[Federal Register Volume 87, Number 117 (Friday, June 17, 2022)]
[Proposed Rules]
[Pages 36654-36761]
[FR Doc No: 2022-11718]

Vol. 87

Friday,

No. 117

June 17, 2022

Part III

Securities and Exchange Commission

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17 CFR Parts 200, 230, 232, et al.

Enhanced Disclosures by Certain Investment Advisers and Investment
Companies About Environmental, Social, and Governance Investment
Practices; Proposed Rule

Federal Register / Vol. 87, No. 117 / Friday, June 17, 2022 /
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200, 230, 232, 239, 249, 274, and 279

[Release No. 33-11068; 34-94985; IA-6034; IC-34594; File No. S7-17-22]
RIN 3235-AM96

Enhanced Disclosures by Certain Investment Advisers and
Investment Companies About Environmental, Social, and Governance
Investment Practices

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is
proposing to amend rules and forms under both the Investment Advisers
Act of 1940 (``Advisers Act'') and the Investment Company Act of 1940
(``Investment Company Act'') to require registered investment advisers,
certain advisers that are exempt from registration, registered
investment companies, and business development companies, to provide
additional information regarding their environmental, social, and
governance (``ESG'') investment practices. The proposed amendments to
these forms and associated rules seek to facilitate enhanced disclosure
of ESG issues to clients and shareholders. The proposed rules and form
amendments are designed to create a consistent, comparable, and
decision-useful regulatory framework for ESG advisory services and
investment companies to inform and protect investors while facilitating
further innovation in this evolving area of the asset management
industry. In addition, we are proposing an amendment to Form N-CEN
applicable to all Index Funds, as defined in Form N-CEN, to provide
identifying information about the index.

DATES: Comments should be received on or before August 16, 2022.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/submitcomments.htm); or
     Send an email to sec.gov">[email protected]sec.gov. Please include
File Number S7-17-22 on the subject line.

Paper Comments

     Send paper comments to Vanessa A. Countryman, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.

All submissions should refer to File Number S7-17-22. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method of submission. The Commission will post all
comments on the Commission's website (https://www.sec.gov/rules/proposed.shtml). Comments also are available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of 10
a.m. and 3 p.m. Operating conditions may limit access to the
Commission's Public Reference Room. All comments received will be
posted without change. Persons submitting comments are cautioned that
we do not redact or edit personal identifying information from comment
submissions. You should submit only information that you wish to make
available publicly.
    Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on the Commission's website. To ensure direct
electronic receipt of such notifications, sign up through the ``Stay
Connected'' option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Robert Holowka, Emily Rowland, or
Samuel Thomas, Senior Counsels; or Christopher Staley, Branch Chief, at
(202) 551-6787 or sec.gov">[email protected]sec.gov, Investment Adviser Regulation
Office, Division of Investment Management; or Zeena Abdul-Rahman,
Pamela K. Ellis, Amy Miller, or Nathan R. Schuur, Senior Counsels; Sara
Cortes, Senior Special Counsel; or Brian McLaughlin Johnson, Assistant
Director, at<PHONE_NUMBER>, Investment Company Regulation Office,
Division of Investment Management, Securities and Exchange Commission,
100 F Street NE, Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The Commission is proposing for public
comment amendments to the information displayed at 17 CFR 200.800; 17
CFR 230.497 (``rule 497'') under the Securities Act of 1933 [15 U.S.C.
77a et seq.] (``Securities Act''); 17 CFR 232.11 (``rule 11 of
Regulation S-T'') and 17 CFR 232.405 (``rule 405 of Regulation S-T'')
under the Securities Exchange Act of 1934 (``Exchange Act'') [15 U.S.C.
78a et seq.]; amendments to Form N-1A [17 CFR 239.15A and 274.11A],
Form N-2 [17 CFR 239.14 and 274.11a-1], Form S-6 [17 CFR 239.19], Form
N-8B-2 [17 CFR 274.12], Form N-CEN [17 CFR 249.330 and 274.101], and
Form N-CSR [17 CFR 249.331 and 274.128] under the Investment Company
Act of 1940 [15 U.S.C. 80a-1 et seq.] (``Investment Company Act''); and
amendments to Form ADV [17 CFR 279.1] under the Advisers Act of 1940
[15 U.S.C. 80b-1 et seq.] (``Advisers Act'').

Table of Contents

I. Introduction
    A. Background
    1. Development and Growth of ESG Investing
    2. Characteristics of ESG-Related Investment Products and
Services
    3. The Need for Specific ESG Disclosure Requirements
    B. Overview of the Proposal
II. Discussion
    A. Proposed Fund Disclosures to Investors
    1. Proposed Prospectus ESG Disclosure Enhancements
    2. Unit Investment Trusts
    3. Fund Annual Report ESG Disclosure
    4. Inline XBRL Data Tagging
    B. Adviser Brochure (Form ADV Part 2A)
    C. Regulatory Reporting on Form N-CEN and ADV Part 1A
    1. Form N-CEN
    2. Form ADV Part 1A Reporting
    D. Compliance Policies and Procedures and Marketing
    E. Compliance Dates
III. Economic Analysis
    A. Introduction
    B. Economic Baseline
    1. Current Regulatory Framework
    2. Affected Parties
    3. Investor Interest in ESG Funds
    4. Institutional Investor Engagement With Companies on ESG-
Related Issues
    5. Current Practices
    C. Benefits, Costs and Effects on Efficiency, Competition, and
Capital Formation of the Proposed Rule and Form Amendments
    1. General Economic Benefits of ESG Disclosure
    2. Investor and Client Facing Disclosures
    3. Regulatory Reporting
    D. Reasonable Alternatives
    1. Uniform Narrative Disclosure Requirements for ESG-Integration
and Focused Funds
    2. More Standardized Disclosures
    3. Alternative Approach to Layered Disclosure for Funds
    4. More Granular Reporting for Advisers
    5. GHG Metrics Reporting Requirements
    6. Modified Inline XBRL Requirements
    E. General Request for Comment
IV. Paperwork Reduction Act Analysis
    A. Introduction
    B. Form N-1A
    C. Form N-2
    D. Forms N-8B-2 and S-6
    E. Proposed Inline XBRL Data Tagging Requirements

