The US securities and exchange commission (SEC) does not provide the actual environmental, social, and governance (ESG) integration definition. But, it considers it an investment strategy that embraces ESG and other non-ESG factors when making investment decisions. Recently, the commission published a proposal to improve investments’ disclosure regarding ESG practices.
The ESG factors will be presented on a layered framework of disclosure, which the commission hopes will improve the reporting. Even though this ruling includes the disclosure of ESG factors, the extent of the disclosure depends on the centrality of ESG consideration in the fund’s strategy.
For instance, open funds will disclose an overview of ESG strategy in the prospectus summary section, and then the strategy details will be provided in the statutory prospectus. The definition of ESG integration according to the SEC identifies three main types of funds; impact funds, ESG-focused, and integration. Each of these funds is discussed below in this article.
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The Integration Fund
According to the SEC, the definition of ESG integration would require these funds to summarize in a few sentences how they incorporate ESG factors while making their investment choices. For instance, they may reveal that they invest in companies that consider financial returns alongside ESG factors or companies that are consistent with the risk-adjusted return.
Under some circumstances, the securities and exchange commission will also need data disclosure about greenhouse gas emissions. Several investors raised questions demanding the data on greenhouse gas emissions be presented so they can analyze and gain insight into how much a company plays a role in reducing emissions. And ensure that no company exaggerates its effort to reduce emissions.
The Impact Fund
Impact funds are yet another type of fund identified in the definition of ESG integration according to the SEC; these funds seek to cause a particular impact and are usually considered a subset of ESG-focused funds.
An example of this is investing in companies that seek current income while promoting the goal of financing the building of affordable houses. Another example is a fund that invests in companies that treat industrial water to increase the availability of safe water.
ESG Focused Fund
The definition of ESG integration, according to the SEC, also addresses the funds that focus on environmental, social, and governance factors. SEC addresses ESG factors in how the fund engages with the companies they invest in or when choosing investments.
In the proposed changes, SEC will also require ESG-focused funds which consider the environment to reveal their weighted carbon emissions and carbon footprint in the portfolio. And these metrics should be in line with the task force on climate-related financial disclosures. The disclosure will also include those funds that use screening to exclude or include certain companies based on ESG considerations.
Summary
The US securities and exchange commission (SEC) does not define (ESG) integration. It considers it an investment strategy that embraces ESG and other non-ESG factors when making investment decisions. The commission identifies three types of funds; the integration fund, the impact fund, and the ESG-focused fund.
