Update on progress in ESG 

Subcommittee

SEC Asset Management Advisory Committee

September 16, 2020
Overview

• Progress report since last meeting for our workstreams

• Value vs Values

• Performance Measurement

• Proxy Voting

• The role of ESG rating systems and benchmarks

• Issuer disclosure

• We explore a range of potential actions for three of the workstreams

September 16, 2020 - ESG Subcommittee 2
Understanding how the workstreams work 

together

September 16, 2020 - ESG Subcommittee 3

Values vs Value

Performance 

Measurement

Truth in Labelling: the 

Role of ESG Ratings

Proxy Voting

Issuer Disclosure
For three of the workstreams, we explore a 

spectrum of potential recommendations

• None of the alternatives explored in this presentation should be taken as recommended or 

preferred

• They are included here in many cases as “strawmen” to illustrate the spectrum of possibilities, 

and the costs and benefits of each, to stimulate discussion with the AMAC and gather feedback

• Once we have a better sense of pros and cons for each area, we plan to come back to the AMAC 

in December with true recommendations

September 16, 2020 - ESG Subcommittee 4

Do 

nothing

Strong 

intervention

Moderate 

intervention
Values vs. Value Workstream

Are ESG funds expressing their investors’ values, or creating value for the investor?

• This workstream explores the following questions:

1. How should ESG be treated within the context of the Names Rule? Is it 

fundamental? Or is it a strategy?

2. If ESG is about values, that is an investor choice. How should that impact 

disclosure?

3. If ESG is about value, it is about financial metrics. How should that impact 

disclosure?

September 16, 2020 - ESG Subcommittee 5

Values vs Value
ESG in the Context of the Names Rule

Key Features of the Rule

• Rule 35d-1 or the “Names Rule” 

established and modified over the years 

to:

• Recognize that a fund’s name may influence 

an investor’s decision to invest in a fund

• Prohibit materially deceptive or misleading 

fund names

• Ensure consistency between what is 

“marketed” by virtue of a name and the 

underlying assets owned by a fund

• Currently requires 80% of assets by value to 

be consistent with certain attributes 

included in a fund’s name

• Requires 80% of assets by value to align 

with names that include:

• Type of investment (e.g., stock, bond, 

commodity)

• Industry of investment (e.g., utilities, health 

care)

• Geography (e.g., Europe, Asia)

• Country (e.g., US, Mexico)

• Does not require 80% of assets to align with names that reflect:

• Investment Objective (e.g., capital 

appreciation, low volatility)

• Strategy (e.g., growth, value, ESG)

• Policy

• However, the Names Rule still prohibits 

funds from using materially deceptive or 

misleading names

September 16, 2020 - ESG Subcommittee 6

Values vs Value
1. How should ESG be treated under the 

Names Rule

• Currently “ESG” is considered a strategy under the Names Rule

• 80% holdings requirement does not apply

• Investors continue to receive protections against materially deceptive 

or misleading names 

• Could be changed if SEC determines Names Rule should apply 

to strategies

• March 2020 SEC Request for Comments on Fund Names specifically asks for industry input on this point

• Is ESG a strategy or fundamental?

• It can be either or both, depending on the context in which they are 

used

• E, S & G can vary broadly in how they are defined and what they 

imply in an investment context

• A strategy could be easier to articulate – e.g., renewable energy, low carbon

• A fundamental use of ESG would be to treat these as risk factors and 

attempt to quantify their potential impact on the overall prospects for 

an investment

• How should ESG be treated under 

the Names Rule in the future?

• If ESG is considered a strategy, it 

should be treated consistently with 

any Names Rule changes made to the 

requirements for strategies

• If the fundamental application is to 

determine “inclusion” or “exclusion” 

of certain assets, this is effectively 

proscribing an asset type or industry 

which are items already covered by 

the Names Rule. As such, a holdings 

requirement should apply. 