    F. Proposed New Annual Reporting Requirements under Rule 30e-1
and Exchange Act Periodic Reporting Requirements for BDCs
    G. Form N-CEN
    H. Form N-CSR
    I. Form ADV
    J. Request for Comments
V. Initial Regulatory Flexibility Analysis
    A. Reason for and Objectives of the Proposed Action
    1. Proposed Amendments to Forms N-1A and N-2 and Fund Annual
Reports
    2. Proposed Amendments to Form N-8B-2 and Form S-6
    3. Proposed Amendments to Form N-CEN
    4. Proposed Amendments to Form N-CSR
    5. Proposed Amendments to Form ADV (Parts 1 and 2)
    B. Legal Basis
    C. Small Entities Subject to the Rule and Rule Amendments
    1. Proposed Amendments to Forms N-1A, N-2, N-8B-2, N-CEN, N-CSR,
and S-6 and Fund Annual Reports
    2. Proposed Amendments to Form ADV
    D. Projected Reporting, Recordkeeping and Other Compliance
Requirements 294
    1. Proposed Amendments to Forms N-1A, N-2, and N-CSR and Fund
Annual Reports
    2. Proposed Amendments to Forms N-8B-2 and S-6
    3. Proposed Amendments to Form N-CEN
    4. Proposed Amendments to Form ADV
    E. Duplicative, Overlapping, or Conflicting Federal Rules
    F. Significant Alternatives
    1. Proposed Amendments to Forms N-1A, N-2, N-8B-2, N-CEN, N-CSR,
and S-6 and Fund Annual Reports
    2. Proposed Amendments to Form ADV
    G. Solicitation of Comments
VI. Consideration of Impact on the Economy Statutory Authority

I. Introduction

    Many registered funds and investment advisers to institutional and
retail clients consider environmental, social, and governance (``ESG'')
factors in their investment strategies.\1\ Investor interest in ESG
strategies has rapidly increased in recent years with significant
inflows of capital to ESG-related services and investment products.\2\
Asset managers, as key conduits for these investments, have responded
to this increase in investor demand by creating and marketing funds and
strategies that consider ESG factors in their selection process.\3\
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    \1\ See Carlson, Debbie, ``ESG Investing Now Accounts for One-
Third of Total U.S. Assets Under Management'', Market Watch (Nov.
17, 2020), available at https://www.marketwatch.com/story/esg-investing-now-accounts-for-one-third-of-total-u-s-assets-under-management-11605626611. See also Letter from Morningstar to Chair
Gensler (June 9, 2021) attaching Sustainable Funds U.S. Landscape
Report--More funds, more flows, and impressive returns in 2020,
Morningstar Manager Research (Feb. 19, 2021), available at https://www.sec.gov/comments/climate-disclosure/cll12-8899329-241650.pdf.
    \2\ U.S. sustainable investments increased from $639 billion in
assets under management (``AUM'') in 1995 to $17.1 trillion by 2020.
The end of the last decade in particular saw extensive growth as the
total U.S.-domiciled assets integrating ESG strategies grew from
$12.0 trillion in 2018 to $17.1 trillion by 2020. This represented a
42% increase that brought the total amount of assets considering ESG
strategies to 33%, or 1 in 3 dollars of total U.S. assets that are
professionally managed. See, U.S. Sustainable Investing Forum, The
Report on U.S. Sustainable and Impact Investing Trends (Nov. 16,
2020), available at: https://www.ussif.org/files/Trends/2020_Trends_Highlights_OnePager.pdf. For purposes of this Release,
when discussing investors in funds and clients of investment
advisers, we generally use the term ``investors'' unless otherwise
required by the context.
    \3\ See U.S. Government Accountability Office (``GAO''), GAO-20-
530, Public Companies: Disclosure of Environmental, Social, and
Governance Factors and Options to Enhance Them (July 2020),
available at https://www.gao.gov/assets/gao-20-530.pdf (stating that
institutional investors seek ESG information to understand risks
that could affect company performance, to inform proxy voting, or to
enhance decision-making in portfolio management). See also, Boffo,
Riccardo and Patalano, Robert, ``ESG Investing: Practices, Progress
and Challenges'', Organization for Economic Co-operation and
Development (``OECD''), (2020), available at https://www.oecd.org/finance/ESG-Investing-Practices-Progress-Challenges.pdf (noting that
ESG investing has evolved in recent years to meet the demands of
institutional and retail investors, as well as certain public sector
authorities, that wish to better incorporate long-term financial
risks and opportunities into their investment decision-making
processes to generate long-term value).
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    Investors looking to participate in ESG investing face a lack of
consistent, comparable, and reliable information among investment
products and advisers that claim to consider one or more ESG factors.
This lack of consistent, comparable, and reliable information can
create a risk that a fund or adviser's actual consideration of ESG does
not match investor expectations, particularly given that funds and
advisers implement ESG strategies in a variety of ways.\4\ The lack of
specific disclosure requirements tailored to ESG investing creates the
risk that funds and advisers marketing such strategies may exaggerate
their ESG practices or the extent to which their investment products or
services take into account ESG factors. With respect to environmental
and sustainability factors, this practice often is referred to as
``greenwashing.'' The absence of a common disclosure framework also
makes it difficult for investors to find the disclosures and to
determine whether a fund's or adviser's ESG marketing statements
translate into concrete and specific measures taken to address ESG
goals and portfolio allocation. It also makes it difficult for
investors to understand how effectively the strategy is implemented
over time, and can frustrate investors' attempts to compare different
ESG strategies across funds or advisers.
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    \4\ When referring to a ``fund'' in this release, we variously
mean management investment companies registered on Form N-1A [17 CFR
274.11A] or Form N-2 [17 CFR 274 11a-1], unit investment trusts
registered on Form S-6 [17 CFR 239.16], and BDCs, but not private
funds as defined under the Advisers Act.
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    The Commission's commitment to improving the information provided
to investors in disclosures is longstanding. For example, the
Commission has long required funds to provide key information about a
fund's fundamental characteristics, while requiring advisers to provide
clear information about their advisory businesses and the investment
strategies they utilize or recommend to clients.\5\ Consistent with
this goal, standardized disclosure of a fund's principal investment
strategies and other key attributes, along with information about
advisory practices, is integral to investors' understanding the
specific types of investments or investment policies underlying certain
strategies when making informed decisions about funds and advisers. As
discussed below, the range of matters that different funds and advisers
consider in implementing ESG strategies, in addition to the increased
investor demand for investments in these strategies, requires strategy-
specific disclosures. That will improve information available to
investors by providing investors with an interest in ESG investing with
key information that is material to their investment decisions.
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    \5\ See Investment Company Act Release No. 23064 (Mar. 13, 1998)
[63 FR 13916 (Mar. 23, 1998)] (amending Form N-1A to focus
prospectus disclosure on key information to assist in investment
decisions) and Investment Company Act Release No. 13436 (Aug. 12,
1983) [48 FR 37928 (Aug. 22, 1983)] (adopting Form N-1A and its two-
part disclosure format permitting funds to provide investors with a
simplified prospectus containing essential information along with a
companion document called the ``Statement of Additional
Information'' (``SAI'') with more detailed information). See also
Investment Company Act Release No. 28584 (Jan. 13, 2009) [74 FR 4546
(Jan. 26, 2009)] (adopting enhanced disclosure and new prospectus
delivery option for registered open-end management investment
companies including a plain English requirement and providing the
statutory prospectus on an internet website) and Investment Adviser
Act Release No. 3060 (July 29, 2010) [75 FR 49233 (Aug. 12, 2010)]
(amending the Form ADV Part 2 ``brochure'' to require advisers to
provide meaningful information in a clearer format, noting ``[t]o
allow clients and prospective clients to evaluate the risks
associated with a particular investment adviser, its business
practices, and its investment strategies, it is essential that
clients and prospective clients have clear disclosure that they are
likely to read and understand'').
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    Accordingly, we are proposing various disclosure and reporting
requirements to provide shareholders and clients improved information
from funds and advisers that consider one or

