG practices in ADV Part 1A. This approach 
would provide investors with clear, consistent, and decision-useful 
information about adviser ESG practices while still providing the 
Commission with enhanced census information on ESG developments in this 
evolving area.
5. GHG Metrics Reporting Requirements
    We considered alternatives for several aspects of the proposed GHG 
reporting requirements including the covered scope of funds, covered 
asset classes, and required metrics.
(a) Covered Scope of Funds
    The proposal would require only environmentally focused funds to 
disclose GHG metrics, which are funds that consider environmental 
factors in response to Item C.3(j)(ii) on Form N-CEN, but do not 
affirmatively state that they do not consider issuers' GHG emissions as 
part of their investment strategy in the ``ESG Strategy Overview'' 
table in the fund's prospectus.\449\ As an alternative, we could 
require all funds that consider environmental factors in response to 
Item C.3(j)(ii) on Form N-CEN to disclose GHG metrics, including

[[Page 36721]]

those that affirmatively state that they do not consider issuers' GHG 
emissions as part of their investment strategy in the fund's 
prospectus. As another alternative, we could further require all ESG-
Focused Funds to disclose GHG metrics.
---------------------------------------------------------------------------

    \449\ See supra footnote 123 and accompanying text.
---------------------------------------------------------------------------

    The benefits of these alternatives would likely be limited, while 
they would increase compliance costs across ESG-Focused Funds. 
Investors who most value GHG disclosures may already invest in ESG-
Focused Funds that consider GHG emissions as part of their strategy.
    Accordingly, these alternatives would likely target investors who 
place a lower value on GHG disclosures. For example, some investors may 
only consider governance-related factors of portfolio companies within 
ESG-Focused Funds. Also, GHG metrics produced by funds pursuing non-
climate related goals could potentially confuse investors, as investors 
may interpret GHG metrics as an indication that the fund considers 
climate-related factors. Therefore, we believe it is appropriate to 
narrow the scope of covered funds, as proposed, by excluding funds from 
GHG metrics reporting requirements if they affirmatively state that 
they do not consider portfolio company GHG emissions as part of their 
ESG strategy. This tailored approach would provide GHG metrics 
information to investors who seek it without increasing burdens on 
funds with a different focus.
    As another alternative, we could expand the proposed requirement to 
disclose GHG emissions information to Integration Funds by requiring 
disclosure of GHG metrics from all Integration Funds that indicate that 
they consider environmental factors on Form N-CEN unless they 
affirmatively state in their principal investment strategies that they 
do not consider GHG emissions as part of their integration process, or 
alternatively requiring such disclosures from Integration Funds that 
specifically consider the GHG emissions associated with the portfolio 
companies in which they invest. These alternatives could help investors 
who consider environmental factors with their investment decisions. 
Because these alternatives would make GHG metrics information more 
widely available across all funds that consider environmental factors 
to any degree, or across all funds that specifically consider GHG 
emissions, and help investors in these funds make comparisons across 
Integration Funds or between Integration Funds and ESG-Focused Funds. 
However, investors in Integration Funds may assign less utility to GHG 
metrics disclosed by those funds than GHG metrics disclosed by ESG-
Focused or ESG-Impact funds since, by definition, environmental factors 
are but one of multiple factors these funds consider. Some investors 
may also misunderstand the GHG metrics disclosure as a signal that the 
Integration Fund considers climate-related factors more significantly 
than other factors, which may lead investors to misdirect their 
investments, affecting capital allocations among Integration Funds and 
ESG-Focused Funds.
    Additionally, these alternatives would impose higher compliance 
costs on Integration Funds that consider environmental factors or 
specifically consider GHG emissions. Although it is difficult to 
precisely estimate the number and scope of Integration Funds, some 
commenters suggested that a substantial number of funds would be 
potentially considered Integration Funds as defined in this 
release.\450\ Therefore, the potential impacts of alternatives that 
apply to all Integration Funds may be significant, although 
alternatives that apply only to Integration Funds that specifically 
consider portfolio company GHG emissions would be more limited, as we 
believe there are a limited number of such funds based on funds' 
current disclosures. In addition, many Integration Funds may not 
currently devote resources to calculate GHG metrics, let alone disclose 
them, as GHG emissions may only be one of many factors that Integration 
Funds consider in their investment selection process. As a result, 
Integration Funds would likely incur significantly higher costs to 
comply with GHG metrics requirements. Facing high compliance costs 
associated with GHG metrics, these options may incentivize a new fund 
or even an existing fund to operate without considering environmental 
factors or portfolio company GHG emissions specifically. These 
alternatives may inadvertently reduce the number of choices available 
for investors who seek to invest in environmental funds.
---------------------------------------------------------------------------

    \450\ See section III.B.2. Also see Morningstar Comment letter.
---------------------------------------------------------------------------

    The additional compliance costs of these alternatives, relative to 
the rule as proposed, would be reduced to the extent that more 
corporate issuers were to publicly disclose their emissions.\451\
---------------------------------------------------------------------------

    \451\ Cf. supra footnote 426 and accompanying text.
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(b) Covered Asset Classes
    We propose GHG metrics that include a wide range of asset classes. 
We understand that, in current practices, sometimes, portfolio carbon 
footprint metric uses the market capitalization of a company, which 
counts only equity, not debt, of a company, as a denominator.\452\ As 
an alternative, therefore, we could have included only equities as the 
denominator in calculating the portfolio carbon footprint metric. 
However, we believe it is important to take into account both equity 
and debt because both equity and debt finance the company's operations, 
thus both contribute indirectly to its emissions. Otherwise, two 
companies with the same GHG emissions could result in different metric 
numbers depending on particular combinations of debt and equity (i.e., 
capital structures) that two companies use to finance their operations. 
This could be confusing to investors, moreover, it may affect capital 
allocations between equity and debt. In general, if certain asset 
classes are not covered in GHG metrics, it may incentivize some funds 
to invest more in one asset class over another, so that GHG metrics 
would look improved even though underlying exposures to climate risks 
remain the same, which could confuse investors. Therefore, climate 
risks would not be accurately reflected in asset prices, and may lead 
to inefficient capital allocations through distorted metrics. To 
mitigate these concerns, under the proposal a fund would be required to 
include in GHG metrics the emissions attributable to the fund's 
investment in any ``portfolio company.'' A ``portfolio company'' would 
include an issuer engaged in or operating a business or activity that 
generates GHG emissions, as well as an investment in a registered or 
private fund.\453\ Under the proposal, a fund's GHG emissions would 
include direct investments in portfolio companies as well as when a 
fund invests through a derivative. Under the proposal, we understand 
funds may incur some costs to assign value to the derivatives. As 
another alternative, we could exclude holdings in derivative securities 
from GHG metrics. This alternative would be less costly than the 
proposal. However, we believe potential cost savings from excluding 
derivatives in GHG metrics would not be substantial, because currently, 
holdings in derivative

[[Page 36722]]

securities are minuscule among ESG funds.\454\ Furthermore, this 
alternative may incentivize funds to try and circumvent disclosure by 
holding equity exposure as derivative positions, potentially affecting 
capital allocations and obfuscating their true underlying financing of 
GHG emissions.
---------------------------------------------------------------------------

    \452\ We understand, however, that leading practices in the 
financial sector are more in line with our proposed approach that 
includes both equity and debt. See PCAF, The Global GHG Accounting & 
Reporting Standard for the Financial Industry, First Edition (Nov. 
18, 2020). (for detailed discussion).
    \453\ We recognize that it is conceptually difficult to 
attribute emissions to certain types of derivative securities or 
certain asset classes such as interest swaps, foreign currencies or 
cash management vehicles. These kinds of investments would not be 
included in the proposed definition of a ``portfolio company.''
    \454\ We analyzed data from form N-PORT to better understand 
asset holdings of funds with names containing ``Sustainable,'' 
``Responsible,'' ``ESG,'' ``Climate,'' ``Carbon,'' or ``Green'' as 
of Sept. 2021. According to this analysis, less than 1 percent of 
holdings are in derivative securities. Note that the data used in 
this analysis may undercount or over-count funds incorporating ESG 
factors in their investment strategies. For example, even though 
some mutual funds and EFTs incorporate ESG factors in their 
investment strategies, some mutual funds and ETFs may not have fund 
names containing these ESG-related terms. In this respect, this 
estimate may undercount the number of funds with ESG strategies. 
Additionally, some funds with names containing ESG terms may 
consider ESG factors along with many other factors in their 
investment decisions. In this respect, this estimate may then over-
count the number of funds with ESG strategies.
---------------------------------------------------------------------------

(c) Required Metrics
    In the proposal, we require two GHG metrics, portfolio carbon 
footprint and weighted average carbon intensity. Alternatively, we 
could permit funds to report a GHG metric of their choice. In this 
option, funds would have a flexibility to select a metric that they 
believe most suitable for their investment strategies or investment 
goals. This flexibility could facilitate the development of new metrics 
that better reflect the advancement in methodologies measuring 
emissions or better capture the changes in environmentally focused 
investment landscapes. On the other hand, in this option, GHG metrics 
disclosures would be less useful for investors as investors could not 
easily compare funds based on objective and comparable emission 
measures of portfolios. Another alternative would be requiring either 
of the carbon footprint or weighted average carbon intensity metrics, 
rather than requiring both. This would be a less costly option. 
However, it would be more difficult to satisfy varying needs and 
investment goals of investors with only one metric. Furthermore, the 
incremental cost associated with producing two metrics, instead of one 
metric, in the proposal would be minimal as the two proposed GHG 
metrics require almost identical data elements that are publicly 
available in most cases.\455\
---------------------------------------------------------------------------

    \455\ The differences convey that the portfolio carbon footprint 
uses enterprise value, while the weighted average carbon intensity 
uses revenue instead. Both revenue and enterprise value of a public 
company are publicly available.
---------------------------------------------------------------------------

(d) Scope 3 Emissions in Required Metrics
    In the proposal, an ESG-Focused Fund that considers environmental 
factors would be required to disclose the Scope 3 emissions of its 
portfolio companies, to the extent that Scope 3 emissions data are 
reported by the fund's portfolio companies. Alternatively, we could 
require funds to disclose Scope 3 emissions for all portfolio companies 
regardless of the reporting status of the company, as Scope 1 and 2 
emissions of all portfolio companies would be disclosed. However, under 
this alternative, fund managers would be required to estimate Scope 3 
emissions of non-reporting companies, which could be substantially 
costlier than the proposed rule. Moreover, the utility of fund 
managers' aggregated estimates of Scope 3 emissions would be somewhat 
limited at present, as estimated scope 3 emissions tend to be less 
consistent and reliable due to the current limited data availability 
and opaque estimation methodologies discussed in section III.B.5. Thus, 
this alternative would likely generate less benefits to investors in 
making informed investment decisions.
    In calculating the required GHG metrics under the proposal, Scope 3 
emissions of the portfolio would be disclosed separately from Scope 1 
and 2 emissions. Further, Scope 3 emissions would be disclosed by 
sector. Alternatively we could include Scope 3 emissions with Scope 1 
and 2 emissions in calculating GHG metrics. However, this alternative 
approach could exacerbate potential double counting issues in measuring 
emissions at the portfolio level. To the extent that Scope 1 and 2 
emissions overlap among companies that the fund invests in, GHG metrics 
would overstate its financed emissions, thus, may confuse and misguide 
investors in their decisions. For instance, GHG metrics overstating 
emissions financed by the fund may inadvertently discourage certain 
investors from investing in the fund and instead encourage them to 
directly invest in portfolio companies.\456\ In addition, because Scope 
3 emissions are less consistent and reliable, GHG metrics including 
Scope 3 would be less consistent and reliable than GHG metrics with 
Scope 1 and 2 emissions only. As a result, these metrics would be less 
useful for investors. With regards to costs, this alternative could be 
costlier than the proposal, because a larger number of companies do not 
disclose Scope 3 emissions, and it would be more difficult to estimate 
due to the complexity of measuring Scope 3 emissions.\457\ Another 
alternative would be to exclude Scope 3 emissions from disclosure 
requirements altogether. However, Scope 3 emissions account for most of 
total carbon emissions in some companies.\458\ In this regard, this 
alternative would provide incomplete information about total carbon 
emissions financed by the fund, and thus may be less useful for 
investors. This is particularly important because portfolio companies 
with the same amount of total carbon emissions could have very 
different Scope 3 emissions depending on how companies arrange their 
business structures (e.g., reliance on supply chains). In this regard, 
if Scope 3 emissions are excluded altogether, investors may not fully 
appreciate nuanced details in GHG metrics of two companies that emit 
the same total amount of carbon yet have different business 
arrangements, and may inadvertently misdirect investments. With regards 
to costs, this alternative would not save significant costs compared to 
the proposal because the proposal would require funds to disclose Scope 
3 emissions to the extent that portfolio companies disclose them.
---------------------------------------------------------------------------

    \456\ Investors who want to have more control over portfolio 
companies may choose to directly invest in such companies. 
Additionally, direct investments allow investors to more easily 
implement their investment strategies according to their values/
objectives. For example, investors may decide to divest from certain 
companies that are not aligned with their values. Investors may 
elect to indirectly invest in portfolio companies through investment 
vehicles like mutual funds or ETFs for several reasons. These 
indirect investment vehicles allow investors to diversify their 
investment risks, and thus achieve more stable returns. Similarly, 
these indirect investment vehicles allow some investors, especially 
small investors, to access certain types of assets that they cannot 
afford to buy otherwise. Investors who indirectly invest in 
portfolio companies through these vehicles, however, often do not 
have direct control over portfolio companies.
    \457\ See supra sections III.B.5.a and III.B.5.b (for more 
detailed discussion regarding scope 3 emissions).
    \458\ See supra sections III.B.5.a and III.B.5.b. Scope 3 
emissions represent the largest portion of companies' emissions, in 
some cases, up to 99 percent of total emissions of the company. See 
supra footnote 395.
---------------------------------------------------------------------------

(e) Non-Reporting Companies
    The current proposal requires the inclusion of good faith estimates 
for GHG emissions, when portfolio companies do not publicly disclose 
GHG emissions either by regulatory filings or by public publications, 
in computing GHG metrics of portfolios. Alternatively, the proposal 
could require the exclusion of these estimates in the computation of 
GHG metrics. This alternative could be potentially

[[Page 36723]]

less costly than the proposal since the fund would not have to expend 
its resources to estimate emissions of non-reporting companies. 
However, because a substantial number of companies do not publicly 
disclose their emissions as discussed in section III.B.5, resulting GHG 
metrics would be less representative of actual emissions financed by 
the fund. As such, this could provide limited benefits to investors, 
and potentially misguide investors seeking to make informed decisions. 
Moreover, GHG metrics could be susceptible to manipulation because 
metrics could appear improved by shifting the composition (reporting 
status and emissions) of portfolio companies. Further, it may 
inadvertently disincentivize non-reporting companies from publicly 
disclosing GHG emissions. As another alternative, we could require 
environmentally focused funds to only invest a limited percentage in 
non-reporting companies. However, this alternative could limit 
investors' investment options. This restriction could disproportionally 
affect small-cap companies or companies in certain sectors such as 
communication or technology sectors, as such companies are less likely 
to publicly disclose emissions.\459\ In addition, to the extent that 
the fund invests in non-reporting companies without any estimations of 
emissions associated with those non-reporting companies, resulting GHG 
metrics would be less representative of the emissions financed by the 
fund, and thus less informative to investors. Similar to the 
alternative discussed above, to the extent that the fund would not 
estimate emissions of non-reporting companies, this alternative could 
be less costly than the proposal.
---------------------------------------------------------------------------

    \459\ See supra section III.B.5 (for more detailed discussion).
---------------------------------------------------------------------------

6. Modified Inline XBRL Requirements
    Under the proposed amendments, the new investor-facing disclosures 
filed by funds on Forms N-1A, N-2, N-8B-2, S-6, N-CSR, and 10-K would 
be tagged in Inline XBRL. Alternatively, we could have changed the 
scope of the proposed tagging requirement for the new investor-facing 
disclosures, such as by limiting this requirement to a subset of funds.
    For example, the tagging requirements could have excluded unit 
investment trusts, which are not currently required to tag any filings 
in Inline XBRL. Under such an alternative, unit investment trusts would 
submit the new disclosures in unstructured HTML or ASCII, and thereby 
avoid the initial Inline XBRL implementation costs (such as the cost of 
training in-house staff to prepare filings in Inline XBRL, and the cost 
to license Inline XBRL filing preparation software from vendors) and 
ongoing Inline XBRL compliance burdens that would result from the 
proposed tagging requirement.\460\ However, narrowing the scope of 
tagging requirements, whether based on fund structure, fund size, or 
other criteria, would diminish the extent of informational benefits 
that would accrue as a result of the proposed disclosure requirements 
by making the excluded funds' disclosures comparatively costlier to 
process and analyze. As such, we are not proposing to exclude any funds 
or otherwise narrow the scope of Inline XBRL tagging requirements.
---------------------------------------------------------------------------

    \460\ See supra section III.C.2. See also infra section IV.E.
---------------------------------------------------------------------------

E. General Request for Comment

    The Commission requests comment on all aspects of this economic 
analysis, including whether the analysis has: (1) identified all 
benefits and costs, including all effects on efficiency, competition, 
and capital formation; (2) given due consideration to each benefit and 
cost, including each effect on efficiency, competition, and capital 
formation; and (3) identified and considered reasonable alternatives to 
the proposed regulations. We request and encourage any interested 
person to submit comments regarding the proposed regulations, our 
analysis of the potential effects of the proposed regulations, and 
other matters that may have an effect on the proposed regulations. We 
request that commenters identify sources of data and information as 
well as provide data and information to assist us in analyzing the 
economic consequences of the proposed regulations. We also are 
interested in comments on the qualitative benefits and costs we have 
identified and any benefits and costs we may not have discussed.
    In addition to our general request for comment on the economic 
analysis associated with the proposed amendments, we request specific 
comment on certain aspects of the proposal:
    195. Have we correctly identified the benefits and costs of the 
proposed rule amendments? Are there additional benefits and costs that 
we should include in our analysis?
    196. We encourage commenters to identify, discuss, analyze, and 
supply relevant data, information, or statistics related to the 
benefits and costs associated the proposed rule amendments. We also 
encourage commenters to supply relevant data, information, or 
statistics related to Integration, ESG-Focused, and Impact Funds as 
defined in this release. In particular, we solicit any additional data, 
information or statistics in connection with our estimated number of 
funds with ESG-focused strategies as discussed in section III.B of this 
release.
    197. Are there costs to, or effects on, parties other than those we 
have identified? What are the costs and/or effects?
    198. How costly would the proposed GHG metrics disclosure 
requirements be for environmentally focused funds that consider GHG 
emissions in their investment strategies?