September 16, 2020 - ESG Subcommittee 7

Values vs Value
2. If ESG is about values, that is an investor 

choice. How should that impact disclosure? • Certain retail and institutional investors may, for a variety of reasons, seek to invest in assets that reflect their beliefs about 

a wide array of issues including environmental, social or governance and consider these to be of equal or greater concern 

than the investment return received from the asset

• Since this is a matter of choice, an investor should remain obligated to conduct reasonable due diligence to ensure that a 

fund’s assets align with their values, regardless of a fund’s name

• However, that does not imply that funds should be able to use names that are materially deceptive or misleading to entice 

investors 

• “Trust but verify” should apply. A fund claiming ESG in its name should provide adequate disclosure to allow prospective 

investors to confirm certain relevant details such as:

• The elements of E, S, or G that are being included in the fund’s strategy

• How the fund manager specifically interprets these elements in the context of a fund (e.g., if a fund has a “social” focus, is 

that applied to enhance diversity, avoid child labor, foster fair trade, etc.)

• How these factors are utilized to select the securities a fund will or will not own (e.g., are these determinations made by the 

manager exclusively, is an independent ESG rating model used to screen assets, etc.)

• Whether the use these factors may allow for non-economic outcomes to override the potential for investment returns

• If and the extent to which any exceptions are allowed within the fund context at individual asset level and at the aggregate 

fund level (e.g, can a “renewable energy” fund own a traditional power generation company that produces 20% of its energy from renewable sources, what percent of total assets can be invested in non-renewable companies)

• How any changes to the fund’s investment approach will be communicated to and approved by the investors.

• Ultimately, a values-based decision rests on the shoulders of the investor. If they are unable to satisfactorily confirm alignment between a fund’s assets, its stated strategy and the values they seek to support, they should pass on the 

investment opportunity

September 16, 2020 - ESG Subcommittee 8

Values vs Value
3. If ESG is about value, it is about financial 

metrics. How should that impact disclosure? • We will be covering some of the current research in ESG performance in the next section; there is certainly debate that 

ESG factors have a sustained, persistent, measurable and material impact on the value of an asset

• Some practitioners believe that ESG factors will lead to superior financial returns in the long-term resulting from:

• Current ESG-related risks are inadequately reflected in the price of certain assets

• Capital flows will reallocate to ESG companies and impact multiples / valuation

• As a result, ESG factors or attributes are being used in the asset selection process by:

• Including assets that meet certain criteria (e.g., nothing allowed unless certain parameters are met or exceeded) 

• Excluding assets that meet certain criteria (e.g., everything allowed except when certain parameters are met or exceeded)

• Considering ESG factors as a supplemental element in a broader, multi-factor framework employed for asset evaluation

• Disclosure Considerations:

• Inclusion / Exclusion approaches can materially limit an investable universe and shape a portfolio’s construction in ways that create 

meaningful risks / rewards relative to the broader market. An investor should be provided the information necessary to assess this 

risk including the metrics or models employed and the relevant thresholds for inclusion / exclusion should be thoroughly described 

and discussed. Any allowance for exceptions to these limits should be described in detail. 

• Managers using ESG factors as a component in a broader investment process should provide equal disclosure regarding all parts of

their process. Added disclosure about ESG elements should be voluntary, but not distort their impact on the total investment

process.

• Managers should be able to create competitive advantage and have proprietary elements to their security selection process

September 16, 2020 - ESG Subcommittee 9

Values vs Value
How should we think about how ESG 

strategies contribute to performance?

• This workstream’s objective is to provide recommendations for understanding 

drivers behind risk and returns of ESG funds, as well as ways to measure 

alignment of financial outcomes with fund’s objectives 

• Since the AMAC meeting in May, we have been focusing on recent research 

measuring the impact of ESG strategies on performance. In particular, we 

looked at the

• Performance of ESG Strategies during Covid-19 crisis

• Impact of E, S, and G individually and collectively on portfolio returns and 

risk

September 16, 2020 - ESG Subcommittee 10

Performance Measurement
What does research show about ESG 

performance during the COVID-19 crisis?

According to recent academic research:

• During the COVID-19 selloff, the performance of ESG funds was better than the broad 

market index. As such, there were claims that companies with high ESG scores were 

immunized against the pandemic

• The specific research findings are:

• After controlling for a number of variables such as industry, liquidity, accounting 

measures, intangible assets etc., ESG was not significantly associated with market 

returns during Q1 2020

• COVID-19 crisis returns are positively associated with intangible assets (R&D, IT, etc.)