more ESG factors. These enhancements are designed to help investors,
and those who provide advice to investors, make more informed choices
regarding ESG investing and better compare funds and investment
strategies. The proposed amendments create a framework for disclosures
about a fund or adviser's ESG-related strategies. We are also proposing
to enhance the quantitative data for environmentally focused fund
strategies, where methodologies for reporting emissions metrics are
becoming more standardized. In addition to these investor- and client-
facing disclosures, we are also proposing that funds and advisers
report census type information on their ESG investment practices in
regulatory reporting to the Commission, which would inform our
regulatory, enforcement, examination, disclosure review, and
policymaking roles, and help us track trends in this evolving area of
asset management. In addition to the ESG-specific disclosure, the
Commission is proposing an amendment to Form N-CEN that would require
all index funds, regardless of whether the fund tracks an ESG-related
index, to report identifying information about the index. Finally, we
are proposing to require funds to submit the ESG-related disclosures in
a structured data language to make it easier for investors and others
to analyze this data.

A. Background

1. Development and Growth of ESG Investing
    ``ESG'' is a term commonly used to incorporate three broad
categories of interest for investors: Environmental, Social, and
Governance.\6\ Investor demand for ESG funds and advisory services has
increased over the last decade, but consideration of ESG issues in
investment decision making has deep roots. In the 1970s and 1980s, some
asset managers began to integrate ESG factors into funds with social
and environmental investment objectives, while the early 1990s saw the
launch of the first ``socially responsible'' indexes.\7\ Since the mid-
2000s, many financial institutions have signed on to climate and
sustainability-related investment frameworks.\8\ In addition, a number
of organizations have formed to promulgate disclosure reporting
frameworks that incorporate environmental measures including: the
Climate Disclosure Standards Board, Global Reporting Initiative,
Sustainability Accounting Standards Board, and International
Sustainability Standards Board.\9\ These trends have accelerated in
recent years as the asset management industry has increasingly focused
on issues such as financing the transition from fossil fuels and
mitigating risks associated with climate change, and additional
voluntary \10\ and regulatory \11\ frameworks have developed.
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    \6\ For the purposes of this release and the proposed rules, the
Commission uses the term ``ESG'' to encompass terms such as
``socially responsible investing,'' ``sustainable,'' ``green,''
``ethical,'' ``impact,'' or ``good governance'' to the extent they
describe environmental, social, and/or governance factors that may
be considered when making an investment decision. These terms,
however, are not defined in the Advisers Act, the Investment Company
Act, or the rules or forms adopted thereunder.
    \7\ See Liu, Jess, ``ESG Investing Comes of Age, Morningstar''
(Feb 11, 2021) available at: https://www.morningstar.com/features/esg-investing-history (noting that the first sustainable mutual
fund, ``Pax World,'' was launched in 1971 and the Domini 400 Social
Index was launched in 1990).
    \8\ The United Nations Principles for Responsible Investment
(``UN PRI'') launched in 2006 and called upon institutional
investors to commit to six principles to integrate ESG issues into
investment analysis and decision-making. See About the PRI,
Principles for Responsible Investment, https://www.unpri.org/pri/about-the-pri (last visited Dec. 8 2021). The Forum for Sustainable
and Responsible Investment and Ceres are two other notable
institutional and investor-led initiatives.
    \9\ See Murray, Sarah, ``Measuring What Matters: the Scramble to
Set Standards for Sustainable Business'' (May 13, 2021) available
at: https://www.ft.com/content/92915630-c110-4364-86ee-0f6f018cba90.
See also IFRS Foundation Announces International Sustainability
Standards Board, IFRS (Nov. 3, 2021), available at: https://www.ifrs.org/news-and-events/news/2021/11/ifrs-foundation-announces-issb-consolidation-with-cdsb-vrf-publication-of-prototypes/.
    \10\ Several of these frameworks have relied on the Greenhouse
Gas Protocol: A Corporate Accounting and Reporting Standard (``GHG
Protocol'') that established measurable standards around reporting
Scopes 1 and 2 GHG emissions that allow investors to more readily
compare the emissions impacts of companies in their portfolios and
conduct scenario analyses. See The Greenhouse Gas Protocol, A
Corporate Accounting and Reporting Standard, Revised Edition,
available at: https://ghgprotocol.org/sites/default/files/standards/ghg-protocol-revised.pdf. In addition, the Financial Stability Board
(``FSB'') established the Task Force on Climate-Related Financial
Disclosures (``TCFD'') in 2015 to develop a framework to foster
consistent climate-related financial disclosures that could be
utilized by organizations across sectors and industries, including
advisers and funds. See Task Force on Climate-related Financial
Disclosures, 2021 Status Report (Oct. 14, 2021) available at https://www.fsb.org/wp-content/uploads/P141021-1.pdf. In 2020, an
international group of asset managers launched the Net Zero Asset
Managers Initiative committing hundreds of signatories to the goal
of achieving net zero gas emissions by 2050 or sooner. See Net Zero
Asset Managers Initiative Progress Report (Nov. 1, 2021) available
at https://www.netzeroassetmanagers.org/media/2021/12/NZAM-Progress-Report.pdf.
    \11\ In 2019, the European Commission adopted the Sustainable
Finance Disclosure Regulation (``SFDR''), a sustainability
disclosure framework for providers of certain financial products and
financial market participants including asset managers. See
Regulation (EU) 2019/2088 of the European Parliament and of the
Council of 27 Nov. 2019 on sustainability[hyphen]related disclosures
in the financial services sector and Regulation (EU) 2020/852 of the
European Parliament and of the Council of 18 June 2020 on the
establishment of a framework to facilitate sustainable investment,
and amending Regulation (EU) 2019/2088 PE/20/2020/INIT (``Taxonomy
Regulation'') (implementing a classification framework to help
determine to what extent economic activities are environmentally
sustainable by reference to six environmental objectives).
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    Statistics measuring fund flows and assets under management reflect
the increasing prevalence of ESG investing in recent years. The size
and scope of the asset management industry's ESG investing landscape
varies significantly depending, for example, on the focus of the
analysis, the assumptions made, and how much of this evolving area is
measured. For example, the U.S. Forum for Sustainable and Responsible
Investment (``US SIF'') states that since 1995, the ``U.S. sustainable
investment universe'' has increased more than 25 times from $639
billion to $17.1 trillion.\12\ Morningstar found that at the close of
2020 the number of ``sustainable'' open-end funds and exchange-traded
funds (``ETFs'') available to U.S. investors had experienced a nearly
fourfold increase over the past decade with a significant acceleration
beginning in 2015.\13\ In the same report, Morningstar states that
sustainable funds have set records for inflows in each of the past 5
years with more significant increases in 2019 and 2020.
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    \12\ US SIF Comment Letter (June 14, 2021). Our proposal takes
into account the comments we received in response to Acting Chair
Allison Herren Lee's requested public input on climate change
disclosure from investors, registrants, and other market
participants. See Acting Chair Allison Herren Lee Public Statement,
Public Input Welcomed on Climate Change Disclosures (Mar. 15, 2021),
available at https://www.sec.gov/news/public-statement/lee-climate-change-disclosures (``Climate RFI''). The comment letters are
available at https://www.sec.gov/comments/climate-disclosure/cll12.htm. Except as otherwise noted, references to comments in this
release pertain to these comments.
    \13\ See Letter from Morningstar to Chair Gensler (June 9, 2021)
attaching Sustainable Funds U.S. Landscape Report: More Funds, More
Flows, and Impressive Returns in 2020, Morningstar Manager Research
(Feb. 10, 2021), available at https://www.sec.gov/comments/climate-disclosure/cll12-8899329-241650.pdf.
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    Investors and other market participants increasingly demand access
to ESG-related investment services, products, and data, as, according
to one survey, 42% of institutional investors say they consider ESG
factors when making an investment decision.\14\ Another survey of
professional fund