IV. Paperwork Reduction Act Analysis

A. Introduction

    Our proposed rule amendments would have an impact on the current 
collections of information burdens under the Paperwork Reduction Act of 
1995 (``PRA'') of the following Forms and Rules: Form 10-K, Form ADV, 
Form N-1A, Form N-2, Form N-8B-2, Form S-6, Form N-CSR, Form N-CEN, 
Investment Company Interactive Data, and 17 CFR 270.30e-1 (``rule 30e-
1''). The titles for the existing collections of information that we 
are amending are: (i) ``Exchange Act Form 10-K'' (OMB Control No. 3235-
0063); (ii) ``Form ADV'' (OMB Control No. 3235-0049); (iii) ``Form N-
1A, Registration Statement under the Securities Act and under the 
Investment Company Act for Open-End Management Investment Companies'' 
(OMB Control No. 3235-0307); (iv) ``Form N-2 under the Investment 
Company Act of 1940 and Securities Act of 1933'' (OMB Control No. 3235-
0026); (v) ``Form N-8B-2, Registration Statement of Unit Investment 
Trusts Which Are Currently Issuing Securities'' (OMB Control No. 3235-
0186); (vi) ``Form S-6 [17 CFR 239.19], for registration under the 
Securities Act of 1933 of Unit Investment Trusts registered on Form N-
8B-2'' (OMB Control No. 3235-0184); ; (vii) ``Form N-CSR, Certified 
Shareholder Report under the Exchange Act and under the Investment 
Company Act for Registered Management Investment Companies'' (OMB 
Control No. 3235-0570); (viii) ``Form N-CEN'' (OMB Control No. 3235-
0730); (ix) ``Investment Company Interactive Data'' (OMB Control No. 
3235-062); and (x) ``Rule 30e-1 under the Investment Company Act, 
Reports to Stockholders of Management Companies'' (OMB

[[Page 36724]]

Control No. 3235-0025).\461\ The Commission is submitting these 
collections of information to OMB for review and approval in accordance 
with 44 U.S.C. 3507(d) and 5 CFR 1320.11. An agency may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless it displays a currently valid OMB control number.
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    \461\ The paperwork burdens associated with 17 CFR 275.203-1, 
275.204-1, and 204-4 (``rules 203-1, 204-1, and 204-4'') are 
included in the approved annual burden associated with Form ADV and 
thus do not entail separate collections of information. Rule 203-1 
under the Advisers Act requires every person applying for investment 
adviser registration with the Commission to file Form ADV. Rule 204-
4 under the Advisers Act requires certain investment advisers exempt 
from registration with the Commission (``exempt reporting 
advisers'') to file reports with the Commission by completing a 
limited number of items on Form ADV. Rule 204-1 under the Advisers 
Act requires each registered and exempt reporting adviser to file 
amendments to Form ADV at least annually, and requires advisers to 
submit electronic filings through IARD.
---------------------------------------------------------------------------

    We discuss below the proposed revised existing collection of 
information burdens associated with the amendments to Form 10-K, Form 
ADV, Form N-1A, Form N-2, Form N-8B-2, Form N-CSR, Form N-CEN, Form S-
6, Investment Company Interactive Data, and rule 30e-1. Responses to 
the disclosure requirements of the amendments to Form 10-K, Form ADV, 
Form N-1A, Form N-2, Form N-8B-2, Form N-CSR, Form N-CEN, Form S-6, and 
rule 30e-1, which are filed with the Commission, are not kept 
confidential.
    A description of the proposed amendments, including the need for 
the information and its use, as well as a description of the likely 
respondents, can be found in Section II above, and a discussion of the 
expected economic effects of the final amendments can be found in 
Section III above.

B. Form N-1A

    Form N-1A is used by registered management investment companies 
(except insurance company separate accounts and small business 
investment companies licensed under the United States Small Business 
Administration), to register under the Investment Company Act and to 
offer their shares under the Securities Act. In our most recent 
Paperwork Reduction Act submission for Form N-1A, we estimated for Form 
N-1A a total annual aggregate ongoing hour burden of 1,672,077 hours, 
and the total annual aggregate external cost burden is 
$132,940,008.\462\ Compliance with the disclosure requirements of Form 
N-1A is mandatory, and the responses to the disclosure requirements 
will not be kept confidential.
---------------------------------------------------------------------------

    \462\ This estimate is based on the last time the rule's 
information collection was submitted for PRA renewal in 2021. See 
Information Collection Request (``ICR'') Reference No. 202106-3235-
001, available at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202106-3235-001.
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    The table below summarizes our PRA initial and ongoing annual 
burden estimates associated with the proposed amendments to Form N-1A.
BILLING CODE 8011-01-P

[[Page 36725]]

[GRAPHIC] [TIFF OMITTED] TP17JN22.009

C. Form N-2

    Form N-2 is used by closed-end management investment companies 
(except small business investment companies licensed as such by the 
United States Small Business Administration) to register under the 
Investment Company Act and to offer their shares under the Securities 
Act. In our most recent Paperwork Reduction Act submission for Form N-
2, we estimated for Form N-2 a total hour burden of 94,627 hours, and 
the total annual external cost burden is $6,260,392.\463\ Compliance 
with the disclosure requirements of Form N-2 is mandatory, and the 
responses to the

[[Page 36726]]

disclosure requirements will not be kept confidential.
---------------------------------------------------------------------------

    \463\ This estimate is based on the last time the rule's 
information collection was submitted for PRA renewal in 2021. See 
ICR Reference No. 202107-3235-015, available at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202107-3235-015.
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    The table below summarizes our PRA initial and ongoing annual 
burden estimates associated with the proposed amendments to Form N-2.
[GRAPHIC] [TIFF OMITTED] TP17JN22.010

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

    Form N-8B-2 is used by UITs to initially register under the 
Investment Company Act pursuant to section 8 thereof.\464\ UITs are 
required to file Form S-6 to register offerings of securities with the 
Commission under

[[Page 36727]]

the Securities Act.\465\ As a result, UITs file Form N-8B-2 only once 
when the UIT is initially created and then use Form S-6 to file all 
post-effective amendments to their registration statements to update 
their prospectuses. In our most recent Paperwork Reduction Act 
submission for Form N-8B-2, we estimated for Form N-8B-2 a total hour 
burden of 28 hours, and a total annual external cost burden of $10,300, 
and for Form S-6 a total hour burden of 107,359 hours, and a total 
annual external cost burden of $68,108,956.\466\ Compliance with the 
disclosure requirements of Forms N-8B-2 and S-6 is mandatory, and the 
responses to the disclosure requirements will not be kept confidential.
---------------------------------------------------------------------------

    \464\ See 17 CFR 274.12.
    \465\ See 17 CFR 239.16.
    \466\ These estimates are based on the last time the rules' 
information collections were each submitted for PRA renewal in 2020. 
See ICR Reference No. 202006-3235-011, available at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202006-3235-011; ICR 
Reference No. 202004-3235-003, available at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202004-3235-003.
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    The tables below summarize our PRA initial and ongoing annual 
burden estimates associated with the proposed amendments to Forms N-8B-
2 and S-6.
[GRAPHIC] [TIFF OMITTED] TP17JN22.011


[[Page 36728]]


[GRAPHIC] [TIFF OMITTED] TP17JN22.012

E. Proposed Inline XBRL Data Tagging Requirements

    The Investment Company Interactive Data collection of information 
references current requirements for certain registered investment 
companies and BDCs to submit to the Commission in Inline XBRL certain 
information provided in response to specified form and rule 
requirements included in their registration statements and post-
effective amendments thereto; prospectuses filed pursuant to 17 CFR 
230.424(b) (``rule 424(b)'') and rule 497(c) or (e) under the 
Securities Act; Exchange Act reports that are incorporated by reference 
into a registration statement; BDC financial statements; and, for 
registered closed-end funds (that are not interval funds) and BDCs, 
their filing fee exhibits.\467\ We are proposing to amend Forms N-1A, 
N-2, N-8B-2, S-6, and N-CSR; and rules 11 and 405 of Regulation S-T to 
require that the ESG-related disclosures that certain funds would be 
providing in their prospectuses and/or annual reports under our 
proposed amendments be submitted to the Commission in Inline XBRL.\468\ 
While funds filing registration statements on Forms N-1A and N-2 
already submit certain information using Inline XBRL, for funds filing 
registration statements on Forms N-8B-2 and S-6 and for funds that file 
their annual reports on Form N-CSR, our proposed data tagging 
requirements would represent wholly new burdens.
---------------------------------------------------------------------------

    \467\ See Inline XBRL Adopting Release (requiring Form N-1A 
prospectus risk/return summary information to be submitted in Inline 
XBRL); Variable Contract Summary Prospectus Adopting Release 
(requiring variable contracts to submit specified Form N-3, N-4, and 
N-6 prospectus information in Inline XBRL); Closed-End Fund Offering 
Reform Adopting Release (requiring registered closed-end funds and 
BDCs to submit Form N-2 cover page information, specified Form N-2 
prospectus information, and financial statement information (for 
BDCs only) in Inline XBRL); and Filing Fee Adopting Release 
(requiring registered closed-end funds (that are not interval funds) 
and BDCs to submit filing fee exhibits filed on Forms N-2 and N-14 
in Inline XBRL), supra footnotes 185-186.
    \468\ The Investment Company Interactive Data collection of 
information do not impose any separate burden aside from that 
described in our discussion of the burden estimates for this 
collection of information.
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    In our most recent Paperwork Reduction Act submission for 
Investment Company Interactive Data, we estimated a total aggregate 
annual hour burden of 252,602 hours, and a total aggregate annual 
external cost burden of $15,350,750.\469\ Compliance with the 
interactive data requirements is mandatory, and the responses will not 
be kept confidential.
---------------------------------------------------------------------------

    \469\ This estimate is based on the last time this information 
collection was approved in 2020. See ICR Reference No. 202008-3235-
007, available at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202008-3235-007.
---------------------------------------------------------------------------

    The table below summarizes our PRA initial and ongoing annual 
burden estimates associated with the proposed amendments to Form N-1A, 
Form N-2, Form N-8B-2, Form S-6, and Form N-CSR.

[[Page 36729]]

[GRAPHIC] [TIFF OMITTED] TP17JN22.013

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

    As discussed above, we are proposing new disclosure requirements in 
the MDFP and MD&A sections of annual reports for registered management 
investment companies and BDCs, respectively.\470\ The collection of 
information burdens for these amendments correspond to information 
collections under rule 30e-1 for registered management investment 
companies and Form 10-K for BDCs. We discuss our proposed changes to 
each of these information collections below.
---------------------------------------------------------------------------

    \470\ See supra, Section II.A.3.
---------------------------------------------------------------------------

    We have previously estimated that it takes a total of 1,039,868 
hours, and involves a total external cost burden of $149,244,791, to 
comply with the collection of information associated with rule 30e-
1.\471\ Compliance with the

[[Page 36730]]

disclosure requirements of rule 30e-1 is mandatory. Responses to the 
disclosure requirements are not kept confidential.
---------------------------------------------------------------------------

    \471\ This estimate is based on the last time the rule's 
information collection was submitted for PRA renewal in 2020. See 
ICR Reference No. 202007-3235-015, available at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202007-3235-015.
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    The table below summarizes our PRA initial and ongoing annual 
burden estimates associated with the proposed amendments to rule 30e-1.

[[Page 36731]]

[GRAPHIC] [TIFF OMITTED] TP17JN22.014


[[Page 36732]]


    We have previously estimated that it takes a total of 14,188,040 
hours, and involves a total external cost burden of $1,893,793,119, to 
comply with the collection of information associated with Form 10-
K.\472\ Compliance with the disclosure requirements of Form 10-K is 
mandatory. Responses to the disclosure requirements are not kept 
confidential.
---------------------------------------------------------------------------

    \472\ This estimate is based on the last time the rule's 
information collection was submitted in 2021. See ICR Reference No. 
202101-3235-003, available at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202101-3235-003.
---------------------------------------------------------------------------

    We believe that the incremental increase in information collections 
burdens associated with the proposed annual report requirements for 
rule 30e-1 discussed above will be the same for Form 10-K. Therefore, 
the table below summarizes the estimated incremental burden increase 
associated with the proposed annual report amendments that ESG-Focused 
BDCs would be required to disclose Form 10-K.
[GRAPHIC] [TIFF OMITTED] TP17JN22.015

G. Form N-CEN

    Form N-CEN is an annual report filed with the Commission by all 
registered investment companies, other than face-amount certificate 
companies. We have previously estimated that it takes a total of 54,890 
hours, and involves a total external cost burden of $1,344,980, to 
comply with the collection of information associated with Form N-
CEN.\473\ Compliance with the disclosure requirements of Form N-CEN is 
mandatory. Responses to the disclosure requirements are not kept 
confidential. The table below summarizes our PRA initial and ongoing 
annual burden estimates associated with the proposed amendments to Form 
N-CEN. Staff estimates there will be no external costs associated with 
this collection of information.
---------------------------------------------------------------------------

    \473\ This estimate is based on the last time the rule's 
information collection was submitted for PRA renewal in 2021. See 
ICR Reference No. 202012-3235-017, available at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202012-3235-017.

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[[Page 36733]]

[GRAPHIC] [TIFF OMITTED] TP17JN22.016

H. Form N-CSR

    Registered management investment companies are required to file 
reports with the Commission on Form N-CSR. In our most recent Paperwork 
Reduction Act submission for Form N-CSR, we estimated the annual 
compliance burden to comply with the collection of information 
requirement of Form N-CSR is 181,167.5 burden hours and an external 
cost burden estimate of $5,199,584.\474\ Compliance with the disclosure 
requirements of Form N-CSR is mandatory, and the responses to the 
disclosure requirements will not be kept confidential.
---------------------------------------------------------------------------

    \474\ This estimate is based on the last time the rule's 
information collection was submitted for PRA renewal in 2020. See 
ICR Reference No. 202005-3235-023, available at https://www.reginfo.gov/public/do/PRAViewICR?ref_nbr=202005-3235-023.
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    The table below summarizes our PRA initial and ongoing annual 
burden estimates associated with the proposed amendments to Form N-CSR.