• Innovation-related assets rather than social capital investments offer greater 

immunity to unexpected COVID-19 related market drawdowns

September 16, 2020 - ESG Subcommittee 11

Performance Measurement

Source: Demers, Hendriske, Joos, Lev. “ESG Didn’t Immunize Stocks Against the Covid-19 Market Crash”. Sep 2020
Does bundling E,S, and G together affect 

performance?

Research by MSCI:

• How do ESG considerations impact performance?

o E, S, and G issues impact company financial performance differently

o If they do, should they be combined differently (weighting)?

o Is the sum of the parts greater than the whole? Or vice versa?

E + S + G ≠ ESG

• Do Companies with High ESG scores and High E, S, G scores outperform those with lower 

scores?

• High ESG ranked portfolio outperformed the Lowest ranked portfolio over time

• High E, S, G ranked portfolios outperformed the lowest ranked portfolios over time

• High ESG ranked > High G ranked > High S ranked > High E ranked

• The whole > Sum of the Parts

September 16, 2020 - ESG Subcommittee 12

Performance Measurement

Source: MSCI, “Deconstructing E,S,G Rating Performance. Risk and Return for E, S, and G by Time Horizon, Sector and Weighting”. June 2020
Should ESG Funds require additional 

performance disclosures?

- Traditional investment styles such as growth/value can use commercially available 3rd

party returns based and holdings-based performance attribution systems to easily decompose sources of returns and see what bets the fund is taking – from security selection to allocation decisions.

- ESG currently does not have such attribution systems. 

- According to a survey by Moody’s, 71% of portfolio managers are unable to view 

performance attribution of ESG factors – only 15% have visibility of ESG factors, while additional 15% said they can view ESG factors but on limited basis.

- In order for end investors to clearly understand the investment outcomes from ESG 

investing, a performance attribution mechanism is needed – for example, do returns come from E, S, and/or G?

September 16, 2020 - ESG Subcommittee 13

Performance Measurement
Using the existing performance disclosure 

requirements as the baseline

• Form N1-A

• Risk/Return Summary: Investment Objectives & Goals

• Risk/Return Summary: Investments, Risks, and Performance

• Principle Investment Strategies of the Fund – how the fund intends to achieve its 

investment objectives

• Principle Risks of Investing in the Fund 

1) Narrative Risk Disclosure

2) Risk/Return Bar Chart & Table

3) Required to Benchmark Against Broad Market Index

September 16, 2020 - ESG Subcommittee 14

Performance Measurement
Spectrum of potential recommendations we have explored in this 

area

September 16, 2020 - ESG Subcommittee 15

Performance Measurement

Do 

Nothing

Strong 

intervention

Moderate 

intervention I 

Description:

Pros:

Cons:

• Little or no change to 

existing disclosure 

requirements for ESG 

performance reporting

• Low cost for managers

• Allows innovation in the 

space to continue

• ESG is treated the same as 

other investment strategies.

• Difficult for investors to 

assess performance impact 

of strategy compared to 

relevant benchmark

• Does not address value vs. 

values spectrum.

• Best practice guidelines or 

mandate description of ESG 

performance objective and 

fund performance relative to 

that objective

• Potential for greater 

transparency re value vs. 

values performance 

objectives

• Unless mandated, compliance 

is voluntary.

• Lack of comparability 

• Increased burden placed only 

ESG funds.

• Mandate performance 

attribution of E, S, and G 

as well as ESG factors

• Greater transparency re 

value vs. values 

performance objectives. 

• Greater comparability.

• More information about 

ESG factor performance.

• Methodology, data, and 

system infrastructure to 

measure ESG factor 

performance does not exist. 

• Significant increased burden 

placed only on ESG funds

• May reduce incentives to 

develop new strategies

Moderate 

intervention II 

• Best practice guidelines or 

mandate use of secondary 

style-adjusted benchmark • Potential for greater 

transparency re value vs. 

values performance objectives. 

• Greater accountability and 

comparability of performance 

objective.

• Unless mandated, compliance 

is voluntary.

• Secondary benchmark 

burden

• Lack of ESG standardization 

creates benchmark selection 

challenges.