selectors and institutional investors indicated that 75% and 77%
respectively believe that the consideration of ESG factors is integral
to investment decision making.\15\ Moreover, funds are increasingly
selecting fund names to signal ESG considerations or converting
existing funds into ESG or ``sustainable'' funds.\16\ An analysis of
Form N-PORT data indicates that 2.4 percent of all funds had names
containing ``Sustainable,'' ``Responsible,'' ``ESG,'' ``Climate,''
``Carbon,'' or ``Green'' as of September 2021.\17\ The Forum for
Sustainable and Responsible Investment has also documented continued
growth in ESG funds, expanding from 55 funds in 1995, to 1,002 in 2016,
and to 1,741 in 2020.\18\
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    \14\ See Whyte, Amy, ``More Institutions than Ever are
Considering ESG. Will they Follow Through?'', Institutional Investor
(Oct. 6, 2020), available at https://www.institutionalinvestor.com/article/b1npm5yq50b024/More-Institutions-Than-Ever-Are-Considering-ESG-Will-They-Follow-Through.
    \15\ See Goodsell, Dave, 2021 ESG Investor Insight Report ESG
Investing: Everyone's on the bandwagon, Natixis Investment Managers
(2021), available at https://www.im.natixis.com/us/research/esg-investing-survey-insight-report.
    \16\ See Ghoul, El-Sadouk and Karoui, Aymen. ``What's in a
(green) name? The consequences of greening fund names on fund flows,
turnover, and performance.'' Finance Research Letters 39: 101620
(2021).
    \17\ See infra text accompanying note 249.
    \18\ See US SIF, Report on U.S. Sustainable, Responsible and
Impact Investing Trends (2016), available at https://www.ussif.org/files/SIF_Trends_16_Executive_Summary(1).pdf and US SIF, Sustainable
Investing Basics (2020), available at https://www.ussif.org/sribasics.
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2. Characteristics of ESG-Related Investment Products and Services
    Approaches to ESG investing vary, which can pose challenges for
investors choosing among investment products and services.\19\ First,
ESG is an expansive term that incorporates three broad categories of
interest for investors and asset managers: environmental issues, social
issues, and governance issues.\20\ Some funds and advisers will
consider only one issue under the ESG umbrella when making investment
decisions, while others will apply the factors more broadly and
implement measures across each of the ESG categories. Even those
focusing on all three categories will have differing perspectives on
what attributes of an issuer or investment fit within ESG.
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    \19\ See infra section III.B.3.
    \20\ See Asset Management Advisory Committee Recommendations for
ESG (July 7, 2021) p. 4 (``AMAC Recommendations''), available at
https://www.sec.gov/files/spotlight/amac/recommendations-esg.pdf.
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    Second, investment products that incorporate one or more ESG
factors vary in the extent to which ESG factors are considered relative
to other factors. This generally falls along a three-part spectrum:
integration, ESG-Focused, and impact investing. We are incorporating
these terms into our proposed rules.
    Generally, ``ESG Integration'' strategies consider one or more ESG
factors alongside other, non-ESG factors in investment decisions such
as macroeconomic trends or company-specific factors like a price-to-
earnings ratio.\21\ In such strategies, ESG factors may be considered
in the investment selection process but are generally not dispositive
compared to other factors when selecting or excluding a particular
investment.
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    \21\ See Funds' Use of ESG Integration and Sustainable Investing
Strategies: An Introduction, Investment Company Institute, p. 4
(July 2020), available at https://www.ici.org/system/files/attachments/pdf/20_ppr_esg_integration.pdf. Some market participants
and commentators refer to funds that consider ESG factors as just
one among many factors as ``ESG consideration'' funds. See Jon Hale,
A Taxonomy of Sustainable Funds, Morningstar, (Mar. 7, 2019)
available at: https://www.morningstar.com/articles/918263/a-taxonomy-of-sustainable-funds. See also infra at section II.A.1.a.
for the Commission's proposed definition of ESG Integration.
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    ``ESG-Focused'' strategies focus on one or more ESG factors by
using them as a significant or main consideration in selecting
investments or in engaging with portfolio companies.\22\ For example,
such ESG-Focused strategies might exclude or include certain
investments based on particular ESG criteria. These factors could
include, for example, screens for carbon emissions, board or workforce
diversity and inclusion, or industry-specific issues. ESG-Focused
strategies could also include engagement with management of the issuers
in which the fund or adviser invests through proxy voting or direct
engagement.
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    \22\ Unlike the terms ``integration'' and ``impact,'' which are
currently used within this market, ``ESG-Focused'' is not currently
a commonly used term and can encompass a number of ESG-related
strategies and labels used in the market. See infra at Section II.
See also, e.g., Funds' Use of ESG Integration and Sustainable
Investing Strategies: An Introduction, Investment Company Institute,
p. 5 (July 2020), available at https://www.ici.org/system/files/attachments/pdf/20_ppr_esg_integration.pdf. (discussing how
sustainable investing strategies are distinct from ESG integration
in that they use ESG analysis as a significant part of the fund's
investment thesis) [hereinafter ICI White Paper]; A Practical Guide
to ESG Integration for Equity Investing, Principles for Responsible
Investment, available at: https://www.unpri.org/listed-equity/esg-integration-techniques-for-equity-investing/11.article.
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    Finally, ``ESG Impact'' strategies have a stated goal that seeks to
achieve a specific ESG impact or impacts that generate specific ESG-
related benefits.\23\ Impact strategies generally seek to target
portfolio investments that drive specific and measurable environmental,
social, or governance outcomes.\24\
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    \23\ See Burton, M. Diane, Chadha, Gurveen, Cole, Shawn A., Dev,
Abhishek, Jarymowycz, Christina, Jeng, Leslie, Kelley, Laura,
Lerner, Josh, Palacios, Jaime R. Diaz, Xu, Yue (Cynthia), and
Zochowski, Robert. ``Studying the U.S.-Based Portfolio Companies of
U.S. Impact Investors,'' Harvard Business School Working Paper, No.
21-130, (May 28, 2021), available at https://www.hbs.edu/ris/Publication%20Files/21-130_1fd65a3f-c144-4338-b319-7aa205339968.pdf
(stating that impact investing is characterized by seeking both
financial returns and a non-financial, social or environmental
impact). For purposes of the proposed rule, we define Impact Funds
as a subset of ESG-Focused Funds. See infra at II.A.1.b.
    \24\ ICI White Paper, at p. 8.
---------------------------------------------------------------------------