[[Page 36734]]

[GRAPHIC] [TIFF OMITTED] TP17JN22.017

I. Form ADV

    The proposed amendments to Form ADV would increase the information 
requested in Form ADV Part 1A and Part 2 for RIAs, and Part 1A for 
ERAs. The estimated new burdens below also take into account changes in 
the numbers of advisers since the last approved PRA for Form ADV and 
increased costs due to inflation. Based on the prior amendments to Form 
ADV, we estimated the annual compliance burden to comply with the 
collection of information requirement of Form ADV is 433,004 burden 
hours and an external cost burden estimate of $14,125,083.\475\ 
Compliance with the disclosure requirements of Form ADV is mandatory, 
and the responses to the disclosure requirements will not be kept 
confidential.
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    \475\ See Investment Adviser Marketing, Final Rule, Investment 
Advisers Act Release No. 5653 (Dec. 22, 2020) [81 FR 60418 (Mar. 5, 
2021)] and corresponding submission to the Office of Information and 
Regulatory Affairs at Reginfo.gov (``2021 Form ADV PRA'').
---------------------------------------------------------------------------

    We propose the following changes to our PRA methodology for Form 
ADV:
     Form ADV Parts 1 and 2. Form ADV PRA has historically 
calculated a per adviser per year hourly burden for Form ADV Parts 1 
and 2 for each of (i) the initial burden and (ii) the ongoing burden, 
which reflects advisers' filings of annual and other-than-annual 
updating amendments. We noted in previous PRA amendments that most of 
the paperwork burden for Form ADV Parts 1 and 2 would be incurred in 
the initial submissions of Form ADV. However, recent PRA amendments 
have continued to apply the total initial hourly burden for Parts 1 and 
2 to all currently registered or reporting RIAs and ERAs, respectively, 
in addition to the estimated number of new advisers expected to be 
registering or reporting with the Commission annually. We believe that 
the total initial hourly burden for Form ADV Parts 1 and 2 going 
forward should be applied only to the estimated number of expected new 
advisers annually. This is because currently registered or reporting 
advisers have generally already incurred the total initial burden for 
filing Form ADV for the first time. On the other hand, the estimated 
expected new advisers will incur the full total burden of initial 
filing of Form ADV, and we believe it is appropriate to apply this 
total initial burden to these advisers. We propose to continue to apply 
any new initial burdens resulting from proposed amendments to Form ADV 
Parts 1 and 2, as applicable, to all currently registered or reporting 
investment advisers plus all estimated expected new RIAs and ERAs 
annually.
     Private fund reporting. We have previously calculated 
advisers' private fund reporting as a separate initial burden. The 
currently approved burden for all registered and exempt reporting 
advisers, including expected new registered advisers and new exempt 
reporting advisers, with respect to reported private funds, is 1 hour 
per private fund reported, which we have previously amortized over 
three years for all private fund advisers. We propose to continue to 
calculate

[[Page 36735]]

advisers' private fund reporting as a separate reporting burden, but we 
propose to apply the initial burden only with respect to the expected 
new private funds.
[GRAPHIC] [TIFF OMITTED] TP17JN22.018


[[Page 36736]]


[GRAPHIC] [TIFF OMITTED] TP17JN22.019


[[Page 36737]]


[GRAPHIC] [TIFF OMITTED] TP17JN22.020


[[Page 36738]]


[GRAPHIC] [TIFF OMITTED] TP17JN22.021


[[Page 36739]]


[GRAPHIC] [TIFF OMITTED] TP17JN22.022

BILLING CODE 8011-01-C

J. Request for Comments

    We request comment on our estimates for the new estimated burden 
hours and change in current burden hours, and their associated costs 
described above. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission 
solicits comments in order to: (i) evaluate whether the proposed 
collections of information are necessary for the proper performance of 
the functions of the Commission, including whether the information will 
have practical utility; (ii) evaluate the accuracy of the Commission's 
estimate of the burden of the proposed collections of information; 
(iii) determine whether there are ways to enhance the quality, utility, 
and clarity of the information to be collected; and (iv) determine 
whether there are ways to minimize the burden of the collections of 
information on those who are to respond, including through the use of 
automated collection techniques or other forms of information 
technology. The agency has submitted the proposed collections of 
information to OMB for approval. Persons wishing to submit comments on 
the collection of information requirements of the proposed amendments 
should direct them to the OMB Desk Officer for the Securities and 
Exchange Commission, [email protected], and 
should send a copy to Vanessa A. Countryman, Secretary, Securities and 
Exchange Commission, 100 F Street NE, Washington, DC 20549-1090, with 
reference to File No. S7-17-22. As OMB is required to make a decision 
concerning the collections of information between 30 and 60 days after 
publication of the proposal, a comment to OMB is best assured of having 
its full effect if OMB receives it within 30 days after publication of 
this release. Requests for materials submitted to OMB by the Commission 
with regard to these collections of information should be in writing, 
refer to File No. S7-17-22, and be submitted to the Securities and 
Exchange Commission, Office of FOIA Services, 100 F Street NE, 
Washington, DC 20549-2736.

V. Initial Regulatory Flexibility Analysis

    The Commission has prepared the following Initial Regulatory 
Flexibility Analysis (``IRFA'') in accordance with section 3(a) of the 
Regulatory Flexibility Act (``RFA'').\476\ It relates to: (i) proposed 
amendments to fund prospectuses and annual reports, and Form N-CEN; 
(ii) proposed amendments to Form ADV Part 1A and Part 2A Brochure.
---------------------------------------------------------------------------

    \476\ 5 U.S.C. 603(a).
---------------------------------------------------------------------------

A. Reason for and Objectives of the Proposed Action

    Many registered funds and investment advisers to institutional and 
retail clients consider ESG factors (as described above) in their 
investment strategies.\477\ We understand that some funds and advisers 
today engage in a diversity of different ESG investing practices, with 
varying levels of ESG factors consideration, in managing 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.
---------------------------------------------------------------------------

    \477\ See supra Section I.
---------------------------------------------------------------------------

    While advisers are required to adhere to disclosure rules that 
currently exist under the Federal securities laws and Commission rules, 
registered funds and investment advisers are not currently subject to 
specific ESG factors disclosure requirements in their ESG investing. 
Investors looking to participate in ESG investing therefore face a lack 
of consistent and comparable information among investment products and 
advisers that say they consider one or more ESG factors. This lack of 
consistent and comparable information can create a risk that a fund or 
adviser's actual consideration of ESG does not match investor 
expectations, particularly given that funds and advisers implement ESG 
strategies in a variety of ways. This also creates the potential for 
``greenwashing,'' as discussed above.\478\
---------------------------------------------------------------------------

    \478\ See id.
---------------------------------------------------------------------------

    We understand that some fund investors and advisory clients are 
seeking reliable, comprehensive, and comparable information about these 
ESG investing practices to enhance their investment decision making 
about for example, whether to invest in a particular ESG fund or to 
hire or retain an adviser that incorporates ESG factors into its 
advisory services.\479\ Accordingly, the Commission is 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 enhancements create a framework for 
qualitative disclosures about a fund or adviser's ESG related 
strategies, and enhance the quantitative data for environmentally 
focused strategies, where methodologies for reporting emissions metrics 
are becoming more standardized. In addition to these investor-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.
---------------------------------------------------------------------------

    \479\ See id.
---------------------------------------------------------------------------

1. Proposed Amendments to Forms N-1A and N-2 and Fund Annual Reports
    We are proposing amendments to Forms N-1A and N-2 to provide 
additional information in fund prospectuses about the fund's principal 
investment strategies to help investors better understand how the fund 
implements ESG factors. The level of detail required would depend on 
the extent to which a fund considers ESG factors in its investment 
process. ESG-

[[Page 36740]]

Focused Funds would include specific disclosure about how the fund 
considers ESG factors in its investment process in tabular format and 
would include an overview of the fund's ESG strategy, how the fund 
incorporates ESG factors in its investment decisions, and how the fund 
engages with companies in its investment portfolio about ESG issues 
(including, if applicable, an overview of its ESG voting policy). In 
addition, to the foregoing, Impact Funds would be required to disclose 
the ESG impact the fund seeks to generate with its investments as part 
of its investment objective. Integration Funds also be required to 
provide disclosure, but it would be limited to a description of how the 
fund incorporates ESG factors into its investment selection process.
    In addition to the amendments to Forms N-1A and N-2 focusing on 
prospectus disclosure, we are proposing amendments to fund annual 
reports to provide additional ESG-related information. Impact Funds 
would be required to discuss the fund's progress on achieving its 
specific impact in quantifiable or numerical terms, and to discuss the 
factors that materially affected the fund's ability to achieve its 
specific impact. Additionally, a fund for which proxy voting on ESG 
voting matters is a significant means of implementing its ESG strategy 
would be required to disclose certain information regarding how the 
fund voted proxies relating to portfolio securities on ESG voting 
matters during the reporting period, and a fund for which engagement 
with issuers on ESG matters is a significant means of implementing its 
ESG strategy would be required to disclose information about its ESG 
engagement meetings. Finally, the proposal would require an ESG-Focused 
Fund that considers environmental factors to disclose the aggregated 
GHG emissions of the portfolio. Collectively, the amendments to Forms 
N-1A and N-2 are designed to provide investors clear information about 
how a fund considers ESG factors and to address the significant 
variability in the ways different funds approach their consideration of 
ESG factors in their investment decisions.
    All of these requirements are discussed in detail above in Section 
II.A. The burdens of these requirements on small entities are discussed 
below as well as above in our Economic Analysis and Paperwork Reduction 
Act Analysis, which discuss the burdens on all investment companies.
2. Proposed Amendments to Form N-8B-2 and Form S-6
    We are proposing amendments to Form N-8B-2 to provide additional 
information in fund prospectuses about how portfolios are selected 
based on ESG factors. The proposed amendment would require any UIT that 
provides exposures to portfolios that were selected based on one or 
more ESG factors to explain how those factors were used to select the 
portfolio securities. We believe these amendments will provide UIT 
investors with the ability to understand the role ESG factors played in 
the portfolio selection process.
    All of these requirements are discussed in detail above in Section 
II.A. The burdens of these requirements on small entities are discussed 
below as well as above in our Economic Analysis and Paperwork Reduction 
Act Analysis, which discuss the burdens on all investment companies.
3. Proposed Amendments to Form N-CEN
    We are also proposing to amend Form N-CEN to collect census-type 
information about funds' use of ESG factors (including use of ESG 
providers) in a structured format designed to provide the Commission 
and investors with consistent and comparable data. A fund would be 
required to indicate whether or not it incorporates ESG factors and, if 
it does incorporate ESG factors, to report: (i) the type of ESG 
strategy it employs, (ii) the ESG factor(s) it considers (i.e., E, S, 
and/or G), and (iii) if applicable, whether it considers ESG factors as 
part of its proxy voting policies and procedures. We believe that the 
proposed new data collected on Form N-CEN would assist both the 
Commission staff and investors in understanding the trends in this 
evolving space and to make more informed decisions about their 
selection of funds that consider ESG factors.
    All of these requirements are discussed in detail above in Section 
II.B. The burdens of these requirements on small advisers and broker-
dealers are discussed below as well as above in our Economic Analysis 
and Paperwork Reduction Act Analysis, which discuss the burdens on all 
investment companies.
4. Proposed Amendments to Form N-CSR
    We are proposing to amend Form N-CSR to provide additional 
information regarding any assumptions and methodologies the fund 
applied in calculating the portfolio's GHG emissions disclosed in its 
prospectus or shareholder reports, and any limitations associated with 
the fund's methodologies and assumptions, as well as explanations of 
any good faith estimates of GHG emissions the fund was required to 
make. BDCs, which do not file reports on Form N-CSR, would provide this 
information in their annual reports on Form 10-K. In addition to the 
above metrics, an ESG-Focused Fund that considers environmental factors 
would also be required to disclose the financed Scope 3 emissions of 
its portfolio companies, to the extent that Scope 3 emissions data is 
reported by the fund's portfolio companies. Collectively, these 
amendments provide important context to information that we propose to 
require to be disclosed in the proposed amendments to Forms N-1A and N-
2, consistent with a layered disclosure framework.
    All of these requirements are discussed in detail above in Section 
II.A. The burdens of these requirements on small advisers and broker-
dealers are discussed below as well as above in our Economic Analysis 
and Paperwork Reduction Act Analysis, which discuss the burdens on all 
investment companies.
5. Proposed Amendments to Form ADV (Parts 1 and 2)
    We are proposing amendments to both Form ADV Part 1A and Form ADV 
Part 2A (the brochure and the wrap fee program brochure) to address 
advisers' uses of ESG factors in their advisory businesses. For the 
brochure, we are proposing to require ESG-related disclosures from 
advisers that consider ESG factors as part of their advisory 
businesses, including when making investment recommendations or 
decisions and when voting client securities. Our proposed requirements 
reflect that the brochure discloses key aspects of the advisory 
relationship, including a description of any services that are tailored 
to the individual needs of clients and any relationships with 
affiliates and third parties that present conflicts of interest and 
affect the adviser-client relationship. We also similarly proposing 
disclosures about a wrap fee program sponsor's use of ESG factors, 
tailored to wrap fee programs, for the wrap fee program brochure. We 
are also proposing amendments to Form ADV Part 1A designed to collect 
information about an adviser's considerations of ESG factors in its 
advisory business. These proposed amendments would expand the 
information collected about the advisory services provided to 
separately

[[Page 36741]]

management account clients and reported private funds.
    All of these requirements are discussed in detail above in Sections 
II.B and II.C.2. The burdens of these requirements on small advisers 
and broker-dealers are discussed below as well as above in our Economic 
Analysis and Paperwork Reduction Act Analysis, which discuss the 
burdens on all advisers.

B. Legal Basis

    The Commission is proposing the rule and form amendments contained 
in this document under the authority set forth in sections 8, 24, 30, 
and 38 of the Investment Company Act [15 U.S.C. 80a et seq.], sections 
203, 204, and 211 of the Advisers Act [15 U.S.C. 80b et seq.], sections 
5, 6, 7, 10, and 19 of the Securities Act [15 U.S.C. 77a et seq.], and 
sections 13, 15, 23, and 35A of the Exchange Act [15 U.S.C. 78b et 
seq.], and 44 U.S.C. 3506-3507.

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
    Under Commission rules, for the purposes of the Investment Company 
Act and the RFA, an investment company is a small entity if, together 
with other investment companies in the same group of related investment 
companies, it has net assets of $50 million or less as of the end of 
its most recent fiscal year.\480\ Commission staff estimates that, as 
of June 2021, there were approximately 27 registered open-end mutual 
funds, 6 registered open-end ETFs, 23 registered closed-end funds, 5 
unit investment trusts and 9 business development companies 
(collectively, 70 funds) are small entities.
---------------------------------------------------------------------------

    \480\ 17 CFR 270.0-10(a).
---------------------------------------------------------------------------

2. Proposed Amendments to Form ADV
    Under Commission rules, for the purposes of the Advisers Act and 
the RFA, an investment adviser generally is a small entity if it: (1) 
has assets under management having a total value of less than $25 
million; (2) did not have total assets of $5 million or more on the 
last day of the most recent fiscal year; and (3) does not control, is 
not controlled by, and is not under common control with another 
investment adviser that has assets under management of $25 million or 
more, or any person (other than a natural person) that had total assets 
of $5 million or more on the last day of its most recent fiscal 
year.\481\
---------------------------------------------------------------------------

    \481\ 17 CFR 275.0-7(a) (``Advisers Act rule 0-7(a)'').
---------------------------------------------------------------------------

    Our proposed new rules and amendments would not affect most 
investment advisers that are small entities (``small advisers'') 
because they are generally registered with one or more state securities 
authorities and not with the Commission. Under section 203A of the 
Advisers Act, most small advisers are prohibited from registering with 
the Commission and are regulated by state regulators. Based on IARD 
data, we estimate that as of December 2020, approximately 434 SEC-
registered advisers are small entities under the RFA.\482\ Because 
these entities are registered, they, like all SEC-registered investment 
advisers, would all be subject to the proposed amendments to Form ADV.
---------------------------------------------------------------------------

    \482\ Based on SEC-registered investment adviser responses to 
Items 5.F. and 12 of Form ADV as of Dec. 2020.
---------------------------------------------------------------------------

    The only small entity exempt reporting advisers that would be 
subject to the proposed amendments would be exempt reporting advisers 
that maintain their principal office and place of business outside the 
United States. Advisers with less than $25 million in assets under 
management generally are prohibited from registering with us unless 
they maintain their principal office and place of business outside the 
United States. Exempt reporting advisers are not required to report 
regulatory assets under management on Form ADV and therefore we do not 
have a precise number of exempt reporting advisers that are small 
entities. Exempt reporting advisers are required to report in Part 1A, 
Schedule D the gross asset value of each private fund they manage.\483\ 
Advisers with their principal office and place of business outside the 
United States may have additional assets under management other than 
what is reported in Schedule D. Based on IARD filings, approximately 
14.1% of registered investment advisers with their principal office and 
place of business outside the U.S. are small entities.\484\ There are 
approximately 1,954 exempt reporting advisers with their principal 
office and place of business outside the U.S.\485\ We estimate that 
14.1% of those advisers, approximately 276 exempt reporting advisers 
with their principal office and place of business outside the U.S., are 
small entities.
---------------------------------------------------------------------------

    \483\ See Form ADV, Part 1A, Schedule D, Section 7.B.(1).A, 
Question 11.
    \484\ Based on adviser data as of Dec. 2020. The number of small 
entity, non-U.S. RIAs is 130, out of 924 total non-U.S. RIAs. 130 is 
approximately 14.1% of 940.
    \485\ Based on adviser data as of Dec. 2020.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping and Other Compliance Requirements

1. Proposed Amendments to Forms N-1A, N-2, and N-CSR and Fund Annual 
Reports
    We propose to require a fund engaging in ESG investing to provide 
additional information about the fund's principal investment strategies 
to help investors better understand how the fund implements ESG 
factors. The proposed amendments are designed to provide investors 
clear information about how a fund considers ESG factors and to address 
the significant variability in the ways different funds approach their 
consideration of ESG factors in their investment decisions. The level 
of detail required by this enhanced disclosure would depend on the 
extent to which a fund considers ESG factors in its investment process, 
with ESG-Focused Funds providing detailed information in a tabular 
format while Integration Funds would provide more limited disclosures.
    For purposes of this analysis, we assume that all funds that are 
small entities would provide all proposed disclosures, even though 
whether or not a particular fund is required to provide certain 
disclosure depends on whether it considers ESG issues and whether it is 
an environmentally focused fund. Assuming that all funds that are small 
entities are ESG-Focused Funds that are also environmentally focused 
funds, we estimate that 65 funds that are small entities would be 
subject to these requirements. Of those, approximately 33 prepare 
prospectuses pursuant to the requirements of Form N-1A and 32 prepare 
prospectuses pursuant to the requirements of Form N-2. We estimate that 
compliance with the proposed amendments to Form N-1A would entail 
internal time costs of $4,272 (12 hours) per fund, compliance with the 
proposed amendments to Form N-2 would entail internal time costs of 
$4,272 (12 hours) per fund, and compliance with the proposed amendments 
to Form N-CSR would entail internal time costs of $3,377 (11 hours) per 
fund.\486\ This would result in aggregate costs of approximately 
$234,960 for funds that are small entities that prepare prospectuses 
pursuant to Forms N-1A or N-2. In addition to prospectus disclosure on 
Form N-1A or N-2, as applicable, funds would be required to disclose 
certain information on their annual reports. Of

