Bryan Corbett: “The proposal would render the term ESG meaningless by capturing strategies that no reasonable person would consider ESG-focused and requiring those funds to issue overly broad and indiscriminate disclosures. That’s bad for investors in private funds who are interested in their ESG impact.”
WASHINGTON, DC – Managed Funds Association (MFA), the trade association for the global alternative asset management industry, today submitted a comment letter to the U.S. Securities and Exchange Commission (SEC) in response to its proposed rule to enhance disclosures of ESG investment practices by investment advisers. The letter emphasizes that the proposed disclosure framework is overly broad and will capture many, if not all, investment strategies under the proposed ESG framework.
MFA supports the Commission’s goal of promoting transparency around investment products and advisers that claim to consider ESG factors. However, the proposed disclosure regime oversimplifies the diverse universe of strategies offered by private fund advisers. By requiring advisers to disclose how they integrate each ESG factor—regardless of how incidental or whether it’s in the context of an ESG strategy—the Commission’s disclosure requirements would create investor confusion by over-emphasizing otherwise immaterial factors.
“The proposal would render the term ESG meaningless by capturing strategies that no reasonable person would consider ESG-focused and requiring those funds to issue overly broad and indiscriminate disclosures. That’s bad for investors in private funds who are interested in their ESG impact. It will set ESG efforts back by years and will make it challenging for ESG efforts to evolve over time,” said MFA President and CEO Bryan Corbett. “The alternative asset management industry fundamentally disagrees with the SEC’s one-size-fits-all, check the box, approach to ESG that fails to recognize the industry’s diversity of strategies. The proposed framework will cause confusion in the marketplace and saddle investors, such as pensions, foundations, and endowments, with distinguishing ESG factors that are being considered as part of an ESG strategy from ESG factors that may be part of a broader financial and risk management analysis.”
To address the concerns with the proposed rule, MFA calls on the Commission to revise the definitions of “ESG Focused” funds to capture strategies that only use ESG factors as a “primary” or “material” consideration in the investment decision-making process. In addition, MFA suggests the Commission remove “ESG Integration” strategies from the final rule or limit that category to strategies where the adviser promotes and markets the use of ESG factors to achieve non-financial ESG objectives. Additional detail from the letter is available below.
MFA raises that requiring advisers to provide disclosures around how they incorporate ESG disclosures—regardless of whether it’s in the context of an ESG strategy—could impede on the Commission’s goal to counter greenwashing by creating investor confusion around the importance of certain ESG factors. From the letter:
“Requiring an adviser to provide extensive disclosures concerning how it integrates ESG factors—no matter how incidental the consideration may be or whether the adviser considers those factors as part of a strategy that is marketed to investors as affirmatively seeking ESG-oriented outcomes—will result in undue emphasis on an otherwise immaterial strategy (or aspect thereof).”
This is likely to lead to greater investor confusion and frustration as the term “ESG” becomes overused and hollow. We believe this result would be contrary to the Commission’s stated goal of reducing the risk of “greenwashing” by creating a misleading impression of the importance of ESG factors to an adviser’s strategy, fund, or investment process.”
MFA underscores that investors already have the ability to contract for additional disclosures, including around ESG strategies. From the letter:
“[T]he type of sophisticated investors investing in private funds have the ability to contract for additional specific disclosures and reporting based on their particular needs and preferences (and, in fact, regularly seek such additional information concerning ESG strategies, execution and performance through their own due diligence processes).”
MFA stresses that the proposed rule’s disclosure regime will likely provide no commensurate benefits to investors and likely limit the ESG approaches and strategies available to investors. From the letter:
“As such, MFA is concerned that without any commensurate benefit to investors and the private funds market more generally, the burdens and costs imposed by the Proposal will limit the ESG approaches and strategies available to investors by discouraging innovation with respect to ESG investing.”
MFA’s full comments to the SEC’s proposed rule can be found here.
About the Global Hedge Fund and Alternative Asset Management Industry
The global hedge fund and alternative asset management industry, including hedge funds, credit, managed futures, and hybrid funds that invest in private companies, has assets under management of $4.3 trillion (Q2 2021). The industry serves thousands of public and private pension funds, charitable endowments, foundations, sovereign governments, and other global institutional investors by providing portfolio diversification and risk-adjusted returns to help meet their funding obligations and return targets.
About the Managed Funds Association
Managed Funds Association (MFA) represents the global hedge fund and alternative asset management industry and its investors by advocating for regulatory, tax, and other public policies that foster efficient, transparent, and fair capital markets. MFA’s more than 150 member firms collectively manage nearly $2.6 trillion across a diverse group of investment strategies. Member firms help pension plans, university endowments, charitable foundations, and other institutional investors to diversify their investments, manage risk, and generate attractive returns over time. MFA has a global presence and is active in Washington, London, Brussels, and Asia. www.managedfunds.org