    Funds and advisers also vary in how they analyze, select, and
manage investments to achieve their ESG objectives. Third-party service
providers and ESG consultants (hereafter referred to as ``ESG
providers'') have emerged that provide data to evaluate ESG factors,
including issuer-specific ratings or scores. Some advisers and funds
rely on these analyses and ratings, while others use them in
combination with internal analyses. Other funds and advisers track
indexes designed to select investments based on various ESG factors.
Index providers are playing a large role in driving the flow of assets
towards issuers that meet the indexes' ESG methodology.\25\
---------------------------------------------------------------------------

    \25\ See Fourth Annual IIA Benchmark Survey Reveals Significant
Growth in ESG, Continued Multi-Asset Innovation & Heightened
Competition (Oct. 28 2020), available at http://www.indexindustry.org/2020/10/28/fourth-annual-iia-benchmark-survey-reveals-significant-growth-in-esg-amid-continued-multi-asset-innovation-heightened-competition/.
---------------------------------------------------------------------------

    Funds and advisers also take differing approaches regarding how
they engage on ESG issues with the issuers in which they invest, such
as through proxy voting or manager engagement.\26\ ESG-Focused Funds
and advisers often use proxy voting and other engagement with issuers
in their portfolios as a more deliberate piece of their strategy than
other investment products.\27\ As institutional investors increasingly
integrate ESG into their engagement with portfolio companies and comply
with their own internal ESG policies or investor mandates, proxy voting
advice

businesses have sought to meet this demand by offering proxy voting
recommendations that consider ESG factors.\28\ While funds are required
to report information about how they vote proxies, less is disclosed
regarding other engagements they may have with issuers in their
capacity as a shareholder.\29\
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    \26\ In 2021, the Commission proposed amendments to Form N-PX to
enhance the information mutual funds, exchange-traded funds, and
certain other funds report about their proxy votes including votes
on ESG issues. See Enhanced Reporting of Proxy Votes by Registered
Management Investment Companies; Reporting of Executive Compensation
Votes by Institutional Investment Managers (Sept. 29, 2021) [86 FR
57478(Oct. 15, 2021)] available at: https://www.sec.gov/rules/proposed/2021/34-93169.pdf.
    \27\ See AMAC Recommendations, supra footnote 20 at 9-10
(``experts consulted by the subcommittee . . . noted that ESG
investment products engage in share ownership activities as a more
deliberate piece of their strategy than many, but not all, other
investment products . . . Investors in these ESG products, and other
investment products, would benefit from clear, consistent statement
[sic] regarding how ownership responsibilities are carried out by
the product'').
    \28\ Investors are increasingly interested in proxy voting
practices that consider ESG factors to influence company behavior.
See, e.g., Peter Reali, Jennifer Grzech, and Anthony Garcia, ESG:
Investors Increasingly Seek Accountability and Outcomes, Harvard Law
School Forum on Corporate Governance, (Apr. 25, 2021), available at
https://corpgov.law.harvard.edu/2021/04/25/esg-investors-increasingly-seek-accountability-and-outcomes/; see also Comment
Letter of Gary Retelny, President and CEO, Institutional Shareholder
Services Inc., available at https://www.sec.gov/comments/climate-disclosure/cll12-8914286-244666.pdf.
    \29\ See AMAC Recommendations, supra footnote 20 at 10 (``while
the AMAC believes that the reporting of proxy voting is already well
regulated, other ownership responsibilities, if significant to the
product's strategy, should be noted'').
---------------------------------------------------------------------------