[[Page 36742]]

the estimated 65 small entity funds that would be subject to these 
requirements, we estimate that 56 are registered management investment 
companies and 9 are BDCs. We estimate that the burdens of compliance 
with the proposed annual report disclosure requirements would be the 
same both for registered management investment companies and for BDCs, 
and that they would entail internal time costs of $9,052 (28 
hours).\487\ This would result in aggregate costs of up to 
approximately $588,380.
---------------------------------------------------------------------------

    \486\ See Sections IV.B and IV.C, respectively. Cost estimates 
only refer to the paperwork collection costs estimated in connection 
with the PRA, not all possible costs associated with compliance.
    \487\ See Section IV.F. Cost estimates only refer to the 
paperwork collection costs estimated in connection with the PRA, not 
all possible costs associated with compliance.
---------------------------------------------------------------------------

2. Proposed Amendments to Forms N-8B-2 and S-6
    We are proposing amendments to Form N-8B-2 that are designed to 
provide investors with clear information about how portfolios are 
selected based on ESG factors. The proposed amendments are intended to 
provide similar information to the proposed amendments to Forms N-1A 
and N-2 so that investors do not face a disclosure gap based on the 
type of fund they select, but the level of detail required by the 
proposed amendment reflects the unmanaged nature of UITs. We estimate 
that 5 UITs that are small entities would be subject to these 
requirements to the extent that they consider ESG factors in their 
strategy. We estimate that compliance with the proposed amendments to 
Form N-8B-2 and S-6 would each entail internal time costs of $254 (0.67 
hours) per UIT.\488\ This would result in aggregate costs of 
approximately $1,270 for UITs that are small entities that prepare 
prospectuses pursuant to Form N-8B-2.
---------------------------------------------------------------------------

    \488\ See Section IV.D. Cost estimates only refer to the 
paperwork collection costs estimated in connection with the PRA, not 
all possible costs associated with compliance.
---------------------------------------------------------------------------

3. Proposed Amendments to Form N-CEN
    We are proposing amendments to Form N-CEN that are designed to 
collect census-type information regarding funds' incorporation of ESG 
into their investment strategies and investment holdings, as well as 
the ESG-related service providers they use in a structured data format. 
The proposed amendments are designed to complement the tailored 
narrative disclosure included in the fund prospectus and annual 
reports, and to give the Commission, investors and other market 
participants the ability to identify efficiently funds that incorporate 
ESG factors into their investment strategies and categorize funds based 
on the type of ESG strategy they employ.
    We estimate that 70 funds that are small entities would be subject 
to these requirements. We estimate that compliance with the proposed 
amendments to Form N-CEN would entail internal time costs of $351 (1 
hour) per fund.\489\ This would result in aggregate costs of 
approximately $24,570 for funds that are small entities.
---------------------------------------------------------------------------

    \489\ See Section IV.G. Cost estimates only refer to the 
paperwork collection costs estimated in connection with the PRA, not 
all possible costs associated with compliance.
---------------------------------------------------------------------------

4. Proposed Amendments to Form ADV
    The proposed amendments to Form ADV would impose certain reporting, 
recordkeeping, and compliance requirements on all Commission-registered 
advisers, including small advisers. All Commission-registered small 
advisers would be required to file Form ADV, including the proposed 
amendments. The proposed amendments to Form ADV would require 
registered investment advisers and exempt reporting advisers to report 
different or additional information than what is currently required. 
Approximately 710 small advisers currently registered, or reporting as 
an exempt reporting adviser, with us would be subject to these 
requirements.\490\ We expect these 434 small entity RIAs to spend, on 
average, 1.9 hours per year to respond to the proposed new and amended 
questions, for a total of 824.6 aggregate hours per year. We expect 
these 276 small entity ERAs to spend, on average, 0.3 hours per year to 
respond to the proposed new and amended questions, for a total of 82.8 
aggregate hours per year. The total for all small entity advisers would 
therefore be 907.4 hours per year.\491\ We expect the aggregate cost to 
small advisers associated with this burden would be $419,275.50.\492\
---------------------------------------------------------------------------

    \490\ 434 small entity RIAs + 276 small entity ERAs = 710 
advisers.
    \491\ See supra section IV.I. of this release.
    \492\ See supra section IV.I. of this release. For the small 
entity RIAs the cost calculation is as follows: 434 RIAs x $419.25 = 
$181,954.50 in internal cost average per RIA + (434 RIAs x .25 hrs) 
x $496) + (434 RIAs x .5 hrs) x $739) = $214,179 in external cost 
average per RIA for a total of $404,133.50. For the small entity 
ERAs the calculation is as follows: 276 ERAs x (0.3 hours x 279.50) 
= $23,142. Cost estimates only refer to the paperwork collection 
costs estimated in connection with the PRA, not all possible costs 
associated with compliance.
---------------------------------------------------------------------------

E. Duplicative, Overlapping, or Conflicting Federal Rules

    Commission staff has not identified any Federal rules that 
currently duplicate, overlap, or conflict with the proposed disclosure 
and reporting requirements. We recognize that the Commission also has 
proposed certain GHG disclosure requirements that would apply to BDCs 
in the Climate Disclosure Proposing Release. We believe the GHG 
disclosure requirements we are proposing in this release that would 
apply to a BDC that is an environmentally focused fund would complement 
the disclosure proposed in the Climate Disclosure Proposing Release if 
both proposals are adopted.\493\ We request comment on this belief, 
whether commenters perceive any duplication or overlap if both 
proposals are adopted and, if so, how the Commission should address any 
such duplication or overlap.
---------------------------------------------------------------------------

    \493\ See Proposed Instruction 10 to Item 24 of Form N-2 [17 CFR 
274.11a-1]; Climate Disclosure Proposing Release, supra footnote 
127.
---------------------------------------------------------------------------

F. Significant Alternatives

    The Regulatory Flexibility Act directs the Commission to consider 
significant alternatives that would accomplish the stated objective, 
while minimizing any significant adverse impact on small entities. The 
Commission considered the following alternatives for small entities in 
relation our proposed amendments: (1) Establishing different reporting, 
recordkeeping, and other compliance requirements or frequency, to 
account for resources available to small entities; (2) exempting small 
entities from the proposed reporting, recordkeeping, and other 
compliance requirements, to account for resources available to small 
entities; (3) clarifying, consolidating, or simplifying the compliance 
requirements under the proposal for small entities; and (4) using 
performance rather than design standards.
1. Proposed Amendments to Forms N-1A, N-2, N-8B-2, N-CEN, N-CSR, and S-
6 and Fund Annual Reports
    We do not believe that different compliance or reporting 
requirements or an exemption from coverage of the forms, or any part 
thereof, for small entities, would be appropriate for the amendments to 
Forms N-1A, N-2, N-8B-2, N-CEN, N-CSR, and S-6. Small entities 
currently follow the same requirements that large entities do when 
preparing, transmitting, and filing annual reports and preparing and 
sending or giving prospectuses to investors. The proposal is designed 
to address a disclosure gap under current law; if the proposal included 
different requirements for small funds, it could raise investor 
protection concerns for investors in small funds to the extent

[[Page 36743]]

that investors in small funds would not receive the same disclosures as 
investors in larger funds.
    Similarly, we do not believe it would be appropriate to exempt 
small funds from the proposed amendments. As discussed above, our 
contemplated disclosure framework would be disrupted if investors in 
smaller funds received different disclosures than investors in larger 
funds. We believe that investors in all funds should benefit from the 
Commission's proposed disclosure amendments, not just investors in 
large funds. Further, the amendments we are proposing generally only 
apply to ESG-Focused Funds, Integration Funds, and Impact Funds, the 
definitions of which require affirmative actions on the part of a fund 
by electing to make certain claims in its disclosure documents. To the 
extent a small entity wishes to be exempted from the rules, such an 
exemption is already available to all funds regardless of size simply 
by avoiding making claims that the Commission has determined require 
additional disclosure in order to protect investors.
    We do not believe that clarifying, consolidating, or simplifying 
the compliance requirements under the proposal for small funds would 
permit us to achieve our stated objectives. We have sought to create as 
clear, consolidated, and simple a regulatory framework as we believe 
appropriate under the circumstances. As noted above, due to the ``opt-
in'' nature of many of the requirements, small entities are already 
able to benefit from a simpler regulatory framework simply by not 
making claims about certain ESG goals for which additional disclosure 
is necessary in order to protect investors.
    Finally, we do not believe it would be appropriate to use 
performance rather than design standards. As discussed above, we 
believe the regulatory disclosures that small funds provide to 
investors should be consistent with the disclosures provided to 
investors in larger entities. Our proposed disclosure requirements are 
tailored to meet the informational needs of different investors, and to 
implement a layered disclosure framework. We believe all fund investors 
should experience the anticipated benefits of the new disclosure 
requirements and that ESG disclosure should be uniform and standardized 
in order to allow investors to compare funds reporting the same 
information on the same frequency, and to help all investors to make 
more informed investment decisions based upon those comparisons.
2. Proposed Amendments to Form ADV
    We do not believe that different compliance or reporting 
requirements or an exemption from coverage of the Form ADV, or any part 
thereof, for small entities, would be appropriate. Because the 
protections of the Advisers Act are intended to apply equally to 
clients of both large and small advisers, it would be inconsistent with 
the purposes of the Act to specify differences for small entities under 
the proposed amendments. In addition, as discussed above, our staff 
would use the information that advisers would maintain to help prepare 
for examinations of investment advisers. Establishing different 
conditions for large and small advisers would negate these benefits.
    We believe the current proposal is clear and that further 
clarification, consolidation, or simplification of the compliance 
requirements is not necessary. We also believe that using performance 
rather than design standards would be inconsistent with our statutory 
mandate to protect investors, as advisers must provide certain 
registration information in a uniform and quantifiable manner so that 
it is useful to our regulatory and examination program.

G. Solicitation of Comments

    The Commission requests comments regarding matters discussed in 
this IRFA. We request comment on the number of small entities that 
would be subject to the proposed disclosure and reporting requirements 
and whether the proposed disclosure and reporting requirements would 
have any effects that have not been discussed. We request that 
commenters describe the nature of any effects on small entities subject 
to the proposed disclosure and reporting requirements and provide 
empirical data to support the nature and extent of such effects. We 
also request comment on the estimated compliance burdens of the 
proposed disclosure and reporting requirements and how they would 
affect small entities.

VI. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, or ``SBREFA,'' \494\ we must advise OMB whether a proposed 
regulation constitutes a ``major'' rule. Under SBREFA, a rule is 
considered ``major'' where, if adopted, it results in or is likely to 
result in (1) an annual effect on the economy of $100 million or more; 
(2) a major increase in costs or prices for consumers or individual 
industries; or (3) significant adverse effects on competition, 
investment or innovation. We request comment on the potential effect of 
the proposed amendments on the U.S. economy on an annual basis; any 
potential increase in costs or prices for consumers or individual 
industries; and any potential effect on competition, investment or 
innovation. Commenters are requested to provide empirical data and 
other factual support for their views to the extent possible.
---------------------------------------------------------------------------

    \494\ Public Law 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C., 15 U.S.C. and as a note 
to 5 U.S.C. 601).
---------------------------------------------------------------------------

Statutory Authority

    The Commission is proposing the rule and form amendments contained 
in this document under the authority set forth in the Securities Act, 
particularly, sections 5, 6, 7, 10, and 19 thereof [15 U.S.C. 77a et 
seq.], the Exchange Act, particularly, sections 13, 15, 23, and 35A 
thereof [15 U.S.C. 78a et seq.], the Investment Company Act, 
particularly, sections 8, 24, 30, and 38 thereof [15 U.S.C. 80a et 
seq.], the Advisers Act, particularly, sections 203, 204, and 211 
thereof [15 U.S.C. 80b et seq.], and 44 U.S.C. 3506-3507.

List of Subjects in 17 CFR Parts 200, 230, 232, 239, 249, 274, and 
279

    Reporting and recordkeeping requirements, Securities.

Text of Proposed Rule and Form Amendments

    For the reasons set out in the preamble, title 17, chapter II of 
the Code of Federal Regulations is proposed to be amended as follows:

PART 200--ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND 
REQUESTS

Subpart N--Commission Information Collection Requirements Under the 
Paperwork Reduction Act: OMB Control Numbers

0
1. The authority citation for part 200, subpart N, continues to read as 
follows:

    Authority:  44 U.S.C. 3506; 44 U.S.C. 3507.

0
2. Amend Sec.  200.800 in the table in paragraph (b) by adding an entry 
for ``Form N-CSR'' between the entries for ``Form N-27F-1'' and ``Form 
N-PORT'' to read as follows:

[[Page 36744]]

Sec.  200.800  OMB control numbers assigned pursuant to the Paperwork 
Reduction Act.

* * * * *
    (b) * * *

------------------------------------------------------------------------
                                          17 CFR part or
                                           section where    Current OMB
   Information collection requirement     identified and    control No.
                                             described
------------------------------------------------------------------------
 
                              * * * * * * *
Form N-CSR..............................         274.128       3235-0570
 
                              * * * * * * *
------------------------------------------------------------------------

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

0
3. The authority citation for part 230 continues to read, in part, as 
follows:

    Authority: 15 U.S.C. 77b, 77b note, 77c, 77d, 77f, 77g, 77h, 
77j, 77r, 77s, 77z-3, 77sss, 78c, 78d, 78j, 78l, 78m, 78n, 78o, 78o-
7 note, 78t, 78w, 78ll(d), 78mm, 80a-8, 80a-24, 80a-28, 80a-29, 80a-
30, and 80a-37, and Pub. L. 112-106, sec. 201(a), sec. 401, 126 
Stat. 313 (2012), unless otherwise noted.
* * * * *
    Sections 230.400 to 230.499 issued under secs. 6, 8, 10, 19, 48 
Stat. 78, 79, 81, and 85, as amended (15 U.S.C. 77f, 77h, 77j, 77s).
* * * * *
0
4. Amend Sec.  230.485 by revising paragraph (c)(3) to read as follows:


Sec.  230.485  Effective date of post-effective amendments filed by 
certain registered investment companies.

* * * * *
    (c) * * *
    (3) A registrant's ability to file a post-effective amendment, 
other than an amendment filed solely for purposes of submitting an 
Interactive Data File, under paragraph (b) of this section is 
automatically suspended if a registrant fails to submit any Interactive 
Data File (as defined in Sec.  232.11 of this chapter) required by the 
form on which the registrant is filing the post-effective amendment. A 
suspension under this paragraph (c)(3) shall become effective at such 
time as the registrant fails to submit an Interactive Data File as 
required by the relevant form. Any such suspension, so long as it is in 
effect, shall apply to any post-effective amendment that is filed after 
the suspension becomes effective, but shall not apply to any post-
effective amendment that was filed before the suspension became 
effective. Any suspension shall apply only to the ability to file a 
post-effective amendment pursuant to paragraph (b) of this section and 
shall not otherwise affect any post-effective amendment. Any suspension 
under this paragraph (c)(3) shall terminate as soon as a registrant has 
submitted the Interactive Data File required by the relevant form.
* * * * *
0
5. Amend Sec.  230.497 by revising paragraphs (c) and (e) to read as 
follows:


Sec.  230.497  Filing of investment company prospectuses--number of 
copies.

* * * * *
    (c) For investment companies filing on Sec. Sec.  239.15A and 
274.11A of this chapter (Form N-1A), Sec. Sec.  239.17a and 274.11b of 
this chapter (Form N-3), Sec. Sec.  239.17b and 274.11c of this chapter 
(Form N-4), or Sec. Sec.  239.17c and 274.11d of this chapter (Form N-
6), within five days after the effective date of a registration 
statement or the commencement of a public offering after the effective 
date of a registration statement, whichever occurs later, 10 copies of 
each form of prospectus and form of Statement of Additional Information 
used after the effective date in connection with such offering shall be 
filed with the Commission in the exact form in which it was used. 
Investment companies filing on Form N-1A, N-3, N-4, or N-6 must submit 
an Interactive Data File (as defined in Sec.  232.11 of this chapter) 
if required by the form on which the registrant files its registration 
statement.
* * * * *
    (e) For investment companies filing on Sec. Sec.  239.15A and 
274.11A of this chapter (Form N-1A), Sec. Sec.  239.17a and 274.11b of 
this chapter (Form N-3), Sec. Sec.  239.17b and 274.11c of this chapter 
(Form N-4), or Sec. Sec.  239.17c and 274.11d of this chapter (Form N-
6), after the effective date of a registration statement, no prospectus 
that purports to comply with Section 10 of the Act (15 U.S.C. 77j) or 
Statement of Additional Information that varies from any form of 
prospectus or form of Statement of Additional Information filed 
pursuant to paragraph (c) of this section shall be used until five 
copies thereof have been filed with, or mailed for filing to the 
Commission. Investment companies filing on Form N-1A, N-3, N-4, or N-6 
must submit an Interactive Data File (as defined in Sec.  232.11 of 
this chapter) if required by the Form on which the registrant files its 
registration statement.
* * * * *

PART 232--REGULATION S-T--GENERAL RULES AND REGULATIONS FOR 
ELECTRONIC FILINGS

0
6. The general authority citation for part 232 continues to read as 
follows:

    Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s(a), 77z-3, 
77sss(a), 78c(b), 78l, 78m, 78n, 78o(d), 78w(a), 78ll, 80a-6(c), 
80a-8, 80a-29, 80a-30, 80a-37, 7201 et seq.; and 18 U.S.C. 1350, 
unless otherwise noted.
* * * * *
0
7. Amend Sec.  232.11 by revising the definition of ``Related Official 
Filing'' to read as follows:


Sec.  232.11  Definition of terms used in this part.

