June 29, 2022

SEC Proposes ESG Disclosure Requirements for Investment Advisers

In a three-to-one vote on May 25, 2022, the U.S. Securities and Exchange Commission (SEC) issued proposed amendments to rules and reporting forms that would require registered investment advisers — including private fund managers and alternative investment advisers — to provide clients and prospective clients with useful and comparable environmental, social and governance (ESG) information. The proposed amendments would provide a common disclosure framework to help clients better evaluate the ESG-related services of advisers and better understand the variety of ways advisers currently approach ESG investing. Similar to the proposed amendments for registered funds (Client Alert, June 15, 2022), the proposed amendments would not define the term ESG, but would propose similar definitions for ESG integration, ESG-focused and impact strategies. If adopted, the proposed amendments would require advisers providing ESG advisory services to report new information about those services to the SEC and provide more detailed disclosure to their clients.

Client Brochure - Part 2A of Form ADV

Registered investment advisers are subject to disclosure requirements concerning their obligations as fiduciaries. A registered adviser must deliver a brochure and one or more brochure supplements to each of its clients or prospective clients that provides 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. The proposed amendments to the client brochure include the following:

Item 8 (Methods of Analysis, Investment Strategies and Risk of Loss): A proposed new subitem 8.D to the firm brochure would require an adviser to describe the ESG factor or factors it considers, if any, for each significant investment strategy or method of analysis and to provide an explanation of whether and how it incorporates a particular ESG factor (E, S or G) and/or a combination of factors. A strategy is “significant” for purposes of Item 8 if more than a small portion of the adviser’s clients’ assets are advised using the method or strategy. The level of disclosure required by the proposed amendments would depend on the extent to which the adviser incorporates ESG factors in its investment recommendations to clients. Similar to funds, the adviser would be required to explain whether and how it employs integration and/or ESG-focused strategies. Advisers with ESG-focused strategies would further be required to specify whether and how they employ ESG impact strategies. The particular disclosure requirement would depend on the type of ESG strategy, as described in the table below:

ESG Strategy Proposed Disclosure Requirement
Integration Strategy Explain how the adviser incorporates ESG factors when making investment recommendations; explain how the adviser considers other, non-ESG factors alongside its consideration of particular ESG factors when providing investment advice, with those ESG factors being generally no more significant than the other factors, such that the particular ESG factors may not be determinative in deciding whether to recommend any particular investment.
ESG-Focused Strategy Explain ESG factors that are a significant or main consideration in providing advice or in the adviser’s engagement strategy with the companies in which the adviser’s clients invest; explain how the adviser incorporates these ESG factors when providing investment advice.
ESG-Impact Strategy Provide an overview of the impact(s) the adviser is seeking to achieve, and how the adviser is seeking to achieve the impact(s); explain how the adviser measures progress toward the stated impact, disclosing the key performance indicators analyzed, the time horizon used to analyze progress, and the relationship between the impact sought and financial return(s).

An adviser that uses — for any significant strategy — criteria or a methodology to evaluate, select, or exclude investments based on the consideration of ESG factors must describe those criteria and/or methodologies and how it uses them in this subitem. The new subitem 8.D would provide a non-exclusive list of criteria and methodologies to address, as applicable, including the 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 any exceptions that apply; 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.

Instructions for Item 10 (Other Financial Industry Activities and Affiliations): The proposed amendments to Item 10.C of the client brochure would require disclosure of any material relationship between the adviser or its management person and any related person that is an ESG consultant or other ESG service provider — including ESG index providers and ESG scoring advisers. This disclosure is designed to address the adviser’s relationships that could create conflicts of interest and would require the adviser to identify the related ESG provider, describe its relationship or arrangement with the provider, and if the relationship or arrangement creates material conflicts of interest with clients, describe the nature of the conflicts, as well as how the adviser addresses them. Further, the proposed amendments would add ESG providers to the list of related parties covered under Item 10.C. of the brochure.

Instructions for Item 17 (Voting Client Securities): Advisers that have specific voting policies or procedures that include one or more ESG considerations when voting client securities must include in their brochures a description of which ESG factors they consider and how they consider them. An adviser with a variety of voting policies and procedures for strategies that address ESG-related matters should describe the variety. An adviser should include whether the adviser allows clients to direct votes on ESG-related voting matters.

