Federal Register, Volume 87 Issue 117 (Friday, June 17, 2022)

[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

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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.
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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\
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\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\
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\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\
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\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\
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\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\
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\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.
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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.
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\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.
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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.
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\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).
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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\
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\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.
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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.
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\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.
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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.
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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.
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\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.
---------------------------------------------------------------------------

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.
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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].
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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\
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\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].

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

[[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.
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\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)].
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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.
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\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?
---------------------------------------------------------------------------

\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).
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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?
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\107\ See Streamlined Shareholder Report Proposal, supra
footnote 99.
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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.
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\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).
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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.
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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\
---------------------------------------------------------------------------

\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\
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\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\
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\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.
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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.
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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.
---------------------------------------------------------------------------

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\
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\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.
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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.
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\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.
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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).
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\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.
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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.
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\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.
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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\
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\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.
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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\
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\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.

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[[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\
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\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.
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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?
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\179\ See Item 27(d)(2) of Form N-1A; see also Instruction 6(a)
to Item 24 of Form N-2.
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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.
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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.
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\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.
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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.
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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.
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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\
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\196\ See infra footnote 223 and accompanying text.
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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.
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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\
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\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.
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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.
---------------------------------------------------------------------------

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).
---------------------------------------------------------------------------

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

\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).
---------------------------------------------------------------------------

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

\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.
---------------------------------------------------------------------------

(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).
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

(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).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

\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\
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\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/.
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(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.
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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.
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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.
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\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.
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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\
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\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\
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\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).
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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.
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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.
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\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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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

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.
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\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.
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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.
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\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+.
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(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\
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\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.
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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.
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\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.
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\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).
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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.
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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\
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\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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

(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.
---------------------------------------------------------------------------

(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\
---------------------------------------------------------------------------

\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\
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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

(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.
---------------------------------------------------------------------------

\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.
---------------------------------------------------------------------------

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

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

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

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

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.

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

[[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.
---------------------------------------------------------------------------

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

\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]]

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
* * * * *
BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TP17JN22.029

[[Page 36758]]

[GRAPHIC] [TIFF OMITTED] TP17JN22.030

[[Page 36759]]

[GRAPHIC] [TIFF OMITTED] TP17JN22.031

[[Page 36760]]

[GRAPHIC] [TIFF OMITTED] TP17JN22.032

BILLING CODE 8011-01-C
* * * * *

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]
BILLING CODE 8011-01-P