The broad scale of COVID-19- related health and economic impacts has expanded ESG into a \u201cMain Street\u201d issue with significant reputation risk for companies, including financial services.<\/p>\n
Article by<\/strong> Amy S. Matsuo*<\/p>\n Since 2015, the total number of U.S. open-ended and exchange-traded ESG funds has nearly tripled. In the first four months of 2020, investments in ESG funds more than doubled compared to the same period last year. And, during that same period, more than 70 percent of the ESG funds self-identified as \u201csustainable equity funds\u201d performed better than their counterparts, across all asset classes. Further, this level of performance held firm through the end of the second quarter.<\/p>\n Pressure from investors, employees, customers, and the general public has driven companies to commit to and act upon an ESG strategy, focusing primarily on environmental factors such as fossil fuels and climate change. With the advent of COVID-19, stakeholders are turning attention to \u201cS\u201d factors – including workplace safety; employee health and well-being; job security; data privacy; customer engagement; supply chain management; community investment; and corporate leadership and innovation. The broad scale of COVID-19- related health and economic impacts has expanded ESG into a \u201cMain Street\u201d issue with significant reputation risk for companies, including financial services.<\/p>\n U.S. financial services regulators and public policy makers have taken a variety of actions and positions that touch on ESG-related concerns. Highlights follow.<\/p>\n Asset managers suggest in the post-COVID-19 environment they and investors will be looking for indicators of firms\u2019 corporate leadership and decisionmaking during periods of disruption; board leadership and accountability; realignment of mission\/messaging regarding ESG initiatives; and preparedness planning for significant unknown events. U.S. financial services regulators are responding cautiously, suggesting that climate change, and ESG concerns generally, are issues to be addressed by public policy makers.<\/p>\n \u2014 Publicly stated: \u00ad<\/p>\n \u2014 Formally requested comment on its Names Rule, which generally requires that if a fund\u2019s name suggests a particular type of investment, industry, or geographic focus at least 80 percent of the fund\u2019s assets must be invested in that type of investment, industry, or geographic region. With respect to \u201cESG,\u201d SEC sought input on whether: \u00ad<\/p>\n \u2014 Published guidance on key performance indicators and other metrics. To the extent companies choose to disclose ESG metrics, the SEC cautions them to include any material information necessary to provide adequate context so that the metric is not misleading, including: \u00ad<\/p>\n \u2014 Received recommendations from its Investor Advisory Committee to develop a principles-based framework for Issuers to provide \u201cmaterial, decision-useful, comparable and consistent information\u201d about ESG factors to aid investors\u2019 investment and voting decisions. The Investor Advisory Committee adds that the SEC should \u201ctake control of ESG disclosure for the U.S. capital markets before other jurisdictions impose disclosure regimes on U.S. Issuers and investors alike.\u201d<\/p>\n \u2014 Provided comment on a General Accountability Office (GAO) report on ESG disclosures and options to enhance them. The report looks at 32 public companies in eight industries, and considers a number of policy options, including specific regulations, endorsement of an ESG framework in regulation, interpretive rulings, industry-developed frameworks, and stock exchange listing requirements.<\/p>\n \u2014 Proposed amendments to its Investment Duties Rule that would clarify ERISA (Employee Retirement Income Security Act) plan fiduciaries may not sacrifice financial results\/investment returns to promote collateral or social goals, and impose increased fiduciary obligations and documentation requirements on ESG investments. Other concerns Additional actions taken by federal financial services agencies to address ESG issues include: \u2014 Reviewing financial services entities\u2019 pandemic preparedness plans, including provisions for employee health and safety, customer support, and continuity of critical operations.<\/p>\nInvestments and disclosure <\/strong><\/h1>\n
The SEC:<\/h1>\n
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The Department of Labor<\/h1>\n