3. The Need for Specific ESG Disclosure Requirements
    Currently, funds and registered advisers are subject to disclosure
requirements concerning their investment strategies. Funds must provide
disclosures concerning material information on investment objectives,
strategies, risks, and governance, and management must provide a
discussion of fund performance in the fund's shareholder report.
Registered advisers are required to provide information about their
advisory services in narrative format on Form ADV Part 2--often
referred to as a brochure--describing their firm's methods of analysis
and investment strategies, fees, conflicts, and personnel. General
disclosures about ESG-related investment strategies fall under these
disclosure requirements, and failure to adhere to current disclosure
requirements violates Federal securities laws, but there are no
specific requirements about what a fund or adviser following an ESG
strategy must include in its disclosures.\30\
---------------------------------------------------------------------------

    \30\ See, e.g., In the Matter of Pax World Management Corp.,
Investment Advisers Act Release No. 2761 (July 30, 2008) (settled
action) (alleging that despite investment restrictions disclosed in
its prospectus, statement of additional information, and other
published materials that it complied with certain socially
responsible investing restrictions the fund purchased securities
contrary to those representations and failed to follow its own
policies and procedures requiring internal screening to ensure
compliance with those restriction).
---------------------------------------------------------------------------

    While the Commission has not generally prescribed specific
disclosures for particular investment strategies, ESG strategies differ
in certain respects that we believe necessitate specific requirements
and mandatory content to assist investors in understanding the
fundamental characteristics of an ESG fund or an adviser's ESG strategy
in order to make a more informed investment decision. First, the
variation discussed above concerning ESG investing, combined with the
lack of a more specific disclosure framework, increases the risk of
funds and advisers marketing or labelling themselves as ``ESG,''
``green,'' or ``sustainable'' in an effort to attract investors or
clients, when the ESG-related features of their investment strategies
may be limited. Such exaggerations can impede informed decision-making
as the labels may cause investors to believe they are investing in--and
potentially are paying higher fees for--a ``sustainable'' strategy that
may actually vary little from ones without such a label.\31\
Ultimately, this can frustrate investor expectations in the market for
ESG investing, with some investors and market participants questioning
whether and to what degree certain ESG funds are appreciably different
than other types of funds.\32\ Requiring comparable, consistent, and
reliable information from all funds and advisers that use an ESG label
would reduce the risk of exaggerated claims of the role of ESG factors
in investing, thereby increasing the efficiency and reliability with
which investors seeking an ESG strategy can find a fund or adviser that
meets their investing preferences, better protecting and serving
investors in the market for ESG-related investing as a whole.
---------------------------------------------------------------------------

    \31\ See Wursthorn, Michael, ``Tidal Wave of ESG Funds Brings
Profit to Wall Street'', The Wall Street Journal (Mar. 16, 2021),
available at https://www.wsj.com/articles/tidal-wave-of-esg-funds-brings-profit-to-wall-street-11615887004 (noting that ETFs with
strategies that focus on socially responsible investments have
higher fees than ``standard ETFs'').
    \32\ Mackintosh, James, ``ESG Funds Mostly Track the Market'',
The Wall Street Journal (Feb. 23, 2020), available at https://www.wsj.com/articles/esg-funds-mostly-track-the-market-11582462980
(noting that an analysis found that ESG funds have inconsistent
approaches, but on average hold slightly more technology stocks and
fewer energy stocks than the S&P 500 index).
---------------------------------------------------------------------------

    In addition to the risk of exaggerated labels or claims, funds and
advisers incorporating or focusing on ESG factors currently present
inconsistent information concerning how they consider ESG factors in
their investment strategies to investors, other market participants,
and the Commission. We believe that a major reason for such
inconsistency is the variety of perspectives concerning what ESG
investing means, the issues or objectives it encompasses, and the ways
to implement an ESG strategy. ``ESG investing,'' ``sustainable
investing,'' or other terms can reasonably connote different investing
approaches to different investors. Even when investors focus on the
same ESG issue, such as climate change or labor practices, there are
debates about how to address such issues, resulting in different, and
sometimes opposing, assessments of whether a particular investment
meets the investors' goals in furthering that issue.\33\ We believe
that requiring funds and advisers to disclose with specificity their
ESG investing approach can help investors and clients understand the
investing approach the fund or adviser uses. It can also help investors
compare the variety of emerging approaches, such as employment of an
inclusionary or exclusionary screen, focus on a specific impact, or
engagement with issuers to achieve ESG goals. The proposed rules would
help draw out these distinctions and better inform investors by
providing them with decision-useful information to compare, for
example, two funds that both refer to their strategy as ``sustainable''
but employ different approaches and areas of focus to implement their
sustainable strategy.
---------------------------------------------------------------------------

    \33\ Some have noted that the ``fluidity of the ESG rubric'' can
lead to subjective application of ESG factors when applied to
certain assets. For example, a recent journal article notes that one
provider of ESG data and ratings found that about half of the ESG
mutual funds it assessed scored as ``average or worse'' than non-ESG
funds using the provider's own ESG scoring methodology, showing that
managers often disagree on the ESG attributes of particular
investments. In another example, the article posits that an issuer
that investors may assess to be ``environmentally sound'' or
``beneficial'' could have what it perceives to be weak corporate
governance controls or mistreat its workforce leaving an investor
with subjective judgments in weighting E versus S versus G factors.
Lastly, the article notes that there is substantial debate around
how to assess the climate impacts of issuers that rely on certain
types of energy production and the relative environmental impacts
and risks of coal, oil, natural gas, and nuclear energy. See
Schanzenbach, Max and Sitkoff, Robert ``Reconciling Fiduciary Duty
and Social Conscience: The Law and Economics of ESG Investing by a
Trustee,'' 72 Stan. L. Rev. 381 (Feb. 2020), available at: https://ssrn.com/abstract=3244665.
---------------------------------------------------------------------------

    Further, ESG investment products can have risk/return objectives
that reflect a longer time horizon and have objectives that extend
beyond risk/return goals.\34\ Funds and advisers with ESG-related
investing objectives can consider factors and measures in addition to
those often used to measure financial return to manage the portfolio.
They may also use additional key performance indicators specific to ESG
objectives to assess the fund's or adviser's effectiveness in meeting
these goals. Additionally, for ESG investing, investors might be more
likely to have an interest in knowing

more about the investment selection and engagement process to ensure
that the process aligns with the ESG-related values or priorities of
the investor, rather than simply as a means for gauging effectiveness
of the end result of financial return.\35\ Accordingly, we believe that
specific ESG-related disclosures would enable an investor to understand
and analyze funds' and advisers' ability to meet any ESG-related
objectives and would complement existing disclosures regarding
objectives related to financial returns by helping the investor
understand the relationship between ESG-related objectives and
financial return objectives.\36\
---------------------------------------------------------------------------