* * * * *
    Related Official Filing. The term Related Official Filing means the 
ASCII or HTML format part of the official filing with which all or part 
of an Interactive Data File appears as an exhibit or, in the case of a 
filing on Form N-1A (Sec. Sec.  239.15A and 274.11A of this chapter), 
Form N-2 (Sec. Sec.  239.14 and 274.11a-1 of this chapter), Form N-3 
(Sec. Sec.  239.17a and 274.11b of this chapter), Form N-4 (Sec. Sec.  
239.17b and 274.11c of this chapter), Form N-6 (Sec. Sec.  239.17c and 
274.11d of this chapter), Form N-8B-2 (Sec.  274.12 of this chapter), 
Form S-6 (Sec.  239.16 of this chapter), and Form N-CSR (Sec. Sec.  
249.331 and 274.128 of this chapter), and, to the extent required by 
Sec.  232.405 [Rule 405 of Regulation S-T] for a business development 
company as defined in Section 2(a)(48) of the Investment Company Act of 
1940 (15 U.S.C. 80a-2(a)(48)), Form 10-K (Sec.  249.310 of this 
chapter), Form 10-Q (Sec.  249.308a of this chapter), and Form 8-K 
(Sec.  249.308 of this chapter), the ASCII or HTML format part of an 
official filing that contains the information to

[[Page 36745]]

which an Interactive Data File corresponds.
* * * * *
0
8. Amend Sec.  232.405 by:
0
a. Revising the introductory text, paragraphs (a)(2), (a)(3)(i) 
introductory text, (a)(3)(ii), (a)(4), (b)(1) introductory text, (b)(2) 
introductory text, and (b)(2)(i), (iii), and (iv);
0
b. Adding paragraphs (b)(2)(v) and (vi);
0
c. Revising paragraph (b)(3)(iii); and
0
d. Revising the final sentence of Note 1 to the section.
    The revisions and additions read as follows:


Sec.  232.405  Interactive Data File submissions.

    This section applies to electronic filers that submit Interactive 
Data Files. Section 229.601(b)(101) of this chapter (Item 601(b)(101) 
of Regulation S-K), paragraph (101) of Part II--Information Not 
Required to be Delivered to Offerees or Purchasers of Form F-10 (Sec.  
239.40 of this chapter), paragraph 101 of the Instructions as to 
Exhibits of Form 20-F (Sec.  249.220f of this chapter), paragraph 
B.(15) of the General Instructions to Form 40-F (Sec.  249.240f of this 
chapter), paragraph C.(6) of the General Instructions to Form 6-K 
(Sec.  249.306 of this chapter), General Instruction C.3.(g) of Form N-
1A (Sec. Sec.  239.15A and 274.11A of this chapter), General 
Instruction I of Form N-2 (Sec. Sec.  239.14 and 274.11a-1 of this 
chapter), General Instruction C.3.(h) of Form N-3 (Sec. Sec.  239.17a 
and 274.11b of this chapter), General Instruction C.3.(h) of Form N-4 
(Sec. Sec.  239.17b and 274.11c of this chapter), General Instruction 
C.3.(h) of Form N-6 (Sec. Sec.  239.17c and 274.11d of this chapter), 
General Instruction 2.(l) of Form N-8B-2 (Sec.  274.12 of this 
chapter), General Instruction 5 of Form S-6 (Sec.  239.16 of this 
chapter), and General Instruction C.4 of Form N-CSR (Sec. Sec.  249.331 
and 274.128 of this chapter) specify when electronic filers are 
required or permitted to submit an Interactive Data File (Sec.  
232.11), as further described in note 1 to this section. This section 
imposes content, format, and submission requirements for an Interactive 
Data File, but does not change the substantive content requirements for 
the financial and other disclosures in the Related Official Filing 
(Sec.  232.11).
    (a) * * *
    (2) Be submitted only by an electronic filer either required or 
permitted to submit an Interactive Data File as specified by Sec.  
229.601(b)(101) of this chapter (Item 601(b)(101) of Regulation S-K), 
paragraph (101) of Part II--Information Not Required to be Delivered to 
Offerees or Purchasers of Form F-10 (Sec.  239.40 of this chapter), 
paragraph 101 of the Instructions as to Exhibits of Form 20-F (Sec.  
249.220f of this chapter), paragraph B.(15) of the General Instructions 
to Form 40-F (Sec.  249.240f of this chapter), paragraph C.(6) of the 
General Instructions to Form 6-K (Sec.  249.306 of this chapter), 
General Instruction C.3.(g) of Form N-1A (Sec. Sec.  239.15A and 
274.11A of this chapter), General Instruction I of Form N-2 (Sec. Sec.  
239.14 and 274.11a-1 of this chapter), General Instruction C.3.(h) of 
Form N-3 (Sec. Sec.  239.17a and 274.11b of this chapter), General 
Instruction C.3.(h) of Form N-4 (Sec. Sec.  239.17b and 274.11c of this 
chapter), General Instruction C.3.(h) of Form N-6 (Sec. Sec.  239.17c 
and 274.11d of this chapter), General Instruction 2.(l) of Form N-8B-2 
(Sec.  274.12 of this chapter), General Instruction 5 of Form S-6 
(Sec.  239.16 of this chapter), or General Instruction C.4 of Form N-
CSR (Sec. Sec.  249.331 and 274.128 of this chapter), as applicable;
    (3) * * *
    (i) If the electronic filer is not a management investment company 
registered under the Investment Company Act of 1940 (15 U.S.C. 80a et 
seq.), a separate account as defined in Section 2(a)(14) of the 
Securities Act (15 U.S.C. 77b(a)(14)) registered under the Investment 
Company Act of 1940, a business development company as defined in 
Section 2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80a-
2(a)(48)), or a unit investment trust as defined in Section 4(2) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-4), and is not within one 
of the categories specified in paragraph (f)(1)(i) of this section, as 
partly embedded into a filing with the remainder simultaneously 
submitted as an exhibit to:
* * * * *
    (ii) If the electronic filer is a management investment company 
registered under the Investment Company Act of 1940 (15 U.S.C. 80a et 
seq.), a separate account (as defined in Section 2(a)(14) of the 
Securities Act (15 U.S.C. 77b(a)(14)) registered under the Investment 
Company Act of 1940, a business development company as defined in 
Section 2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80a-
2(a)(48)), or a unit investment trust as defined in Section 4(2) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-4), and is not within one 
of the categories specified in paragraph (f)(1)(ii) of this section, as 
partly embedded into a filing with the remainder simultaneously 
submitted as an exhibit to a filing that contains the disclosure this 
section requires to be tagged; and
    (4) Be submitted in accordance with the EDGAR Filer Manual and, as 
applicable, either Item 601(b)(101) of Regulation S-K (Sec.  
229.601(b)(101) of this chapter), paragraph (101) of Part II--
Information Not Required to be Delivered to Offerees or Purchasers of 
Form F-10 (Sec.  239.40 of this chapter), paragraph 101 of the 
Instructions as to Exhibits of Form 20-F (Sec.  249.220f of this 
chapter), paragraph B.(15) of the General Instructions to Form 40-F 
(Sec.  249.240f of this chapter), paragraph C.(6) of the General 
Instructions to Form 6-K (Sec.  249.306 of this chapter), General 
Instruction C.3.(g) of Form N-1A (Sec. Sec.  239.15A and 274.11A of 
this chapter), General Instruction I of Form N-2 (Sec. Sec.  239.14 and 
274.11a-1 of this chapter), General Instruction C.3.(h) of Form N-3 
(Sec. Sec.  239.17a and 274.11b of this chapter), General Instruction 
C.3.(h) of Form N-4 (Sec. Sec.  239.17b and 274.11c of this chapter), 
General Instruction C.3.(h) of Form N-6 (Sec. Sec.  239.17c and 274.11d 
of this chapter); General Instruction 2.(l) of Form N-8B-2 (Sec.  
274.12 of this chapter); General Instruction 5 of Form S-6 (Sec.  
239.16 of this chapter); or General Instruction C.4 of Form N-CSR 
(Sec. Sec.  249.331 and 274.128 of this chapter).
    (b) * * *
    (1) If the electronic filer is not a management investment company 
registered under the Investment Company Act of 1940 (15 U.S.C. 80a et 
seq.), a separate account (as defined in Section 2(a)(14) of the 
Securities Act (15 U.S.C. 77b(a)(14)) registered under the Investment 
Company Act of 1940, a business development company as defined in 
Section 2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80-
2(a)(48)), or a unit investment trust as defined in Section 4(2) of the 
Investment Company Act of 1940 (15 U.S.C. 80-4), an Interactive Data 
File must consist of only a complete set of information for all periods 
required to be presented in the corresponding data in the Related 
Official Filing, no more and no less, from all of the following 
categories:
* * * * *
    (2) If the electronic filer is an open-end management investment 
company registered under the Investment Company Act of 1940, a separate 
account (as defined in Section 2(a)(14) of the Securities Act) 
registered under the Investment Company Act of 1940 (15 U.S.C. 80a et 
seq.), or a unit investment trust as defined in Section 4(2) of the 
Investment Company Act of 1940 (15 U.S.C. 80a-4), an Interactive Data 
File must consist of only a

[[Page 36746]]

complete set of information for all periods required to be presented in 
the corresponding data in the Related Official Filing, no more and no 
less, from the information set forth in:
    (i) Items 2, 3, and 4 of Form N-1A (Sec. Sec.  239.15A and 274.11A 
of this chapter); and, as applicable, the information provided in 
response to Item 9(b)(2) of Form N-1A pursuant to Instructions 1 or 2, 
as well as any information provided in response to Item 27(b)(7)(i)(B)-
(E) of Form N-1A included in any annual report filed on Form N-CSR;
* * * * *
    (iii) Items 2, 4, 5, 10, and 17 of Form N-4 (Sec. Sec.  239.17b and 
274.11c of this chapter);
    (iv) Items 2, 4, 5, 10, 11, and 18 of Form N-6 (Sec. Sec.  239.17c 
and 274.11d of this chapter);
    (v) Item 11 of Form N-8B-2 (Sec.  274.12 of this chapter), pursuant 
to Instruction 2, including to the extent required by Sec.  239.16 of 
this chapter (Form S-6); or
    (vi) Item 7 of Form N-CSR (Sec. Sec.  249.331 and 274.128 of this 
chapter), as applicable.
    (3) * * *
    (iii) As applicable, all of the information provided in response to 
Items 3.1, 4.3, 8.2.b, 8.2.d, 8.2.e, 8.3.a, 8.3.b, 8.5.b, 8.5.c, 8.5.e, 
10.1.a-d, 10.2.a-c, 10.2.e, 10.3, and 10.5 of Form N-2 in any 
registration statement or post-effective amendment thereto filed on 
Form N-2; or any form of prospectus filed pursuant to Sec.  230.424 of 
this chapter (Rule 424 under the Securities Act); or, if a Registrant 
is filing a registration statement pursuant to General Instruction A.2 
of Form N-2, any documents filed pursuant to Sections 13(a), 13(c), 14, 
or 15(d) of the Exchange Act, any to the extent such information 
appears therein; as well as any information provided in response to 
Instructions 4.g.(1)(B)-(E) or 10 to Item 24 of Form N-2 that is 
included in any annual report filed on Form N-CSR or Form 10-K.
* * * * *
    Note 1 to Sec.  232.405: * * * For an issuer that is a management 
investment company, unit investment trust or separate account 
registered under the Investment Company Act of 1940 (15 U.S.C. 80a et 
seq.) or a business development company as defined in Section 2(a)(48) 
of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(48)), or a 
unit investment trust as defined in Section 4(2) of the Investment 
Company Act of 1940 (15 U.S.C. 80a-4), General Instruction C.3.(g) of 
Form N-1A (Sec. Sec.  239.15A and 274.11A of this chapter), General 
Instruction I of Form N-2 (Sec. Sec.  239.14 and 274.11a-1 of this 
chapter), General Instruction C.3.(h) of Form N-3 (Sec. Sec.  239.17a 
and 274.11b of this chapter), General Instruction C.3.(h) of Form N-4 
(Sec. Sec.  239.17b and 274.11c of this chapter), General Instruction 
C.3.(h) of Form N-6 (Sec. Sec.  239.17c and 274.11d of this chapter), 
General Instruction 2.(l) of Form N-8B-2 (Sec.  274.12 of this 
chapter), General Instruction 5 of Form S-6 (Sec.  239.16 of this 
chapter), and General Instruction C.4 of Form N-CSR (Sec. Sec.  249.331 
and 274.128 of this chapter), as applicable, specifies the 
circumstances under which an Interactive Data File must be submitted.

PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

0
9. The general authority citation for part 239 continues to read as 
follows:

    Authority: 15 U.S.C. 77c, 77f, 77g, 77h, 77j, 77s, 77z-2, 77z-3, 
77sss, 78c, 78l, 78m,78n, 78o(d), 78o-7 note, 78u-5, 78w(a), 78ll, 
78mm, 80a-2(a), 80a-3, 80a-8, 80a-9, 80a-10, 80a-13, 80a-24, 80a-26, 
80a-29, 80a-30, and 80a-37; and sec. 107, Pub. L. 112-106, 126 Stat. 
312, unless otherwise noted.
* * * * *
0
10. Amend Form S-6 (referenced in Sec.  239.16) by adding Instruction 5 
to the General Instructions to read as follows:

    Note: The text of Form S-6 does not, and this amendment will 
not, appear in the Code of Federal Regulations.

FORM S-6

* * * * *

General Instructions

* * * * *

Instruction 5. Interactive Data

    (a) An Interactive Data File as defined in Rule 11 of Regulation S-
T [17 CFR 232.11] is required to be submitted to the Commission in the 
manner provided by Rule 405 of Regulation S-6 [17 CFR 232.405] for any 
registration statement or post-effective amendment thereto on Form S-6 
that includes or amends information provided in response to Item 11 of 
Form N-8B-2 (as provided pursuant to Instruction 1.(a) of the 
Instructions As To The Prospectus of this Form).
    (1) Except as required by paragraph (a)(2), the Interactive Data 
File must be submitted as an amendment to the registration statement to 
which the Interactive Data File relates. The amendment must be 
submitted on or before the date the registration statement or post-
effective amendment that contains the related information becomes 
effective.
    (2) In the case of a post-effective amendment to a registration 
statement filed pursuant to paragraphs (b)(1)(i), (ii), (v), or (vii) 
of Rule 485 under the Securities Act [17 CFR 230.485(b)], the 
Interactive Data File must be submitted with the filing to which the 
Interactive Data Filing relates on or before the date the post-
effective amendment that contains the related information becomes 
effective.
    (b) All interactive data must be submitted in accordance with the 
specifications in the EDGAR Filer Manual.

PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

0
11. The general authority citation for part 274 continues to read as 
follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m, 
78n, 78o(d), 80a-8, 80a-24, 80a-26, 80a-29, and 80a-37, unless 
otherwise noted.
* * * * *
0
12. Amend Form N-1A (referenced in Sec. Sec.  239.15A and 274.11A) by:
0
a. Revising General Instruction C.3(g);
0
b. Revising Item 2;
0
c. Revising Item 4(a);
0
d. In Item 9, adding Instructions to Item 9(b)(2); and
0
e. Revising Item 27(b)(7)(i).
    The revisions and additions read as follows:

    Note: The text of Form N-1A does not, and this amendment will 
not, appear in the Code of Federal Regulations.

