The US SEC has proposed two ESG rules for asset managers.

The US SEC has proposed two ESG rules for asset managers. (1) Names Rule would require funds that use ESG terms in their names to follow ESG strategies. (2) ESG Strategy Disclosures would require funds that follow ESG strategies to make certain disclosures.

Names Rule
■ This would require a fund to invest 80% of its assets in ESG if it uses ESG terms in its name. The proposal would bar the use of ESG terminology in a funds name if the fund only considers ESG as "one of many factors" in investment decisions.

ESG Strategy Disclosures
■ This would require funds that have an ESG strategy to provide details in their prospectus of how they consider ESG factors when selecting investments. There are 3 “tiers/layers”. (1) “Integration” (2) “ESG-focused” (3) Impact.

There would be lesser requirements for “integration” funds than for “ESG-focused” funds. There also would be greenhouse gas emission disclosures for funds that have a climate change focus.

An “ESG-Focused Fund” would mean a fund that focuses on one or more ESG factors by using them as a significant or main consideration (1) in selecting investments or (2) in its engagement strategy with the companies in which it invests.

On Impact, the main disclosure will be “an overview of the impact(s) the fund is seeking to achieve, and how the fund is seeking to achieve the impact(s). The overview must include (i) how the fund measures progress toward the specific impact, including the key performance indicators the fund analyzes, (ii) the time horizon the fund uses to analyze progress, and (iii) the relationship between the impact the fund is seeking to achieve and financial return(s)” But also the “impact objectives” will need to be disclosed upfront along with return objectives.

Of note, there is one dissenting commissioner. SEC Commissioner Hester Pierce objected to the Names Rule proposal because she said the 80% investment requirement is too subjective given ambiguity about what constitutes an ESG investment. The better approach is to focus less on the name and more on the disclosures describing the investment strategies. She also objected to the ESG proposal as the SEC already has the power to police asset managers who mislead investors about their ESG efforts. She also complained that the SEC fails to define ESG, which means the proposal will not work because the terms are too broad and it will be nearly impossible to have consistent disclosures among funds.

Comments open for 60 days. Link to proposals below:

List page for SEC rules: https://www.sec.gov/rules/proposed.shtml

Direct links to pdfs of proposals:
Proposing Release: Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices (sec.gov)
https://www.sec.gov/rules/proposed/2022/33-11068.pdf
https://www.sec.gov/rules/proposed/2022/33-11067.pdf

Links to statements, including Hester Peirce's objections:
https://www.sec.gov/news/speeches-statements
https://www.sec.gov/news/statement/peirce-statement-esg-052522

UK Charity investment law case: charities have the discretion to exclude investments

Important UK Charity investment case law (2022): “Should charities, whose principal purposes are environmental protection and improvement and the relief of poverty, be able to adopt an investment policy that excludes many potential investments because the trustees consider that they conflict with their charitable purposes? One might be forgiven for thinking that the answer should obviously be that such a policy would be entirely appropriate. But because of uncertainty over the reach of the only leading case in this area […]and the fact that this is a very important decision for them, the Claimants, who are the trustees of two such charities, seek the Court's blessing for the adoption of their new investment policies.”

The decision - in my view - of this judgment is that charities now have the discretion to exclude certain investments, even where the potential return from those investments would be greater, if the trustees reasonably believe that the investments would be in conflict with the charity’s objects.

So, for instance if a charity has an environmental objective then exclusions based on, for instance, Paris-alignment assessments would be allowed (if a proper balancing assessment was done by the trustees.)

Judge also sums:

(1)  Trustees’ powers of investment derive from the trust deeds or governing instruments (if any) and the Trustee Act 2000.

(2)  Charity trustees’ primary and overarching duty is to further the purposes of the trust. The power to invest must therefore be exercised to further the charitable purposes.

(3)  That is normally achieved by maximising the financial returns on the investments that are made; the standard investment criteria set out in s.4 of the Trustee Act 2000 requires trustees to consider the suitability of the investment and the need for diversification; applying those criteria and taking appropriate advice is so as to produce the best financial return at an appropriate level of risk for the benefit of the charity and its purposes.

(4)  Social investments or impact or programme-related investments are made using separate powers than the pure power of investment.

(5)  Where specific investments are prohibited from being made by the trustees under the trust deed or governing instrument, they cannot be made.

(6)  But where trustees are of the reasonable view that particular investments or classes of investments potentially conflict with the charitable purposes, the trustees have a discretion as to whether to exclude such investments and they should exercise that discretion by reasonably balancing all relevant factors including, in particular, the likelihood and seriousness of the potential conflict and the likelihood and seriousness of any potential financial effect from the exclusion of such investments.

(7)  In considering the financial effect of making or excluding certain investments, the trustees can take into account the risk of losing support from donors and damage to the reputation of the charity generally and in particular among its beneficiaries.

(8)  However, trustees need to be careful in relation to making decisions as to investments on purely moral grounds, recognising that among the charity’s supporters and beneficiaries there may be differing legitimate moral views on certain issues.

(9)  Essentially, trustees are required to act honestly, reasonably (with all due care and skill) and responsibly in formulating an appropriate investment policy for the charity that is in the best interests of the charity and its purposes. Where there are difficult decisions to be made involving potential conflicts or reputational damage, the trustees need to exercise good judgment by balancing all relevant factors in particular the extent of the potential conflict against the risk of financial detriment.

(10) If that balancing exercise is properly done and a reasonable and proportionate investment policy is thereby adopted, the trustees have complied with their legal duties in such respect and cannot be criticised, even if the court or other trustees might have come to a different conclusion.
I would echo the judge who wrote:

“I think it was important, not only for these charities, but also for charities generally, that there should be clarity as to the law on investment powers of charity trustees. That is why I gave permission for these proceedings to be brought. I hope that such clarity has been provided.”

The judge decided:

“…The Claimants have decided, reasonably in my view, that there needs to be a dramatic shift in investment policies in order to have any appreciable effect on greenhouse gas emissions and for there to be any chance of ensuring that there is no more than a 1.5°C rise in pre-industrial temperature. The only question is whether they have sufficiently balanced that objective with any financial detriment that may be suffered as a result. In my view they have and the performance of the portfolio will be tested regularly against recognised benchmarks and will seek to provide the financial return specified in the Proposed Investment Policy.

Accordingly I consider that the Claimants have exercised their powers of investment properly and lawfully, having taken account of all relevant factors and not taken into account irrelevant factors. I believe that the decision to adopt the Proposed Investment Policy is sufficiently “momentous” to justify the court giving its blessing to that decision and I therefore make the declaration that is sought in the adjusted wording of declaration 9 in the draft Order. That is in the following terms, with my amendments:

“The trustees of the Charities are (a) permitted to adopt [the Proposed Investment Policy] and (b) that doing so will discharge their duties in respect of the proper exercise of their powers of investment.”

Read the full judgment : https://www.bailii.org/ew/cases/EWHC/Ch/2022/974.html

Or Pdf here.