ESG reporting has become increasingly important in recent years as more investors seek out opportunities to invest in companies with strong environmental, social, and governance practices. However, there is currently no uniform standard for how companies report this type of information, which makes it difficult for investors to compare apples-to-apples when evaluating different investment options. The new SEC ESG proposal would require all public companies to disclose certain ESG information in their annual reports starting next year.
The new SEC ESG proposal would provide greater transparency around company policies and practices related to climate change, human rights, diversity & inclusion, etc., making it easier for investors to make informed decisions about where to put their money.
There are still some unanswered questions about the proposal – including how exactly companies will be required to report this information – but we’ll continue following developments closely and will keep you updated as more details emerge.
Table of Contents
What Is the SEC ESG Proposal?
The SEC’s proposal to amend Rule 2a-7 of the Investment Company Act of 1940, which governs money market funds (MMFs), to include a new category of funds that would invest in a wider range of assets and float their share prices, is an important step in the right direction.
However, we believe the proposal does not go far enough in its reforms and, as such, fails to adequately protect investors.
The SEC’s proposal would allow MMFs to invest in a wider range of assets, including corporate debt and commercial paper, and to float their share prices.
This would give MMFs greater flexibility to manage their portfolios and better protect investors in times of market stress.
However, the proposal fails to address two key issues:
- The proposal would allow MMFs to continue to use the amortized cost method of valuation, which we believe overvalues the assets in the portfolio and does not reflect the true market value of the fund.
- The proposal would not require MMFs to hold a minimum amount of cash and cash equivalents, which we believe is necessary to protect investors in times of market stress.
We urge the SEC to reconsider these two key issues and to make the necessary changes to the proposal in order to better protect investors.
Why Is the SEC Considering This Proposal?
The SEC is considering a proposal that would allow companies to raise money by issuing “securities backed by environmental, social and governance” (ESG) assets. This would allow companies to tap into a new source of funding to support their ESG initiatives.
Currently, there are a few ways that companies can raise money to finance their ESG initiatives. They can either take out loans or sell equity in their company.
However, these options can be expensive and may not be the best option for companies that are just starting out. The SEC’s proposal would allow companies to issue securities that are backed by ESG assets.
This would provide companies with a new source of funding that would be more affordable than loans or equity. The SEC’s proposal is still in its early stages, and it is not clear whether or not it will be approved.
However, if it is approved, it could have a big impact on the way companies finance their ESG initiatives.
What Are Some of the Key Provisions of the Proposal?
The SEC’s proposal for an “ESG disclosure framework” is intended to provide greater clarity and consistency for public companies when it comes to disclosing information about environmental, social, and governance (ESG) matters.
The proposal would not require companies to disclose any new information but would provide guidance on what types of information should be considered material and therefore disclosed.
(Source)
The proposal has three key provisions.
1. Disclosure Principle
Companies would be required to disclose material information about ESG matters, just as they are required to disclose other material information about their business.
2. Materiality
The information would be considered material if it would reasonably be expected to impact a company’s share price or other financial measures.
3. Flexibility
The proposal would give companies flexibility in how they disclose ESG information, depending on their individual circumstances.
How Would This Impact Companies and Investors?
The SEC’s proposed rule on the disclosure of environmental, social, and governance (ESG) factors is a welcome development for companies and investors alike.
The proposal, if adopted, would require companies to disclose certain ESG information in their annual reports. This would provide investors with greater transparency into how companies are managing these important issues.
The proposed rule is also significant because it would codify the SEC’s current position that companies must consider ESG factors when making investment decisions. This is a positive development for companies that are already incorporating ESG factors into their decision-making. It would also encourage more companies to do so.
The proposed rule is likely to have a positive impact on the market for ESG investments. Investors will have greater clarity on which companies are taking these issues seriously and which ones are not. This will make it easier for investors to put their money into companies that are making progress on these important issues.
The proposed rule is not without its critics, however.
Some argue that the disclosure requirements would be too burdensome for companies. Others argue that the proposed rule would give an unfair advantage to companies that are already ahead of the curve on ESG issues.
Overall, the proposed rule is a positive development for companies and investors alike. It would provide greater transparency into how companies are managing these important issues.
What Are Some Potential Next Steps for the Proposal?
As you know, the SEC’s proposal to amend Rule 2a-7 of the Investment Company Act of 1940 was published for comment in the Federal Register on July 10, 2022.
The proposal would, among other things, allow money market funds to continue to operate with a stable $1.00 per share net asset value while permitting the use of amortized cost accounting and other measures to better reflect the true value of a money market fund’s underlying assets.
The comment period for the proposal ended on October 8, 2022, and the SEC is now in the process of reviewing and considering the more than 280 comment letters it received.
Once the SEC has fully considered all of the comments, it will decide whether to revise the proposal and re-publish it for another comment period, or whether to issue a final rule.
In the meantime, here are some potential next steps for the proposal:
- The SEC could revise the proposal in light of the comments it received and re-publish it for another comment period.
- The SEC could issue a final rule without making any further changes to the proposal.
- The SEC could decide not to proceed with the proposal at this time.
We will continue to monitor the situation and will update this blog post as more information becomes available.
FAQs About the SEC ESG Proposal
What is the SEC doing about ESG?
The Securities Exchange Commission has proposed amendments that will require funds and investment advisers to disclose how they incorporate ESG factors in their investment process.
Is ESG reporting mandatory in the US?
There is no mandatory ESG reporting requirement in the United States. However, in March 2022, the Securities and Exchange Commission (SEC) proposed climate-risk disclosure requirements, which would expand the annual reporting requirements of publicly traded companies.
The proposal is currently under review, and it is unclear if or when it will be finalized.
Is ESG legally required?
There is no legal requirement for companies to implement ESG policies, but some investors may consider it when making investment decisions.
Conclusion
The new SEC ESG proposal is a potentially game-changing development for both companies and investors. If approved, it would require all public companies to disclose certain information about their environmental, social, and governance practices in their annual reports. This would provide greater transparency around company policies and practices related to climate change, human rights, diversity, and inclusion, making it easier for investors to make informed decisions about where to put their money.
There are still some unanswered questions about the proposal – including how exactly companies will be required to report this information – but we’ll continue following developments closely and will keep you updated as more details emerge.