FORM N-1A

* * * * *

General Instructions

* * * * *
    C. * * *
    3. * * *
    (g) Interactive Data
    (i) An Interactive Data File (Sec.  232.11 of this chapter) is 
required to be submitted to the Commission in the manner provided by 
rule 405 of Regulation S-T [17 CFR 232.405] for any registration 
statement or post-effective amendment thereto on Form N-1A that 
includes or amends information provided in response to Items 2, 3, and 
4, and, as applicable, any information provided in response to Item 
9(b)(2) pursuant to Instructions 1 or 2.
    (A) * * *
    (B) * * *
    (ii) An Interactive Data File is required to be submitted to the 
Commission in the manner provided by rule 405 of Regulation S-T for any 
form of prospectus filed pursuant to

[[Page 36747]]

paragraphs (c) or (e) of rule 497 under the Securities Act [17 CFR 
230.497(c) or (e)] that includes information provided in response to 
Items 2, 3, 4, or Item 9(b)(2) pursuant to Instructions 1 or 2 that 
varies from the registration statement. The Interactive Data File must 
be submitted with the filing made pursuant to rule 497.
    (iii) An Interactive Data File is required to be submitted to the 
Commission in the manner provided by rule 405 of Regulation S-T for any 
information provided in response to Item 27(b)(7)(i)(B)-(E) of Form N-
1A that is included in any annual report filed on Form N-CSR.
    (iv) All interactive data must be submitted in accordance with the 
specifications in the EDGAR Filer Manual, and in such a manner that 
will permit the information for each Series and, for any information 
that does not relate to all of the Classes in a filing, each Class of 
the Fund to be separately identified.
* * * * *
    Item 2. * * *
    Disclose the Fund's investment objectives or goals. A Fund also may 
identify its type or category (e.g., that it is a Money Market Fund or 
a balanced fund).
    Instruction. If the Fund is an Environmental, Social, or Governance 
(``ESG'') Impact Fund, as defined in Item 4(a)(2)(i)(C), disclose the 
ESG impact that the Fund seeks to generate with its investments.
* * * * *
    Item 4. * * *
    (a) Principal Investment Strategies of the Fund.
    (1) Based on the information given in response to Item 9(b), 
summarize how the Fund intends to achieve its investment objectives by 
identifying the Fund's principal investment strategies (including the 
type or types of securities in which the Fund invests or will invest 
principally) and any policy to concentrate in securities of issuers in 
a particular industry or group of industries.
    (2) Environmental, Social and Governance (``E,'' ``S,'' or ``G,'' 
and collectively, ``ESG'') Considerations.
    (i) Definitions
    (A) ``Integration Fund'' is a Fund that considers one or more ESG 
factors alongside 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.
    (B) ``ESG-Focused Fund'' is a Fund is 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. An ESG-Focused Fund 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, as defined pursuant to rule 482 under the 
Securities Act of 1933 [17 CFR 230.482], or sales literature, as 
defined pursuant to rule 34b-1 under the Investment Company Act of 1940 
[17 CFR 270.34b-1], indicate that the Fund's investment decisions 
incorporate one or more ESG factors by using them as a significant or 
main consideration in selecting investments.
    (C) ``Impact Fund'' is an ESG-Focused Fund that seeks to achieve a 
specific ESG impact or impacts.
    (ii) If the Fund considers ESG factors as part of its principal 
investment strategies, based on the information given in response to 
Item 9(b)(2), provide the following disclosure:
    (A) If the Fund is an Integration Fund, summarize in a few 
sentences how the Fund incorporates ESG factors into the investment 
selection process, including what ESG factors the Fund considers.
    (B) If the Fund is an ESG-Focused Fund, disclose the following 
information in a tabular format in the order specified below.

[[Page 36748]]

[GRAPHIC] [TIFF OMITTED] TP17JN22.023

Instructions
    1. The table should precede other disclosure required by Item 4(a). 
Disclosure provided in the table does not need to be repeated as 
narrative disclosure in Item 4(a)(1).
    2. The Fund may replace the term ``ESG'' in each row with another 
term or phrase that more accurately describes the applicable ESG 
factors the Fund considers. The Fund also may replace the term ``the 
Fund'' in each row with an appropriate pronoun, such as ``we'' or 
``our.''
    3. The Fund's disclosure for each row should be brief and limited 
to the information required by the row's instruction. Funds should use 
lists and other text features designed to provide overviews. Electronic 
versions of the summary prospectus should include a hyperlink to the 
location where the information is described in greater detail.
    4. Overview of the Fund's [ESG] strategy. Provide a concise 
description in a few sentences of the ESG factor or factors that are 
the focus of the Fund's strategy. The Fund must also include the list 
shown in the table above of common ESG strategies in a ``check the 
box'' style and indicate with a check mark or other feature all that 
apply. The Fund should only check the box for proxy voting or 
engagement with issuers (or both, as applicable) if it is a significant 
means of implementing the Fund's ESG strategy, meaning that the Fund, 
as applicable, 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.
    5. How the Fund incorporates [ESG] factors in its investment 
decisions. Summarize how the Fund incorporates ESG factors into its 
investment process for evaluating, selecting, or excluding investments. 
The summary must include, as applicable:
    (a) An overview of how the Fund applies any inclusionary or 
exclusionary screen, including a brief explanation of 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 the inclusionary or exclusionary screen. For these purposes, an 
inclusionary screen is a method of selecting investments based on ESG 
criteria. An exclusionary screen starts with a given universe of 
investments and then excludes investment based on ESG criteria. If 
applicable, state what exceptions apply to the inclusionary or 
exclusionary screen. In addition, 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 explain briefly why the screen applies to less than 
100% of the portfolio.
    (b) An overview of how the Fund uses an internal methodology, 
third-party data provider, such as a scoring or ratings provider, or a 
combination of both.
    (c) The name of any index the Fund tracks and a brief description 
of the index and how the index utilizes ESG factors in determining its 
constituents.
    Information must be provided with respect to each applicable common 
ESG strategy (e.g., inclusionary and exclusionary screens) in a 
disaggregated manner if more than one applies. For example, 
inclusionary screening must be explained distinctly from exclusionary 
screening. Funds may use multiple rows or other text features to

[[Page 36749]]

clearly identify the disclosure related to each applicable common ESG 
strategy.
    6. How the Fund incorporates [ESG] factors in its investment 
decisions. As applicable, provide an overview of any third-party ESG 
frameworks that the Fund follows as part of its investment process.
    7. How the Fund incorporates [ESG] factors in its investment 
decisions. An Impact Fund must provide 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). State that the Fund reports 
annually on its progress in achieving the impact(s) in the Fund's 
annual report to shareholders.
    8. How the Fund votes proxies and/or engages with companies about 
[ESG] issues. The Fund must fill out this row regardless of whether the 
proxy voting or engagement boxes are checked. The Fund must describe 
briefly how the Fund engages or expects to engage with issuers on ESG 
issues (whether by voting proxies or otherwise). The Fund must state 
whether it has specific or supplemental policies and procedures that 
include one or more ESG considerations in voting proxies and, if so, 
state which considerations. If the Fund seeks to engage other than 
through shareholder voting, such as through meetings with or advocacy 
to management, the Fund must provide an overview of the objectives it 
seeks to achieve with the engagement strategy. If the Fund does not 
engage or expect to engage with issuers on ESG issues (whether by 
voting proxies or otherwise), the Fund must provide that disclosure in 
the row.
* * * * *
    Item 9. * * *
    (b) * * *
    (2) * * *
Instructions
    1. If the Fund is an Integration Fund, as defined in Item 
4(a)(2)(i)(A), describe how the Fund incorporates ESG factors into its 
investment selection process, including:
    (a) The ESG factors that the Fund considers.
    (b) If the Fund considers the GHG emissions of its portfolio 
holdings as an ESG factor in its investment selection process, describe 
how the Fund considers the GHG emissions of its portfolio holdings, 
including a description of the methodology the Fund uses for this 
purpose.
    2. If the Fund is an ESG-Focused Fund, as defined in Item 
4(a)(2)(i)(B), describe how the Fund incorporates ESG factors into its 
investment process, including:
    (a) The index methodology for any index the fund tracks, including 
any criteria or methodologies for selecting or excluding components of 
the index that are based on ESG factors.
    (b) Any internal methodology used and how that methodology 
incorporates ESG factors.
    (c) The scoring or ratings system of any third-party data provider, 
such as a scoring or ratings provider, used by the Fund or other third-
party provider of ESG-related data about companies, including how the 
Fund evaluates the quality of such data.
    (d) 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.
    (e) A description of any third-party ESG frameworks that the Fund 
follows as part of its investment process and how the framework applies 
to the Fund.
    (f) With regard to engagement, whether by voting proxies or 
otherwise, a description of specific objectives of such engagement, 
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.
* * * * *
    Item 27. * * *
    (b) * * *
    (7) * * *
    (i)(A) Discuss the factors that materially affected the Fund's 
performance during the most recently completed fiscal year, including 
the relevant market conditions and the investment strategies and 
techniques used by the Fund's investment adviser.
    (B) If the Fund is an Impact Fund as defined in Item 4(a)(2)(i)(C), 
summarize briefly the Fund's progress on achieving the impacts 
described in response to Instruction 7 of Item 4(a)(2) in both 
qualitative and quantitative terms during the reporting period, and the 
key factors that materially affected the Fund's ability to achieve the 
impact(s).
    (C) If the Fund is an ESG-Focused Fund, as defined in Item 
4(a)(2)(i)(B), and indicates that it uses proxy voting as a significant 
means of implementing its ESG strategy in response to Item C.3(j)(iii) 
on Form N-CEN, disclose the percentage of ESG voting matters during the 
reporting period for which the Fund voted in furtherance of the 
initiative. The Fund may limit this disclosure to voting matters 
involving the ESG factors the Fund incorporates into its investment 
decisions. The Fund, other than a business development company, also 
must include a cross reference, and for electronic versions of the 
shareholder report include a hyperlink, to its most recent complete 
voting record filed on Form N-PX.
    (D) If the Fund is an ESG-Focused fund, as defined in Item 
4(a)(2)(i)(B), and indicates that it uses ESG engagement as a 
significant means of implementing its ESG strategy in response to Item 
C.3(j)(iii) on Form N-CEN, discuss the Fund's progress on any key 
performance indicators. Disclose the number or percentage of issuers 
with which the Fund held ESG engagement meetings and total number of 
ESG engagement meetings. For this purpose, an ``ESG engagement 
meeting'' is a substantive discussion with management of an issuer 
advocating for one or more specific ESG goals to be accomplished over a 
given time period, where progress that is made toward meeting such goal 
is measurable, that is part of an ongoing dialogue with the issuer 
regarding this goal. If personnel of the Fund's adviser hold an ESG 
engagement meeting with an issuer on behalf of multiple Funds advised 
by the adviser, each Fund for which the meeting is within its ESG 
strategy may count the ESG engagement meeting.
    (E) If a Fund is an ESG-Focused fund, as defined in Item 
4(a)(2)(i)(B), and indicates that it considers environmental factors in 
response to Item C.3(j)(ii) on Form N-CEN, except for an ESG-Focused 
fund that affirmatively states in the ``ESG Strategy Overview'' table 
required by Item 4(a)(2)(ii)(B) that it does not consider the 
greenhouse gases (``GHG'') emissions of the portfolio companies in 
which it invests, disclose the following aggregated GHG emissions 
metrics of the portfolio for the reporting period: (1) Carbon Footprint 
and (2) Weighted Average Carbon Intensity. Calculate these metrics 
using the methodologies in the instructions below, and provide all 
related disclosures.
Instructions
1. Computation of Aggregated GHG Emissions
    (a) Carbon Footprint: Disclose the total GHG emissions associated 
with the Fund's portfolio, normalized by the Fund's net asset value and 
expressed in

[[Page 36750]]

tons of carbon dioxide equivalent (``CO2e'') per million 
dollars invested in the Fund. Calculate the Portfolio Carbon Footprint 
as follows for each portfolio holding:
[GRAPHIC] [TIFF OMITTED] TP17JN22.024

    (i) Calculate the enterprise value of the portfolio company. 
Enterprise value is the sum of the portfolio company's equity value and 
the book value of its short- and long-term debt.
    (ii) Calculate the GHG emissions associated with each portfolio 
holding by dividing the current value of the holding by the enterprise 
value of the portfolio company. Then, multiply the resulting value by 
the portfolio company's Scope 1 and Scope 2 emissions.
    (iii) Add the GHG emissions associated with all portfolio holdings, 
then divide the resulting amount by the Fund's net asset value to 
derive the Fund's carbon footprint.
    (b) Weighted Average Carbon Intensity: Disclose the Fund's exposure 
to carbon-intensive companies, expressed in tons of CO2e per 
million dollars of the portfolio company's total revenue, calculated as 
follows for each portfolio holding:
[GRAPHIC] [TIFF OMITTED] TP17JN22.025

    (i) Calculate the portfolio weight of each portfolio holding by 
dividing the current value of the portfolio holding by the current net 
asset value of the Fund's whole portfolio.
    (ii) Calculate the GHG emissions of each portfolio company by 
dividing the portfolio company's Scope 1 and Scope 2 emissions by the 
portfolio company's total revenue.
    (iii) Multiply the portfolio weight of each portfolio holding by 
the GHG emissions of each portfolio company. The sum of these values 
for all portfolio holdings is the Fund's weighted average carbon 
intensity.
    (c) Scope 3 Emissions: If the fund holds investments in portfolio 
companies that disclose their Scope 3 emissions, disclose the Scope 3 
emissions associated with the Fund's portfolio, to the extent Scope 3 
emissions are publicly available as provided in Instruction (d)(x) of 
this Item, using the Carbon Footprint methodology described in 
paragraph (a) of this Item.
    (i) Disclose Scope 3 emissions separately for each industry sector 
in which the Fund invests, as well as the percentage of the fund's net 
asset value invested in each industry sector.
    (d) GHG Metric Calculation Data: To calculate the GHG emissions as 
discussed in paragraphs (a), (b) and (c) above, apply the following 
definitions, data inputs, and assumptions:
    (i) CO2e means the common unit of measurement to 
indicate the global warming potential of each greenhouse gas, expressed 
in terms of the global warming potential of one unit of carbon dioxide.
    (ii) Global warming potential means a factor describing the global 
warming impacts of different greenhouse gases. It is a measure of how 
much energy will be absorbed in the atmosphere over a specified period 
of time as a result of the emission of one ton of a greenhouse gas, 
relative to the emissions of one ton of carbon dioxide.
    (iii) Greenhouse gases (``GHG'') means carbon dioxide, methane, 
nitrous oxide, nitrogen trifluoride, hydrofluorocarbons, 
perfluorocarbons, and sulfur hexafluoride.
    (iv) GHG emissions means direct and indirect emissions of 
greenhouse gases expressed in metric tons of CO2e, of which:
    (A) Direct emissions are GHG emissions from sources that are owned 
or controlled by a portfolio company.
    (B) Indirect emissions are GHG emissions that result from the 
activities of the portfolio company, but occur at sources not owned or 
controlled by the portfolio company.
    (v) Scope 1 emissions are direct GHG emissions from operations that 
are owned or controlled by a portfolio company.
    (vi) Scope 2 emissions are indirect GHG emissions from the 
generation of purchased or acquired electricity, steam, heat, or 
cooling that is consumed by operations owned or controlled by a 
portfolio company.
    (vii) Scope 3 emissions are all indirect GHG emissions not 
otherwise included in a portfolio company's Scope 2 emissions, which 
occur in the upstream and downstream activities of a portfolio 
company's value chain.
    (viii) Value chain means the upstream and downstream activities 
related to a portfolio company's operations. Upstream activities in 
connection with a value chain may include activities by a party other 
than the portfolio company that relate to the initial stages of a 
portfolio company's production of a good or service (e.g., materials 
sourcing, materials processing, and supplier activities). Downstream 
activities in connection with a value chain may include activities by a 
party other than the portfolio company that relate to processing 
materials into a finished product and delivering it or providing a 
service to the end user (e.g., transportation and distribution, 
processing of sold products, use of sold products, end of life 
treatment of sold products, and investments).
    (ix) A portfolio company or portfolio holding means a Fund's 
investment in, including an indirect investment through a derivatives 
instrument:
    (A) An issuer that is engaged in or operates a business or activity 
that generates GHG emissions; or

[[Page 36751]]

    (B) An investment company, or entity that would be an investment 
company under section 3(a) of the Investment Company Act but for the 
exceptions to that definition provided for in sections 3(c)(1) and 
3(c)(7) of the Investment Company Act, that invests in issuers 
described in paragraph A of this subsection, except for an investment 
in reliance on Sec.  270. 12d1-1.
    (x) Use the values necessary to calculate the portfolio company's 
equity value, total debt, and total revenue: (1) from the portfolio 
company's most recent public report required to be filed with the 
Commission pursuant to the Securities Exchange Act or the Securities 
Act (``regulatory report'') containing such information) or, (2) absent 
a regulatory report, based on information provided by the portfolio 
company. If a portfolio company's total revenue is reported in currency 
other than US dollars, convert the reported revenue into US dollars 
using the exchange rate as of the date of the relevant regulatory 
report providing the company's revenue.
    (xi) Sources of portfolio company emissions data.
    (A) If the portfolio company reports Scope 1, Scope 2, and Scope 3 
emissions in a regulatory report, the Fund must use the Scope 1, Scope 
2, or Scope 3 emissions in the portfolio company's most recent 
regulatory report.
    (B) If the portfolio company does not report its Scope 1, Scope 2, 
and Scope 3 emissions as described in subsection 1 of this instruction, 
the Fund must use Scope 1, Scope 2, or Scope 3 emissions that are 
publicly provided by the portfolio company.
    (C) If the portfolio company does not report or otherwise publicly 
provide its Scope 1 and Scope 2 emissions, use a good faith estimate of 
the portfolio company's Scope 1 and Scope 2 emissions. Discuss briefly 
how the Fund calculates such estimates, including the sources of data 
for determining such estimates, and the percentage of the Fund's 
aggregated GHG emissions for which the Fund used estimates rather than 
reported emissions.
    (xii) Use the value of each portfolio holding and the net asset 
value of the portfolio as of the end of the Fund's most recently 
completed fiscal year.
    (xiii) If a Fund obtains exposure to a portfolio company by 
entering into a derivatives instrument, the derivatives instrument will 
be treated as an equivalent position in the securities of the portfolio 
company that are referenced in the derivatives instrument. A 
derivatives instrument for this purpose means any swap, security-based 
swap, futures contract, forward contract, option, any combination of 
the foregoing, or any similar instrument.
* * * * *
0
13. Amend Form N-2 (referenced in Sec. Sec.  239.14 and 274.11a-1) by:
0
a. Revising General Instructions I.2 and 3, redesignating I.5 as I.6, 
and adding new I.5;
0
b. Adding Item 8.2.e; and
0
c. Revising Instructions 4.g.(1) and 10 to Item 24.
    The revisions and additions read as follows:

    Note: The text of Form N-2 does not, and this amendment will 
not, appear in the Code of Federal Regulations.