    \34\ See AMAC Recommendations, supra footnote 20 at p. 6.
    \35\ For example, investors often have differing priorities when
it comes to ESG investment. Studies have shown that certain
investors in socially responsible investments may be less sensitive
to financial performance compared to other investors, perhaps
because SRI investors derive utility from non-pecuniary attributes
as well. See infra at text accompanying note 288.
    \36\ AMAC Recommendations, supra footnote 20, at 6-7.
---------------------------------------------------------------------------

B. Overview of the Proposal

    In light of these observations, we are proposing to require
additional specific disclosure requirements regarding ESG strategies to
investors in fund registration statements, the management discussion of
fund performance in fund annual reports, and adviser brochures.\37\ We
believe that these disclosures would promote consistent, comparable,
reliable--and therefore decision-useful--information for investors.
These changes also would allow investors to identify funds more readily
and advisers that do or do not consider ESG factors, differentiate how
they consider ESG factors, and help inform their analysis of whether
they should invest. To address exaggerated claims about ESG strategies,
we are proposing minimum disclosure requirements for any fund that
markets itself as an ESG-Focused Fund, and requiring streamlined
disclosure for Integration Funds that consider ESG factors as one of
many factors in investment selections. We also propose that funds tag
their ESG disclosures using the Inline eXtensible Business Reporting
Language (``Inline XBRL'') structured data language to provide machine-
readable data that investors and other market participants could use to
more efficiently access and evaluate ESG funds. We believe that these
requirements would provide improved transparency and decision-useful
information to investors assisting them in making an informed choice
based on their preferences for ESG investing.
---------------------------------------------------------------------------

    \37\ More specifically, we propose to amend Forms N-1A, N-2, N-
CSR, N-8B-2, S-6, N-CEN, and ADV Part 2A.
---------------------------------------------------------------------------

    To complement the disclosure in the prospectus, we are proposing to
require that certain ESG-Focused Funds provide disclosures in their
annual reports. Specifically, we are proposing that an Impact Fund
summarize its progress on achieving its specific impact(s) in both
qualitative and quantitative terms, and the key factors that materially
affected the fund's ability to achieve the impact(s), on an annual
basis. We also are proposing amendments to fund annual reports to
require a fund for which proxy voting or other engagement with issuers
is a significant means of implementing its strategy to disclose
information regarding how it voted proxies relating to portfolio
securities on particular ESG-related voting matters and information
regarding its ESG engagement meetings.
    Finally, the Commission is proposing a requirement for ESG-Focused
Funds that consider environmental factors. Specifically, we are
proposing to require disclosure of two greenhouse gas (``GHG'')
emissions metrics for the portfolio in such funds' annual reports. We
believe the proposed information would provide quantitative metrics
related to climate for investors focused on climate risk while also
providing verifiable data from which to evaluate environmental claims.
This information also would benefit those investors that have made net
zero or similar commitments by helping them determine whether a
particular investment is consistent with the commitment they have
made.\38\ Disclosure of GHG metrics could better prevent exaggerated
claims in this space by providing consistent, comparable, and reliable
data that investors can use when reviewing funds that market themselves
as focusing on climate factors in their investment processes. With
access to GHG metrics, fund investors and market participants could
review the relative carbon footprints and carbon intensity of ESG-
Focused Funds against comparable funds and determine whether a fund's
climate or sustainability disclosures align with its actual GHG
metrics.
---------------------------------------------------------------------------

    \38\ See Net Zero Asset Managers Initiative, Net Zero Asset
Managers initiative announces 41 new signatories, with sector seeing
`net zero tipping point' (July 6, 2021) available at: https://www.netzeroassetmanagers.org/net-zero-asset-managers-initiative-announces-41-new-signatories-with-sector-seeing-net-zero-tipping-point. See also Glasgow Financial Alliance for Net Zero: ``Our
Progress and Plan Towards a Net-Zero Global Economy'' (Nov. 2021)
available at: https://www.gfanzero.com/progress-report/.
---------------------------------------------------------------------------

    To complement the proposed ESG disclosures in fund registration
statements and annual reports and adviser brochures, we are proposing
to require certain ESG reporting on Forms N-CEN and ADV Part 1A, which
are XML-structured forms on which funds and advisers, respectively,
report census-type data. This reporting would provide the Commission,
investors, and other market participants with structured data that can
be used to understand industry trends in the market for ESG investment
products and services.

II. Discussion

A. Proposed Fund Disclosures to Investors

1. Proposed Prospectus ESG Disclosure Enhancements
    We are proposing to require a fund engaging in ESG investing to
provide additional information about the fund's implementation of ESG
factors in the fund's principal investment strategies. The proposed
amendments are designed to provide investors clear and comparable
information about how a fund considers ESG factors.\39\ They also
address the significant variability in the ways different funds
approach the incorporation of ESG factors in their investment decisions
by contemplating a range of strategies that funds use. The level of
detail required by this enhanced disclosure would depend on the extent
to which a fund considers ESG factors in its investment process.
Additionally, because the information necessary to understand fully a
fund's ESG methodology could lead to a large amount of disclosure, our
proposed requirements contemplate layered disclosure. For example,
open-end funds would provide an overview of their ESG strategy in the
summary section of the prospectus, and would provide more details about
the strategy in the statutory prospectus.\40\ We designed this layered
disclosure approach to highlight key information for investors to help
them make better informed investment decisions as well as to promote
disclosure that is inviting and usable to a broad spectrum of
investors. This approach is designed so

the additional information that may be interest to some investors is
available through layered disclosure.\41\
---------------------------------------------------------------------------