• Increased burden placed only 

ESG funds.
What requirements should govern ESG Funds’ 

proxy voting practices?

• This workstream’s objective is to recommend approaches to proxy voting for ESG strategies

• When workstreaminitiated, the focus was on the range of practice in proxy voting for ESG funds, and whether any action needed to be taken

• In July, 2020, the Commission voted to amend rules concerning proxy solicitations, and provided supplemental guidance

• Benefits of amended rules: 

• Additional conditions to the availability of certain existing exemptions from the information and filing requirements of the Federal proxy rules that are commonly used by proxy voting advice 

businesses

• Disclosure of conflicts of interest between proxy adviser and affiliates

• Clarity that proxy voting advice generally constitutes a solicitation (SEC ’34 Act)

• Failure to disclose certain information my be subject to antifraud provision of the proxy rules

• We believe these actions effectively improved investors ethical outcomes and in combination with rule 13F provide an adequate level of transparency with respect to 

proxy voting whether a fund is designed to include ESG considerations or not

September 16, 2020 - ESG Subcommittee 16

Proxy Voting
What role can ESG Rating Systems and 

Benchmarks play?

• This workstream’s objective was initially to provide recommendations for how and 

whether to suggest or require the use of third party ESG ratings systems and/or 

benchmarks for those investment portfolios that brand themselves as ESG

• We are broadening this objective to provide recommendations to address “truth in 

labelling” and concerns about the potential for “greenwashing” in ESG funds, including 

how and whether to suggest or require the use of third party ESG ratings systems 

and/or benchmarks for those investment portfolios that brand themselves as ESG

• Since the prior AMAC meeting, we have focused on the best way to achieve this “truth 

in labelling” objective, examining the potential for voluntary or mandatory enhanced 

fund disclosure, enhanced issuer disclosure, or the use of ESG ratings or benchmarks

• We set out three of the alternatives we considered on the page that follows; a fourth 

alternative, enhancing issuer disclosure, will be covered in the final section of the 

presentation

September 16, 2020 - ESG Subcommittee 17

ESG Rating Systems
Spectrum of potential recommendations we have 

explored in this area

September 16, 2020 - ESG Subcommittee 18

ESG Rating Systems

Do 

nothing

Strong 

intervention

Moderate 

intervention

Description:

Pros:

Cons:

• Little or no change to current 

disclosure requirements for ESG 

funds

• Low cost for managers

• Allows continuing development in 

this field to flourish

• There are many kinds of fund claims 

that require no empirical proof; why 

hold this class to a higher standard

• Potential for misrepresentation

• Difficult to distinguish between 

strategies of varying quality

• Provide best practice guidelines for ESG 

fund disclosure, likely describing 

investment process, standardizing on 

ICI-recommended taxonomy 

• Relatively low cost for managers

• Allows better comparability and 

consistency

• Allows continuing development in this 

field

• Allows for a variety of styles, does not 

favor one particular style

• Voluntary nature may still result in 

funds that misrepresent or engage in 

selective disclosure

• Without mandated definitions, 

comparability might be misleading 

• Require Funds Claiming ESG 

to have a Higher ESG Score 

than their benchmark from 

an “NRSRO” for ESG 

• Consistent, measurable approach 

driving a particular kind of consistency 

and reliability for investors

• Quicker to put in place than enhanced 

issuer disclosure

• Could drive costs for managers higher

• If too few NRSROs, can limit 

development of the field; if too many, 

comparability suffers

• Rating approaches currently differ 

markedly
Supporting detail 

Fund disclosure taxonomy detail

• Enhanced fund disclosure using common 

language based on the ICI taxonomy1 would 

detail how a fund achieves its ESG strategy:

• Whether the fund excludes securities, includes 

securities, or uses a combined approach

• Whether it uses qualitative methods, or 

quantitative methods such as use of proprietary 

or third party scoring systems, or a combination 

of both

• Having a fund board approve the disclosure 

might add an extra quality control

• A recommended practice might to have 

performance attribution that demonstrates 

how these practices affected returns

Comparability of ESG ratings

• As shown in the Investment Adviser Association 

research brief, “Sustainable Investing is an Active 

Process,” 2020

September 16, 2020 - ESG Subcommittee 19

ESG Rating Systems

1. Investment Company Institute, “Funds’ Use of ESG Integration and Sustainable Investing Strategies: An Introduction,” July 2020
Opportunities to improve the quality of ESG 

disclosure by issuers

• This workstream’s objective is to make recommendations to the SEC concerning 

guidance it should give corporate issuers (or regulation it should enact) for how 

those issuers disclose and present ESG data and related information

• Materiality 

• Because ESG issues are material, investors should be able to obtain this information from 

issuers and that information should be: 

• Comprehensive

• Meaningful

• Comparable

September 16, 2020 - ESG Subcommittee 20

Issuer Disclosure
Opportunities to improve the quality of ESG 

disclosure

September 16, 2020 - ESG Subcommittee 21

Issuer Disclosure

Dimension Standard

Comprehensive • Required disclosures and metrics cover all material ESG 

issues

Meaningful • Required disclosures and metrics convey issuer’s exposure 

to each material ESG issue

• Disclosure standards acknowledge dynamic nature of 

materiality

Comparable • Required disclosures and metrics balance standardization 

(to promote comparison across industries) with specificity 

(to enhance comparability within industries)
Opportunities to improve the quality of ESG 

disclosure

September 16, 2020 - ESG Subcommittee 22

Issuer Disclosure

Dimension Issues

Comprehensive • < 30% of public cos. disclose ESG risks; even less for 

private cos.

• Fixed-inc. disclosure poor; issuer- or lender-focused, but 

not both

Meaningful • Backward- vs. forward-looking

• Voluminous metrics makes analysis challenging

• Lack of “positive impact” data (vs. mitigating “negative 

impact”)

• Cherry-picking by issuers

Comparable • Multiple standard-setters (GRI, SASB, TCFD, etc.), 

stakeholders
Gaps in Disclosure and Role Regulation Can Play

• Standard-setting: Establishing materiality and its meaning across 

industries

• Disclosure framework: Metrics based on materiality; issuer 

commentary

• Standardization: Achievable through existing frameworks (i.e., SASB)

• Presentation: Data and issuer commentary

September 16, 2020 - ESG Subcommittee 23

Issuer Disclosure
Standard-setting

• Embrace third-party standard-setting organizations’ ESG reporting 

metrics

• Emphasize disclosure of material issues (backward- and forward-looking)

• Make third-party standard setters’ recommendations authoritative, 

binding

• Similar to GAAP

• Hold 3rd-party standard setters accountable for harmonizing existing 

standards

• i.e., GRI, TCFD, SASB, etc.

• Encourage collaboration among standard-setters (i.e., SASB + GRI) 

September 16, 2020 - ESG Subcommittee 24

Issuer Disclosure
Disclosure framework

• Require principles-based disclosures that focuses on material issues

• Establish balanced approach to required disclosure

• i.e., focused list of mandatory disclosures applicable to most issuers; 

supplement w/specific disclosures for business/industry concerned

• Expand reporting requirements from largest firms to nearly all 

companies

• Formalize requirements for “green bonds” based on use of proceeds

• Adopt multi-tier approach that is well adapted to smaller issuers

September 16, 2020 - ESG Subcommittee 25

Issuer Disclosure
Standardization

• Standardize...

• Industry-specific disclosures on env. impact, starting w/climate change

• Supported by highly refined industry classifications that enhance comparability

• Disclosures across issuers, when material

• Forward-looking disclosures; backward-looking metrics; discussion of risk 

management; climate scenario analysis

• Commentary on change across key dimensions of material ESG risk

• Baseline ESG disclosures

• Critical indicators across sectors (climate, safety, etc.) 