Appendix 1 (Wrap Fee Program Brochure): Advisers that sponsor wrap fee programs currently provide a specialized brochure to their wrap fee clients. Since some wrap fee programs may incorporate ESG factors in the selection of portfolio managers for the wrap fee clients, the SEC is proposing the following ESG disclosure requirements for wrap fee program brochures:

  • The proposed amendments to Item 4 of the wrap fee program brochure (Services, Fees and Compensation) would require advisers that consider ESG factors in their wrap fee programs to provide a description of what ESG factors they consider, and how they incorporate the factors under each program.
  • The proposed amendments to Item 6 of the wrap fee program brochure (Portfolio Manager Selection and Evaluation) would 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. The description of ESG factors generally should include the types of ESG information the adviser considers and must include how the adviser considers the ESG factors. Specifically, the proposed amendments would require advisers to describe (i) any criteria or methodology they 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 they review, or whether a third party reviews, portfolio managers’ applications of the relevant ESG factors described, including a description of the nature of the review and the name of any third party conducting the review; and (iii) 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.
  • The proposed amendments to Item 6.C. of wrap fee program brochure would require a wrap fee sponsor-manager (any adviser that acts itself or through its supervised persons as a portfolio manager for a wrap fee program) to respond to the new proposed disclosure requirements in Item 8.D (Methods of Analysis, Investment Strategies and Risk of Loss) of Part 2A of Form ADV.

Part 1A of Form ADV

The proposed amendments to Part 1A of Form ADV would obtain a “census” of advisers that incorporate ESG factors into their investment strategies, including their use of ESG consultants.  The proposed amendments would expand the information collected about the ESG-related advisory services provided to separately managed account clients and reported private funds, allowing the SEC staff to use information to identify advisers for examinations to help safeguard against “greenwashing” (i.e., exaggerating ESG strategies or the extent to which investment products or services consider ESG factors in order to attract business). The SEC notes that, because Form ADV is public on its website, the new information would also permit the public to better identify advisers providing various levels of ESG strategies.

Item 5.K(5)-(6) and corresponding sections of Schedule D (Separately Managed Account Clients): The proposed amendments would require reporting of whether the registered investment adviser considers any ESG factors (i) as part of one or more significant investment strategies or methods of analysis in the advisory services including in the selection of other investment advisers if applicable, and/or (ii) as part of its advisory services when requested by separately managed account clients. The adviser would be required to indicate with respect to each of these strategies whether the strategy is an ESG Integration strategy, an ESG Focused strategy, or an ESG Impact strategy and which E, S and/or G factors are considered. An adviser must select all three approaches if it offers all three ESG investing strategies.

Section 7.B.(1) of Schedule D (Private Fund Reporting): The proposed amendments would require reporting of whether a private fund 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 each private fund. The adviser would be required to report whether the strategy is an ESG Integration strategy, an ESG Focused strategy or an ESG Impact strategy, and report whether it incorporates one or more of E, S and/or G factors — and which factor or factors are incorporated.

Item 5.M (Third-Party ESG Framework(s)): The proposed amendments would require advisers to report whether they follow any third-party ESG framework(s) in connection with their advisory services, and if so, the name of the framework(s).

Items 6 and 7 (and Corresponding Sections 6.A. and 7.A. of Schedule D): If adopted as proposed, the amendments would require registered investment advisers and exempt reporting advisers to report whether they conduct other business activities as ESG providers or have related persons that are ESG providers. For each related person ESG provider, the adviser would be required to complete the relevant items in Section 7.A of Schedule D, including, 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.

Compliance Policies and Procedures and Marketing

The SEC reaffirms in the proposing release existing obligations under the Investment Advisers Act of 1940 and the Investment Company Act of 1940 that compliance policies of the advisers that incorporate ESG factors must be reasonably designed to ensure the adviser manages the portfolios consistently with how its ESG strategy was described to investors. Further, advisers must annually review the adequacy and effectiveness of such compliance policies and procedures. The SEC also reaffirms that it would be materially misleading for an adviser to overstate in an advertisement the extent to which it utilizes or considers ESG factors in managing client portfolios.

Request for Comment and Compliance Period

The public comment period will close on August 17, 2022 (60 days following the publication of the proposing release in the Federal Register on June 17, 2022). The SEC has proposed a one-year compliance period for the proposed disclosure requirements and regulatory reporting on Form ADV Parts 1 and 2. In the proposing release, the SEC directs approximately 200 requests for comment to the investment adviser and fund industry relating to each element of the proposed requirements as it looks to finalize the rules.


In light of the growing number of advisers offering ESG-related services and the emerging spectrum of strategies to ESG investing, the proposed new disclosure requirements aim to facilitate clients’ understanding of how advisers use ESG factors in formulating investment advice and providing investment recommendations, in turn enabling them to select an adviser that aligns with their expectations regarding ESG investing. The requirements are also designed to help clients evaluate any corresponding risks or conflicts of interest related to an adviser’s incorporation of ESG factors into its advisory services. The industry’s responses to the SEC’s requests for comment could have a large impact on how closely the final rule tracks the rule proposal. Please reach out to your Faegre Drinker ESG investment management team member to discuss the rule proposal further or if you would like assistance preparing a comment letter.

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