FORM N-2

* * * * *

General Instructions

* * * * *

I. Interactive Data

    * * *
    2. An Interactive Data File is required to be submitted to the 
Commission in the manner provided by Rule 405 of Regulation S-T for any 
registration statement or post-effective amendment thereto filed on 
Form N-2 or for any form of prospectus filed pursuant to Rule 424 under 
the Securities Act [17 CFR 230.424] that includes or amends information 
provided in response to Items 3.1, 4.3, 8.2.b, 8.2.d, 8.2.e, 8.3.a, 
8.3.b, 8.5.b, 8.5.c, 8.5.e, 10.1.a-d, 10.2.a-c, 10.2.e, 10.3, or 10.5. 
The Interactive Data File must be submitted either with the filing, or 
as an amendment to the registration statement to which it relates, on 
or before the date the registration statement or post-effective 
amendment that contains the related information becomes effective. 
Interactive Data Files must be submitted with the filing made pursuant 
to Rule 424.
    3. If a Registrant is filing a registration statement pursuant to 
General Instruction A.2, an Interactive Data File is required to be 
submitted to the Commission in the manner provided by Rule 405 of 
Regulation S-T for any of the documents listed in General Instruction 
F.3.(a) or General Instruction F.3.(b) that include or amend 
information provided in response to Items 3.1, 4.3, 8.2.b., 8.2.d, 
8.2.e, 8.3.a, 8.3.b, 8.5.b, 8.5.c, 8.5.e, 10.1.a-d, 10.2.a-c, 10.2.e, 
10.3, or 10.5. The Interactive Data File must be submitted with the 
filing of the document(s) listed in General Instruction F.3.(a) or 
General Instruction F.3.(b).
    * * *
    5. An Interactive Data File is required to be submitted to the 
Commission in the manner provided by Rule 405 of Regulation S-T for any 
information provided in response to Instructions 4.g.(1)(B)-(E) or 10 
to Item 24 of Form N-2 that is included in any annual report filed on 
Form N-CSR or Form 10-K.
* * * * *

Part A--Information Required in a Prospectus

* * * * *
    Item 8. * * *
    2. * * *
    e. Environmental, Social, and Governance (``E,'' ``S,'' or ``G,'' 
and collectively, ``ESG'') Considerations
    (1) Definitions.
    (A) ``Integration Fund'' is a Fund that considers one or more ESG 
factors alongside 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.
    (B) ``ESG-Focused Fund'' is 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. An ESG-Focused Fund 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, as defined pursuant to rule 482 under the 
Securities Act of 1933 [17 CFR 230.482], or sales literature, as 
defined pursuant to rule 34b-1 under the Investment Company Act of 1940 
[17 CFR 270.34b-1], indicate that the Fund's investment decisions 
incorporate one or more ESG factors by using them as a significant or 
main consideration in selecting investments.
    (C) ``Impact Fund'' is an ESG-Focused Fund that seeks to achieve a 
specific ESG impact or impacts.
    (2) If the Fund considers ESG factors as part of its principal 
portfolio emphasis, provide the following disclosure:
    (A) If the Fund is an Integration Fund, summarize in a few 
sentences how the Fund incorporates ESG factors into the investment 
selection process, including what ESG factors the Fund considers.
    (B) If the Fund is an ``ESG-Focused Fund,'' disclose the following 
information in a tabular format in the order specified below.

[[Page 36752]]

[GRAPHIC] [TIFF OMITTED] TP17JN22.026

Instructions
    1. The table should precede other disclosure required by Item 8.2.
    2. The Fund may replace the term ``ESG'' in each row with another 
term or phrase that more accurately describes the applicable ESG 
factors the Fund considers. The Fund also may replace the term ``the 
Fund'' in each row with an appropriate pronoun, such as ``we'' or 
``our.''
    3. The Fund's disclosure for each row should be brief and limited 
to the information required by the row's instruction. Funds should use 
lists and other text features designed to provide overviews. Electronic 
versions of the table should include a hyperlink to the location in the 
filing where the information is described in greater detail.
    4. Overview of the Fund's [ESG] strategy. Provide a concise 
description in a few sentences of the ESG factor or factors that are 
the focus of the Fund's strategy. The Fund must also include the list 
shown in the table above of common ESG strategies in a ``check the 
box'' style and indicate with a check mark or other feature all that 
apply. The Fund should only check the box for proxy voting or 
engagement with issuers (or both, as applicable) if it is a significant 
means of implementing the Fund's ESG strategy, meaning that the Fund, 
as applicable, 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.
    5. How the Fund incorporates [ESG] factors in its investment 
decisions. Summarize how the Fund incorporates ESG factors into its 
investment process for evaluating, selecting, or excluding investments. 
The summary must include, as applicable:
    a. An overview of how the Fund applies any inclusionary or 
exclusionary screen, including a brief explanation of the factors the 
screen applies, such as particular industries or business activities it 
seeks to include or exclude. For these purposes, an inclusionary screen 
is a method of selecting investments based on ESG criteria. Conversely, 
a fund applying an exclusionary screen starts with a given universe of 
investments and then excludes investment based on ESG criteria. If 
applicable, state what exceptions apply to the inclusionary or 
exclusionary screen. In addition, 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 explain briefly why the screen applies to less than 
100% of the portfolio.
    b. An overview of how the Fund uses an internal methodology, third-
party data provider, such as a scoring or ratings provider, or a 
combination of both.
    c. The name of any index the Fund tracks and a brief description of 
the index and how the index utilizes ESG factors in determining its 
constituents.
    Information must be provided with respect to each applicable common 
ESG strategy (e.g., inclusionary and exclusionary screens) in a 
disaggregated manner if more than one applies. For example, 
inclusionary screening must be explained distinctly from exclusionary 
screening. Funds may use multiple rows or other text features to

[[Page 36753]]

clearly identify the disclosure related to each applicable common ESG 
strategy.
    6. How the Fund incorporates [ESG] factors in its investment 
decisions. As applicable, provide an overview of any third-party ESG 
frameworks that the Fund follows as part of its investment process.
    7. How the Fund incorporates [ESG] factors in its investment 
decisions. An Impact Fund must provide 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)). State that the Fund 
reports annually on its progress in achieving the impact(s) in the 
Fund's annual report to shareholders or annual report on Form 10-K as 
applicable.
    8. How the Fund votes proxies and/or engages with companies about 
[ESG] issues. The Fund must fill out this row regardless of whether the 
proxy voting or engagement boxes are checked. The Fund must describe 
briefly how the Fund engages or expects to engage with issuers on ESG 
issues (whether by voting proxies or otherwise). The Fund must state 
whether it has specific or supplemental policies and procedures that 
include one or more ESG considerations in voting proxies and, if so, 
state which considerations. If the Fund seeks to engage other than 
through shareholder voting, such as through meetings with or advocacy 
to management, the Fund must provide an overview of the objectives it 
seeks to achieve with the engagement strategy. If the Fund does not 
engage or expect to engage with issuers on ESG issues (whether by 
voting proxies or otherwise), the Fund must provide that disclosure in 
the row.
    9. Supplemental ESG disclosure. As applicable, the following items 
must be disclosed by Integration Funds or ESG-Focused Funds to 
supplement the disclosures in the ESG Strategy Overview Table, to the 
extent not discussed in the Table. However, such disclosures do not 
need to precede other disclosures in Item 8.2.
    a. If the Fund is an Integration Fund, describe how the Fund 
incorporates ESG factors into its investment selection process, 
including:
    (1) The ESG factors that the Fund considers.
    (2) If the Fund considers the GHG emissions of its portfolio 
holdings as an ESG factor in its investment selection process, describe 
how the Fund considers the GHG emissions of its portfolio holdings, 
including a description of the methodology the Fund uses for this 
purpose.
    b. If the Fund is an ESG-Focused Fund, describe how the Fund 
incorporates ESG factors into its investment process, including:
    (1) The index methodology for any index the fund tracks, including 
any criteria or methodologies for selecting or excluding components of 
the index that are based on ESG factors.
    (2) Any internal methodology used and how that methodology 
incorporates ESG factors.
    (3) The scoring or ratings system of any third-party data provider, 
such as a scoring or ratings provider, used by the Fund or other third-
party provider of ESG-related data about companies, including how the 
Fund evaluates the quality of such data.
    (4) 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.
    (5) A description of any third-party ESG frameworks that the Fund 
follows as part of its investment process and how the framework applies 
to the Fund.
    (6) With regard to engagement, whether by voting proxies or 
otherwise, a description of specific objectives of such engagement, 
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.
    10. If the Fund is an Impact Fund, where the Fund first describes 
its objective in the filing, disclose the ESG impact that the Fund 
seeks to generate with its investments.
* * * * *

Part B--Information Required in a Statement of Additional Information

* * * * *
Item 24. Financial Statements
* * * * *
Instructions
* * * * *
    4. * * *
* * * * *
    g. Management's Discussion of Fund Performance. Disclose the 
following information:
    (1)(A) Discuss the factors that materially affected the Fund's 
performance during the most recently completed fiscal year, including 
the relevant market conditions and the investment strategies and 
techniques used by the Fund. The information presented may include 
tables, charts, and other graphical depictions.
    (B) If the Fund is an Impact Fund as described in Item 
8.2.e.(1)(C), summarize briefly the Fund's progress on achieving the 
impacts described in response to Instruction 7 of Item 8.2.e in both 
qualitative and quantitative terms during the reporting period, and the 
key factors that materially affected the Fund's ability to achieve the 
impact(s).
    (C) If the Fund is an ESG-Focused fund, as defined in Item 
8.2.e.(1)(B), and indicates that it uses proxy voting as a significant 
means of implementing its ESG strategy in response to Item C.3(j)(iii) 
on Form N-CEN, disclose the percentage of ESG voting matters during the 
reporting period for which the Fund voted in furtherance of the 
initiative. The Fund may limit this disclosure to voting matters 
involving the ESG factors the Fund incorporates into its investment 
decisions. The Fund, other than a business development company, also 
must include a cross reference, and for electronic versions of the 
shareholder report include a hyperlink, to its most recent complete 
voting record filed on Form N-PX.
    (D) If the Fund is an ESG-Focused fund, as defined in Item 
8.2.e.(1)(B), and indicates that it uses ESG engagement as a 
significant means of implementing its ESG strategy in response to Item 
C.3(j)(iii) on Form N-CEN, discuss the Fund's progress on any key 
performance indicators. Disclose the number or percentage of issuers 
with which the Fund held ESG engagement meetings and total number of 
ESG engagement meetings. For this purpose, an ``ESG engagement 
meeting'' is a substantive discussion with management of an issuer 
advocating for one or more specific ESG goals to be accomplished over a 
given time period, where progress that is made toward meeting such goal 
is measurable, that is part of an ongoing dialogue with the issuer 
regarding this goal. If personnel of the Fund's adviser hold an ESG 
engagement meeting with an issuer on behalf of multiple Funds advised 
by the adviser, each Fund for which the meeting is within its ESG 
strategy may count the ESG engagement meeting.
    (E) If the Fund is an ESG-Focused fund, as defined in Item 
8.2.e.(1)(B), and indicates that it considers environmental factors in 
response to Item C.3(j)(ii) on Form N-CEN, except for an ESG-Focused 
fund that affirmatively states in the ``ESG Strategy Overview'' table 
required by Item

[[Page 36754]]

4(a)(2)(ii)(B) that it does not consider the greenhouse gases (``GHG'') 
emissions of the portfolio companies in which it invests, disclose the 
following aggregated GHG emissions metrics of the portfolio for the 
reporting period: (1) Carbon Footprint and (2) Weighted Average Carbon 
Intensity. Calculate these metrics using the methodologies in the 
instructions below, and provide all related disclosures.
Instructions
1. Computation of Aggregated GHG Emissions
    (a) Carbon Footprint: Disclose the total GHG emissions associated 
with the Fund's portfolio, normalized by the Fund's net asset value and 
expressed in tons of carbon dioxide equivalent (``CO2e'') 
per million dollars invested in the Fund. Calculate the Portfolio 
Carbon Footprint as follows for each portfolio holding:
[GRAPHIC] [TIFF OMITTED] TP17JN22.027

    (i) Calculate the enterprise value of the portfolio company. 
Enterprise value is the sum of the portfolio company's equity value and 
the book value of its short- and long-term debt.
    (ii) Calculate the GHG emissions associated with each portfolio 
holding by dividing the current value of the holding by the enterprise 
value of the portfolio company. Then, multiply the resulting value by 
the portfolio company's Scope 1 and Scope 2 emissions.
    (iii) Add the GHG emissions associated with all portfolio holdings, 
then divide the resulting amount by the Fund's net asset value to 
derive the Fund's carbon footprint
    (b) Weighted Average Carbon Intensity: Disclose the Fund's exposure 
to carbon-intensive companies, expressed in tons of CO2e per 
million dollars of the portfolio company's total revenue, calculated as 
follows for each portfolio holding:
[GRAPHIC] [TIFF OMITTED] TP17JN22.028

    (i) Calculate the portfolio weight of each portfolio holding by 
dividing the current value of the portfolio holding by the current net 
asset value of the Fund's whole portfolio.
    (ii) Calculate the GHG emissions of each portfolio company by 
dividing the portfolio company's Scope 1 and Scope 2 emissions by the 
portfolio company's total revenue.
    (iii) Multiply the portfolio weight of each portfolio holding by 
the GHG emissions of each portfolio company. The sum of these values 
for all portfolio holdings is the Fund's weighted average carbon 
intensity.
    (c) Scope 3 Emissions: If the fund holds investments in portfolio 
companies that disclose their Scope 3 emissions, disclose the Scope 3 
emissions associated with the Fund's portfolio, to the extent Scope 3 
emissions are publicly available as provided in Instruction (d)(x) of 
this Item, using the Carbon Footprint methodology described in 
paragraph (a) of this Item.
    (i) Disclose Scope 3 emissions separately for each industry sector 
in which the Fund invests, as well as the percentage of the fund's net 
asset value invested in each industry sector.
    (d) GHG Metric Calculation Data: To calculate the GHG emissions as 
discussed in paragraphs (a), (b) and (c) above, apply the following 
definitions, data inputs, and assumptions:
    (i) CO2e means the common unit of measurement to 
indicate the global warming potential of each greenhouse gas, expressed 
in terms of the global warming potential of one unit of carbon dioxide.
    (ii) Global warming potential means a factor describing the global 
warming impacts of different greenhouse gases. It is a measure of how 
much energy will be absorbed in the atmosphere over a specified period 
of time as a result of the emission of one ton of a greenhouse gas, 
relative to the emissions of one ton of carbon dioxide.
    (iii) Greenhouse gases (``GHG'') means carbon dioxide; methane; 
nitrous oxide; nitrogen trifluoride; hydrofluorocarbons; 
perfluorocarbons; and sulfur hexafluoride.
    (iv) GHG emissions means direct and indirect emissions of 
greenhouse gases expressed in metric tons of CO2e, of which:
    (A) Direct emissions are GHG emissions from sources that are owned 
or controlled by a portfolio company.
    (B) Indirect emissions are GHG emissions that result from the 
activities of the portfolio company, but occur at sources not owned or 
controlled by the portfolio company.
    (v) Scope 1 emissions are direct GHG emissions from operations that 
are owned or controlled by a portfolio company.
    (vi) Scope 2 emissions are indirect GHG emissions from the 
generation of purchased or acquired electricity, steam, heat, or 
cooling that is consumed by operations owned or controlled by a 
portfolio company.
    (vii) Scope 3 emissions are all indirect GHG emissions not 
otherwise included in a portfolio company's Scope 2 emissions, which 
occur in the upstream and downstream activities of a portfolio 
company's value chain.
    (viii) Value chain means the upstream and downstream activities 
related to a portfolio company's operations. Upstream activities in 
connection with a value chain may include activities by a party other 
than the portfolio company that relate to the initial stages of a 
portfolio company's production of a good or service (e.g., materials 
sourcing, materials processing, and supplier activities). Downstream 
activities in