• Key information on board diversity; workforce demographic data

• Policies on bribery and corruption, whistle-blowing, codes of ethics

• Policy commitments and programs designed to meet commitments

• At least 3 years of performance data on programs’ success

September 16, 2020 - ESG Subcommittee 26

Issuer Disclosure
Presentation

• Make ESG disclosures look like other financial disclosures

• Data should be temporally aligned with financial disclosures

• Encourage “integrated” reporting (a single, encompassing report, i.e., annual 

report)

• Machine-readable in standard format w/standard taxonomy

September 16, 2020 - ESG Subcommittee 27

Issuer Disclosure
Spectrum of potential recommendations we have 

explored in this area

September 16, 2020 - ESG Subcommittee

28

Issuer Disclosure

Do 

nothing

Strong 

intervention

Moderate 

intervention

Description:

Pros:

Cons:

• Make minimal change to current 

issuer disclosure requirements

• Low cost/burden for issuers

• Facilitates “market-driven” 

response, i.e., investors reward 

issuers who uphold best disclosure 

practices, encouraging others to 

follow

• Doesn’t uphold best practices for 

comprehensive, meaningful, 

comparable disclosure

• Impedes development of common 

disclosure standard and framework, 

resulting in continued inefficiency

• Encourage and then mandate disclosure 

per principles developed by third-party 

standard-setters; tier by materiality and 

issuer size

• Gives issuers time to prepare for/adapt 

to emerging disclosure frameworks

• Taps a successful model (i.e., GAAP, etc.)

• Promotes common disclosure standard 

without being overly prescriptive

• Differentiates per materiality, issuer size

• Industry, regulators haven’t coalesced 

around a third-party framework yet

• Gradual, patchwork approach might not 

promote standardization, comparability

• Codify comprehensive set of 

disclosure rules through regulation, 

irrespective of materiality, issuer size

• Enshrines clear, comprehensive 

standard for disclosing ESG matters

• Boasts authoritativeness, consistency

• Obviates need for patchwork approach 

that takes time to implement, courts 

risk of confusion

• Fails to acknowledge diffs. in ESG issue 

materiality, issuer size/readiness

• Puts potentially heavy burden on 

issuers to implement disclosure

• Rules-based approach could detract 

from disclosure meaningfulness
Next steps

• We welcome feedback from AMAC members, and reactions to the 

range of actions we described for Performance Measurement, ESG 

Ratings/Truth in Labeling approaches, and Issuer Disclosure 

• We plan to meet with investors and issuers in the next quarter to 

better understand the uses of issuer disclosure, and the costs to 

produce it

• We plan to return to the AMAC meeting in December to make our 

recommendations 

September 16, 2020 - ESG Subcommittee 29
Appendix

September 16, 2020 - ESG Subcommittee 30
Additional ESG-related questions from the 

request for comment on Fund Names

• Should we amend the Names Rule to apply specifically to investment strategies?

• It does not seem unreasonable to require strategies to comply with the Names Rule

• A manager should be able to describe a fund’s strategy, articulate the general parameters as to how that strategy is applied and ultimately demonstrate how selected 

assets meet these parameters

• In this way, an investor can be assured that a fund’s actual investments reflect what is marketed in its Name

• Should the Names Rule apply to terms such as “ESG” or “sustainable” that reflect certain qualitative characteristics of an investment?

• Yes, with flexibility for an asset manager to describe its interpretation of these terms and how they are used to construct a portfolio

• Are investors relying on these terms as indications of the types of assets in which a fund invests or does not invest (e.g., in companies that are carbon-neutral)?

• Are investors relying on these terms as indications of a strategy (e.g., investing with the objective of encouraging enhanced governance)?

• Are investors relying on these terms as indications of a fund’s non-economic objectives? 

• For the three questions above the same answer applies

• Yes, some investors may rely on terms to indicate the type of assets a fund will own, the strategy it employs to select assets and any additional objectives of a fund. Sophisticated investors will generally perform adequate diligence to confirm these facts.

• Should there be limits on a fund’s ability to characterize its investments as ESG or sustainable?

• Instead of tying terms such as ESG in a fund’s name to any particular investments or investment strategies, should we instead require funds using 

these terms to explain to investors what they mean by the use of these terms? 

• For the two questions above, the following answer applies.

• At a minimum current protections should continue to apply - a fund should not be able to make materially deceptive or misleading claims. An improved approach would be to recognize that “ESG” has a broad interpretation and, as such, would require accurate descriptions of that interpretation in the context of a particular fund and then require consistent application of this interpretation with respect to the assets owned

September 16, 2020 - ESG Subcommittee 31