The SEC’s ESG proposed rules are almost imminent – is your investment firm prepared?

In 2022, the Securities and Exchange Commission (SEC) proposed environment, social and governance (ESG) regulations. For public companies, these developments could mean the most significant overhaul of ESG reporting requirements in nearly two decades.

Although these regulations haven’t become official, they reflect a new area of interest for regulators and state officials as climate control becomes a growing concern. Regulators, such as the Department of Labor, and state officials are developing climate-related regulations. Advisers involved in ESG investing must stay up to date on these developments to ensure that they are in compliance with adopted rules.

What your investment firm needs to know about the SEC’s ESG proposed regulations

The SEC’s ESG proposed regulations could mean sweeping climate-related disclosure requirements for public companies. These regulations would require public companies to provide certain climate-related financial data and greenhouse gas emissions insights in public disclosure filings. Companies would have to disclose emissions they are responsible for and emissions from their supply chains and products.

These regulations reflect the growing concern over climate control. Additionally, these regulations are intended to ensure investors have access to relevant and material information when deciding whether to make or keep an investment. These regulations also come in light of investment advisers’ interest in ESG investing. The SEC recognizes investors are interested in more than just the audited financial statements of a company in which they may invest – they are interested in how the company is impacting their communities and the environment.

Here are some top takeaways about the proposed rules:

1. The SEC’s proposed rules aim to reduce greenwashing in adviser marketing.
2. Regulatory scrutiny in the SEC’s ESG proposed rule and the new Marketing Rule for investment advisers means firms and public companies will have to exercise unprecedented caution.
3. Investment advisers who haven’t yet developed an ESG investing program should not underestimate the commitment of time and resources require to build a compliance program which takes these factors into account.
4. The proposed SEC rules will require substantial changes to ADV1 and 2A for advisers involved in ESG investing.
5. Advisers should be prepared to engage in substantive discussions with clients who express interest in ESG investing, as there are still no universally accepted definitions of ESG-related concepts and third-party ratings, and rankings vary widely as a result.

Your investment firm should plan adequate lead time to develop their compliance program in accordance with the current and changing regulatory landscape. It will be crucial to ensure client expectations align with the adviser’s ESG investment strategies and products.

National Regulatory Services (NRS®) solutions can guide you through the ever-changing regulatory landscape and help ensure that your firm has a compliance program that considers the ESG requirements. Let’s talk about how we can help!