ESG Disclosure and Materiality Reminders for RIAs

June 7, 2021

WHAT HAPPENED?

Climate and environmental, social, and governance (ESG) topics continue to gain prevalence in capital markets, especially when it comes to evolving regulatory expectations. As new disclosure protocols are finalized and existing ESG guidelines become more prominent, questions remain in some areas of regulation. The SEC acknowledges several misconceptions exist about ESG materiality disclosure requirements. A recent statement released by SEC Commissioner Lee outlines some common regulatory misunderstandings and the facts of each matter:

KEY TAKEAWAYS

• Securities laws do not require disclosure of all material matters by default. In general, securities laws only obligate disclosure of material information when certain requirements are met. Currently, materiality disclosure requirements specific to ESG investing have not been released by the SEC. Materiality disclosures affecting ESG strategies are likely still required under other rules, however.
• Obligations to disclose material ESG information may not be obvious to those responsible for filing disclosures; determining materiality can be subjective in some cases. Investors concerned with this information may not know securities laws do not require certain material information to be reported. When using the “reasonable investor” test to determine materiality, investment managers may need to conduct further research to better understand what investors expect from ESG-related disclosures.
• In future rulemakings, the SEC may require ESG disclosure that extends beyond material information. It is often falsely believed that all SEC disclosure requirements consist solely of material information; there is precedent to show the opposite is true. For example, Regulation S-K contains reporting requirements that include non-material information for many filers.
• ESG factors are material to investment and voting decisions and are not inherently political. The SEC asserts that political connotations do not take away from the materiality of ESG investments, especially because investors have broadly reported ESG matters have a material impact on their decision making.

WHAT DOES THIS MEAN FOR ME?

Changes to ESG disclosure requirements are expected to be released by the SEC in the coming months or years and should be monitored by your firm’s compliance team. As new regulations are released, comprehensive oversight of climate and ESG disclosures will be required.

If you want to get ahead of upcoming regulations, consider adopting and implementing a global ESG framework like the Equator Principles, Principles for Responsible Investment (UNPRI), or CFA Institute’s forthcoming ESG Disclosure Standards for Investment Products.

If you have questions about current climate and ESG disclosure requirements or questions about materiality, Fairview can assist. Our team of seasoned regulatory compliance professionals can help your firm meet its reporting and disclosure obligations. Contact us today for more information.