Applicability of the SEC’s Proposed ESG Rules to Private Fund Advisers
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Key takeaways:
- The Proposed ESG Rule represents a significant shift in private fund adviser disclosure requirements. If the Proposed ESG Rule is adopted as proposed, private fund advisers will be required to make, for the first time, disclosures based on SEC-enumerated strategies and factors rather than on broad materiality standards alone. This effectively forces advisers to highlight ESG factors more prominently than other factors, even if an adviser does not consider such factors to be material or does not market its funds and strategies as “ESG,” which could potentially skew investor expectations.
- The Proposed ESG Rule does not define “ESG” or “E,” “S,” or “G,” thus forcing private fund advisers to make subjective judgments about a particular factor’s potential status as ESG related and effectively turning each strategy, at a minimum, into an “integration” strategy. Whether or not a definition of “ESG” is ultimately more helpful, the Proposed ESG Rule creates a higher level of ambiguity and a risk of second-guessing by the SEC and its staff on the nature and substance of ESG disclosures without the benefit of materiality as a threshold defense. The Proposing Release does, however, contain potentially helpful guidance with respect to suggested language to describe ESG factors and their implementation, and to characterize strategies as “integration,” ESG-focused” and “impact.”
While the Proposed ESG Rules are less onerous than the SFDR, the two regimes are similar in certain aspects, including the requirement to provide basic sustainability-related - disclosures in some instances and to categorize funds based on ESG focus. Private fund advisers subject to both regimes thus should be in a position to use existing procedures and disclosures to demonstrate compliance with aspects of the Proposed ESG Rule.
- Private fund advisers will need to evaluate current ESG disclosures, determine what new disclosures would be required, and look to update, as necessary, compliance policies and processes with measures to specifically address the detailed requirements of the Proposed ESG Rule. While the Proposed ESG Rule does not expressly propose to adopt new specific compliance requirements, the SEC reaffirmed its expectations for ESG compliance as set out in a prior risk alert.