[[Page 36755]]

connection with a value chain may include activities by a party other 
than the portfolio company that relate to processing materials into a 
finished product and delivering it or providing a service to the end 
user (e.g., transportation and distribution, processing of sold 
products, use of sold products, end of life treatment of sold products, 
and investments).
    (ix) A portfolio company or portfolio holding means a Fund's 
investment in, including an indirect investment through a derivatives 
instrument:
    (A) An issuer that is engaged in or operates a business or activity 
that generates GHG emissions; or
    (B) An investment company, or entity that would be an investment 
company under section 3(a) of the Investment Company Act but for the 
exceptions to that definition provided for in sections 3(c)(1) and 
3(c)(7), that invests in issuers described in paragraph A of this 
subsection, except for an investment in reliance on Sec.  270. 12d1-1.
    (x) Use the values necessary to calculate the portfolio company's 
equity value, total debt, and total revenue: (1) from the portfolio 
company's most recent public report required to be filed with the 
Commission pursuant to the Exchange Act or the Securities Act 
(``regulatory report'') containing such information) or, (2) absent a 
regulatory report, based on information provided by the portfolio 
company. If a portfolio company's total revenue is reported in currency 
other than U.S. dollars, convert the reported revenue into US dollars 
using the exchange rate as of the date of the relevant regulatory 
report providing the company's revenue.
    (xi) Sources of portfolio company emissions data.
    (A) If the portfolio company reports Scope 1, Scope 2, and Scope 3 
emissions in a regulatory report, the Fund must use the Scope 1, Scope 
2, or Scope 3 emissions in the portfolio company's most recent 
regulatory report.
    (B) If the portfolio company does not report its Scope 1, Scope 2, 
and Scope 3 emissions as described in subsection 1 of this instruction, 
the Fund must use Scope 1, Scope 2, or Scope 3 emissions that are 
publicly provided by the portfolio company.
    (C) If the portfolio company does not report or otherwise publicly 
provide its Scope 1 and Scope 2 emissions, use a good faith estimate of 
the portfolio company's Scope 1 and Scope 2 emissions. Discuss briefly 
how the Fund calculates such estimates, including the sources of data 
for determining such estimates, and the percentage of the Fund's 
aggregated GHG emissions for which the Fund used estimates rather than 
reported emissions.
    (xii) Use the value of each portfolio holding and the net asset 
value of the portfolio as of the end of the Fund's most recently 
completed fiscal year.
    (xiii) If a Fund obtains exposure to a portfolio company by 
entering into a derivatives instrument, the derivatives instrument will 
be treated as an equivalent position in the securities of the portfolio 
company that are referenced in the derivatives instrument. A 
derivatives instrument for this purpose means any swap, security-based 
swap, futures contract, forward contract, option, any combination of 
the foregoing, or any similar instrument.
* * * * *
    10. Business Development Companies.
    a. Every annual report filed under the Exchange Act by a business 
development company must contain the information required by 
Instruction 4.b, and, as applicable, Instructions 4.g(1)(B)-(E) and 4.h 
to this Item.
    b. The requirement to respond to Instructions 4.g(1)(C)-(E) is 
predicated on responses to certain disclosures required by Item C.3(j) 
of Form N-CEN. For purposes of this Item, provide the information 
required by Instructions 4.g(1)(C)-(E) to the extent that a business 
development company would have supplied the predicate responses to Item 
C.3(j) were it required to file Form N-CEN.
    c. Any information provided in response to Instructions 4.g(1)(B)-
(E) to this Item that appears in a business development company's 
annual report must be included with the disclosure required by Item 7 
of Form 10-K (Management's Discussion and Analysis of Financial 
Condition and Results of Operations).
    d. Every annual report filed on Form 10-K that contains the 
information required by Instruction 4.g(1)(E) to this Item also must 
contain the information required by Item 7 of Form N-CSR (Disclosure of 
Greenhouse Gas (GHG) Emissions Methodologies and Assumptions).
* * * * *
0
14. Amend Form N-8B-2 (referenced in Sec.  274.12) by:
0
a. In the heading of ``2. Preparation and filing of Registration 
Statement'' under the General Instructions, adding a new instruction 
(l); and
0
b. Revising the instructions to II.11.
    The addition and revisions read as follows:

    Note: The text of Form N-8B-2 does not, and this amendment will 
not, appear in the Code of Federal Regulations.

FORM N-8B-2

* * * * *

General Instructions for Form N-8B-2

* * * * *
    2. * * *

(l). Interactive Data

    (1) An Interactive Data File as defined in Rule 11 of Regulation S-
T [17 CFR 232.11] is required to be submitted to the Commission in the 
manner provided by Rule 405 of Regulation S-T [17 CFR 232.405] for any 
registration statement on Form N-8B-2 that includes information 
provided in response to Item 11 pursuant to Instruction 2. The 
Interactive Data File must be submitted with the filing to which it 
relates on the date such filing becomes effective.
    (2) All interactive data must be submitted in accordance with the 
specifications in the EDGAR Filer Manual.
* * * * *

General Description of the Trust and Securities of the Trust

* * * * *
    11. * * *

Instructions

    1. The registrant need only disclose information with respect to an 
issuer that derived more than 15% of its gross revenues from the 
business of a broker, a dealer, an underwriter, or an investment 
adviser during its most recent fiscal year. If the registrant has 
issued more than one class or series of securities, the requested 
information must be disclosed for the class or series that has 
securities that are being registered.
    2. If one or more environmental, social, or governance (``E,'' 
``S,'' or ``G,'' and collectively, ``ESG'') factors are used to select 
the portfolio securities, describe briefly how such factors are 
incorporated into the investment selection process, including which ESG 
factors are considered.
* * * * *
0
15. Amend Form N-CEN (referenced in Sec. Sec.  249.330 and 274.101) by:
0
a. Redesignating Items C.3.b.i. through C.3.b.iv. as Items C.3.b.ii. 
through C.3.b.v., and
0
b. Adding new Items C.3.b.i. and C.3.j.
    The additions read as follows:

    Note: The text of Form N-CEN does not, and this amendment will 
not, appear in the Code of Federal Regulations.

FORM N-CEN

* * * * *

[[Page 36756]]

Part C: Additional Questions for Management Investment Companies

    Item C.3. * * *
    b. * * *
    i. Full name and LEI, if any, or provide and describe other 
identifying number of index: ____
* * * * *
    j. Funds that incorporate Environmental, Social and/or Governance 
(``E,'' ``S,'' or ``G,'' and collectively, ``ESG'') factors: __
    i. Does the Fund provide the disclosure required by Item 
4(a)(2)(ii) of Form N-1A or Item 8.2.e.(2)(B) of Form N-2? [Y/N] If 
yes,
    1. Is the Fund an ``Integration Fund'' as described in Item 
4(a)(2)(i)(A) of Form N-1A or Item 8.2.(e)(1)(A) (A)of Form N-2? [Y/N]
    2. Is the Fund an ``ESG-Focused Fund'' as described in Item 
4(a)(2)(i)(B) of Form N-1A or Item 8.2.e.(1)(B) of Form N-2? [Y/N] If 
yes,
    A. Is the Fund an ``Impact Fund'' as described in Item 
4(a)(2)(i)(C) of Form N-1A or Item 8.2.e.(1)(C) of Form N-2? [Y/N]
    ii. Which of the following factors does the Fund consider:
    1. Environmental factors? [Y/N]
    2. Social factors? [Y/N]
    3. Governance factors? [Y/N]
    iii. Which of the following does the Fund engage in to implement 
its ESG strategy:

1. Tracks an index? [Y/N]
2. Applies an inclusionary screen? [Y/N]
3. Applies an exclusionary screen? [Y/N]
4. Proxy voting? [Y/N]
5. Engagement with issuers? [Y/N]
6. Other? [Y/N]

    iv. Does the Fund consider ESG information or scores from ESG 
consultant(s) or other ESG service provider(s)? [Y/N] If yes,
    1. Full name(s) and LEI, if any, or provide and describe other 
identifying number of ESG consultant(s) or other ESG service 
provider(s): ____
    2. Is the ESG consultant(s) or other service provider(s) an 
affiliated person of the Fund? [Y/N]
    v. Does the Fund follow any third-party ESG framework(s)? [Y/N] If 
yes,
    1. Name(s) of the framework(s): ____
* * * * *
0
16. Amend Form N-CSR (referenced in Sec. Sec.  249.331 and 274.128) by:
0
a. Revising Instruction C.4;
0
b. Revising the second sentence of Item 2.(c);
0
c. Revising Item 2.(f)(1);
0
d. Redesignating Items 7 through 13 as Items 8 through 14;
0
e. Adding a new Item 7; and
0
f. In Certifications, revising the introductory text of Instruction to 
paragraph (a)(2); and
0
g. Revising the heading ``Instructions to Item 13'' to read 
``Instructions to Item 14.''.
    The revisions and addition read as follows:

    Note: The text of Form N-CSR does not, and this amendment will 
not, appear in the Code of Federal Regulations.

FORM N-CSR

* * * * *

General Instructions

* * * * *
    C. * * *
    4. Interactive Data File. An Interactive Data File as defined in 
Rule 11 of Regulation S-T [17 CFR 232.11] is required to be submitted 
to the Commission in the manner provided by Rule 405 of Regulation S-T 
[17 CFR 232.405] by a management investment company registered under 
the Investment Company Act of 1940 (15 U.S.C. 80a et seq.) to the 
extent required by Rule 405 of Regulation S-T for information provided 
in response to, as applicable:
    (a) Item 27(b)(7)(i)(B)-(E) of Form N-1A included in any annual 
report filed on this Form;
    (b) Items 3.1, 4.3, 8.2.b, 8.2.d, 8.2.e, 8.3.a, 8.3.b, 8.5.b, 
8.5.c, 8.5.e, 10.1.a-d, 10.2.a-c, 10.2.e, 10.3, and 10.5 of Form N-2 
included in any annual report filed on this Form by a Registrant that 
is filing a registration statement pursuant to General Instruction A.2 
of Form N-2;
    (c) Instructions 4.g.(1)(B)-(E) to Item 24 of Form N-2 included in 
any annual report filed on this Form; and
    (d) Item 7 of this Form.
* * * * *
    Item 2. * * *
    (c) * * * The registrant must file a copy of any such amendment as 
an exhibit pursuant to Item 14(a)(1), unless the registrant has elected 
to satisfy paragraph (f) of this Item by posting its code of ethics on 
its website pursuant to paragraph (f)(2) of this Item, or by 
undertaking to provide its code of ethics to any person without charge, 
upon request, pursuant to paragraph (f)(3) of this Item.
* * * * *
    (f) * * *
    (1) File with the Commission, pursuant to Item 14(a)(1), a copy of 
its code of ethics that applies to the registrant's principal executive 
officer, principal financial officer, principal accounting officer or 
controller, or persons performing similar functions, as an exhibit to 
its annual report on this Form N-CSR;
* * * * *

Item 7. Disclosure of Greenhouse Gas (GHG) Emissions Methodologies and 
Assumptions

    If a registrant is required to disclose the aggregated GHG 
emissions of its portfolio in its report transmitted to stockholders 
pursuant to Rule 30e-1 under the Act, the registrant must provide 
descriptions of any assumptions and methodologies it applied in 
calculating the portfolio's GHG emissions, any limitations associated 
with the registrant's assumptions and methodologies, and explanations 
of any good faith estimates of GHG emissions the registrant was 
required to make in response to Item 27(b)(7)(i)(E) of Form N-1A or 
Instruction 4.g.(1)(E) to Item 24 of Form N-2.
* * * * *

Certifications

* * * * *

Instruction to Paragraph (a)(2)

    Until the date that the registrant has filed its first report on 
Form N-PORT (17 CFR 270.150), in the certification required by Item 
14(a)(2), the registrant's certifying officers must certify that they 
have disclosed in the report any change in the registrant's internal 
control over financial reporting that occurred during the registrant's 
most recent fiscal quarter that has materially affected, or is 
reasonably likely to materially affect, the registrant's internal 
control over financial reporting.
* * * * *

Instructions to Item 14

* * * * *

PART 279--FORMS PRESCRIBED UNDER THE INVESTMENT ADVISERS ACT OF 
1940

0
17. The authority citation for part 279 continues to read as follows:

    Authority: The Investment Advisers Act of 1940, 15 U.S.C. 80b-1, 
et seq., Pub. L. 111-203, 124 Stat. 1376.

0
18. Form ADV (referenced in Sec.  279.1) is amended by:
0
a. In Part 1A, Item 5, adding paragraphs K.(5), K.(6), and M.;
0
b. In Part 1A, Item 6, adding paragraph A.(15);
0
c. In Part 1A, Item 7, adding paragraph A.(17);
0
d. In Part 1A, Schedule D, adding Section 6.A.(15);

[[Page 36757]]

0
e. In Part 1A Schedule D, adding 7.A.5.(q);
0
f. In Part 1A Schedule D, adding Section 7.B.(1)A.29.;
0
g. In Part 2A Item 8, adding paragraph D.;
0
h. In Part 2A, adding Item 10.C.12.;
0
i. In Part 2A, revising 17.A.;
0
j. In Part 2A Appendix 1, revising Items 4.A, Items 6A. and C.
    The revisions and additions read as follows:

    Note: The text of Form ADV does not, and the amendments will 
not, appear in the Code of Federal Regulations.

FORM ADV (Paper Version)

* * * * *

PART 1A

* * * * *
    Item 5. * * *
* * * * *
    K. Separately Managed Account Clients
* * * * *
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* * * * *

Uniform Application for Investment Adviser Registration

Part 2: Uniform Requirements for the Investment Adviser Brochure and 
Brochure Supplements

* * * * *

Part 2A of Form ADV: Firm Brochure

* * * * *
Item 8. Methods of Analysis, Investment Strategies and Risk of Loss
* * * * *

[[Page 36761]]

    D. For each significant investment strategy or method of analysis 
you use for which you consider any ESG factors, provide a description 
of the ESG factor or factors you consider, and how you incorporate 
these factors when advising your clients with respect to investments, 
including in the selection or recommendation of other investment 
advisers, and whether and how you incorporate E, S, or G factors, or a 
combination of ESG factors. This must include, but not be limited to, 
an explanation of whether and how you:
    1. consider one or more ESG factors alongside other, non-ESG 
factors in your investment advice, but such ESG factors are generally 
no more significant than other factors in advising your clients with 
respect to investments, such that ESG factors may not be determinative 
in providing advice with respect to any particular investment 
(``integration''); or
    2. focus on one or more ESG factors by using them as a significant 
or main consideration in advising your clients with respect to 
investments or in your engagement strategy with the companies in which 
your clients invest (ESG-``focused''). ESG ``impact'' strategies or 
methods of analysis are those ESG-focused strategies or methods of 
analysis that seek to achieve a specific ESG impact or impacts. For any 
ESG impact strategy or methodology, you must provide an overview of the 
impact(s) you are seeking to achieve and how you are seeking to achieve 
the impact(s) (including how you measure progress toward the stated 
impact, disclosing the key performance indicators you analyze, the time 
horizon you use to analyze progress, and the relationship between the 
impact you are seeking to achieve and financial return(s)).
    If you use criteria or a methodology for evaluating, selecting, or 
excluding investments in your significant investment strategy or method 
of analysis based on the consideration of ESG factors, describe that 
criterion and/or methodology and how you use it for each applicable 
significant investment strategy or method of analysis. This must 
include, but is not limited to, a description of whether (and how) you 
use any of the following:
    1. an internal methodology, a third-party criterion or methodology 
such as a scoring provider or framework, or a combination of both, 
including an explanation of how the adviser evaluates the quality of 
relevant third-party data;
    2. an inclusionary or exclusionary screen, including an explanation 
of 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 the inclusionary or exclusionary screen; and/
or
    3. an index, including the name of the index and a description of 
the index and how the index utilizes ESG factors in determining its 
constituents.''

    Note: If you utilize or follow a third-party ESG framework, 
criterion, or index, you may include a hyperlink to any such 
framework, criterion, or index in your response to this Item.

* * * * *
Item 10. Other Financial Industry Activities and Affiliations
    C. * * *
* * * * *
    12. ESG consultant or other ESG service provider.
* * * * *
Item 17. Voting Client Securities
    A. If you have, or will accept, authority to vote client 
securities, describe briefly your voting policies and procedures, 
including those adopted pursuant to SEC rule 206(4)-6. If you have 
specific voting policies or procedures to include one or more ESG 
considerations when voting client securities, describe which ESG 
factors you consider and how you consider them. Describe whether (and, 
if so, how) your clients can direct your vote in a particular 
solicitation. Describe how you address conflicts of interest between 
you and your clients with respect to voting their securities. Describe 
how clients may obtain information from you about how you voted their 
securities. Explain to clients that they may obtain a copy of your 
proxy voting policies and procedures upon request.
* * * * *

Part 2A Appendix 1 of Form ADV: Wrap Fee Program Brochure

* * * * *
Item 4. Services, Fees and Compensation
    A. Describe the services, including the types of portfolio 
management services, provided under each program. Indicate the wrap fee 
charged for each program or, if fees vary according to a schedule, 
provide your fee schedule. Indicate whether fees are negotiable and 
identify the portion of the total fee, or the range of fees, paid to 
portfolio managers. If you consider Environmental, Social, or 
Governance (``ESG'') factors under your programs, provide a description 
of the factors you consider, and how you incorporate them under each 
program.
* * * * *
Item 6. Portfolio Manager Selection and Evaluation
    A. * * *
    4. If you consider ESG factors when selecting, reviewing, or 
recommending portfolio managers as described in this Item, describe the 
ESG factors you consider and how you consider them. Your description of 
those factors must include:
    (i) a description of any criteria or methodology you use to assess 
portfolio managers' applications of the relevant ESG factors into their 
portfolio management, including any industry or other standards for 
presenting the achievement of ESG impacts and/or third-party ESG 
frameworks, and any internal criteria or methodology;
    (ii) an explanation of whether you review, or whether a third-party 
reviews, portfolio managers' applications of the relevant ESG factors 
described above. If so, describe the nature of the review and the name 
of any third party conducting the review.
    (iii) if applicable, an explanation that neither you nor a third-
party assesses portfolio managers' application of the relevant ESG 
factors into their portfolio management, and/or that the portfolio 
managers' application of the relevant ESG factors may not be 
calculated, compiled, assessed, or presented on a uniform and 
consistent basis.
* * * * *
    C. If you, or any of your supervised persons covered under your 
investment adviser registration, act as a portfolio manager for a wrap 
fee program described in the wrap fee program brochure, respond to 
Items 4.B, 4.C, 4.D (Advisory Business), 6 (Performance-Based Fees and 
Side-By-Side Management), 8.A and 8.D (Methods of Analysis, Investment 
Strategies and Risk of Loss), and 17 (Voting Client Securities) of Part 
2A of Form ADV.

    By the Commission.

    Dated: May 25, 2022.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2022-11718 Filed 6-16-22; 8:45 am]
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