    \39\ This approach would complement existing requirements that
funds use plain English and disclose essential information in a
concise and straightforward manner to help investors make informed
investment decisions about the fund. See, e.g., General Instructions
B.4.(c) and C.1-3(c) of Form N-1A [17 CFR 274.11A]; General
Instruction for Part A and General Instructions for Parts A and B of
Form N-2 [17 CFR 274.11a-1].
    \40\ While Closed-End Funds do not utilize a summary section in
their prospectuses, our proposed requirements for closed-end funds
still utilize principles of layered disclosure by requiring certain
items to appear earlier in the prospectus.
    \41\ The Commission has taken multiple steps that recognize
investors' preferences for concise and engaging disclosure of key
information as well ensure that additional information that may be
of interest to some investors is available through layered
disclosure. See, e.g., New Disclosure Option for Open-End Management
Investment Companies, Investment Company Act Release No. 23065 (Mar.
13, 1998) [63 FR 13968 (Mar. 23, 1998)]; Enhanced Disclosure and New
Prospectus Delivery Option for Registered Open-End Management
Investment Companies, Investment Company Act Release No. 28584 (Jan.
13, 2009) [74 FR 4546 (Jan. 26, 2009)]; Updated Disclosure
Requirements and Summary Prospectus for Variable Annuity and
Variable Life Insurance Contracts, Investment Company Act Release
No. 33814 (Mar. 11, 2020) [85 FR 25964 (May 1, 2020)]; see also
Tailored Shareholder Reports, Treatment of Annual Prospectus Updates
for Existing Investors, and Improved Fee and Risk Disclosure for
Mutual Funds and Exchange-Traded Funds; Fee Information in
Investment Company Advertisements, Investment Company Act Rel. No.
33963 (Aug. 5, 2020) [85 FR 70716, 70720-21 (Nov. 5, 2020)] (stating
that the ``vast majority of individual investors responding to
questions in the Fund Investor Experience RFC about summary
disclosure expressed a preference for summary disclosure . . . .
[and that] Commenters' overall preference for summary disclosure is
generally consistent with other information the Commission has
received--through investor testing, surveys, and other information
gathering--that similarly indicates that investors strongly prefer
concise, layered disclosure'').
---------------------------------------------------------------------------

    Specifically, and as discussed further below, funds that meet the
proposed definition of ``Integration Fund'' would provide more limited
disclosures. ``ESG-Focused'' Funds, which would include, for example,
funds that apply inclusionary or exclusionary screens, funds that focus
on ESG-related engagement with the issuers in which they invest, and
funds that seek to achieve a particular ESG impact, would be required
to provide more detailed information in a tabular format.\42\ The
proposed amendments would apply to open-end funds (including ETFs) and
closed-end funds (including business development companies (``BDCs''))
that incorporate one or more ESG factors into their investment
selection process.\43\
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    \42\ Because we are proposing requirements specific to funds
that seek to achieve a particular ESG impact, we are also proposing
a distinct definition for this subset of ESG-Focused Funds. See
infra at Section II.A.1.ii.
    \43\ For a BDC, certain proposed disclosure would be included in
the management discussion and analysis, in the BDC's annual report
on Form 10-K [17 CFR 249.310]. Also, a unit investment trust
(``UIT'') would not be subject to the proposed annual report to
shareholders requirements because a UIT is not required to provide
management's discussion of fund performance (``MDFP'') disclosure in
their annual reports.
---------------------------------------------------------------------------

    1. We are not proposing to define ``ESG'' or similar terms and,
instead, we are proposing to require funds to disclose to investors (1)
how they incorporate ESG factors into their investment selection
processes and (2) how they incorporate ESG factors in their investment
strategies. Is this approach appropriate? Should we seek to define
``ESG'' or any of its subparts in the forms? Should we provide a non-
exhaustive list of examples of ESG factors in the forms? Should we
define certain types of factors as being ESG but allow funds to add
additional factors to that concept if they choose? Are there any other
approaches that we should take in providing guidance to funds as to
what constitutes ESG?
    2. Should these disclosure requirements apply to registered open-
end funds, registered closed-end funds, and BDCs, as proposed? Are
there other substantive disclosure requirements that should differ
based on the type of fund? Should our proposed disclosure requirements
apply to insurance company separate accounts registered as management
investment companies?
(a) Proposed Integration Fund Disclosure
    We are proposing to require an Integration Fund to summarize in a
few sentences how the fund incorporates ESG factors into its investment
selection process, including what ESG factors the fund considers. For
example, an Integration Fund might provide a brief narrative of how it
incorporates factors, or provide an example to illustrate how it
considers ESG factors with other factors.\44\ This disclosure would be
in addition to the information funds currently are required to provide
in their prospectuses about their investments, risks, and performance.
Open-end funds would provide this information in the summary section of
the fund's prospectus, while closed-end funds, which do not use summary
prospectuses, would disclose the information as part of the
prospectus's general description of the fund.\45\
---------------------------------------------------------------------------

    \44\ For example, an Integration Fund might disclose that it
invests in companies consistent with its objective of risk-adjusted
return; that it considers ESG factors alongside financial, industry-
related and macroeconomic factors; that the specific ESG factors it
evaluates are the impact and risk around climate change,
environmental performance, labor standards, and corporate
governance; and that its consideration of these factors would not
necessarily result in a company being included or excluded from the
evaluation process but rather would contribute to the overall
evaluation of that company. Proposed Item 4(a)(2)(ii)(A) of Form N-
1A [17 CFR 274.11A]; proposed Item 8.(2)(e)(2)(A) of Form N-2 [17
CFR 274.11a-1]. For purposes of section II.A.1., the term ``funds''
includes all management investment companies, including BDCs, but
not unit investment trusts; see also General Instructions B.4.(c)
and C.1.(a) of Form N-1A [17 CFR 274.11A]; General Instructions Part
A: The Prospectus of Form N-2 [17 CFR 274.11a-1].
    \45\ Id. See 17 CFR 230.498 [Rule 498 under the Securities Act
of 1933]. We estimate that as of Dec. 31, 2020, approximately 95% of
mutual funds and ETFs use summary prospectuses. This estimate is
based on data on the number of mutual funds and ETFs that filed a
summary prospectus in 2020 in the Commission's Electronic Data,
Gathering, Analysis, and Retrieval system (``EDGAR'') (10,739) and
the Investment Company Institute's estimated number of mutual funds
and ETFs as of Dec. 31, 2020 (11,323). See Investment Company
Institute, 2021 Investment Company Fact Book, at 40, available at
https://www.ici.org/system/files/2021-05/2021_factbook.pdf.
---------------------------------------------------------------------------

    An Integration Fund, for this purpose, would be a fund that
considers one or more ESG factors along with other, non-ESG factors in
its investment decisions, but those ESG factors are generally no more
significant than other factors in the investment selection process,
such that ESG factors may not be determinative in deciding to include
or exclude any particular investment in the portfolio. Such funds may
select investments because those investments met other criteria applied
by the fund's adviser (e.g., investments selected on the basis of
macroeconomic trends or company-specific factors like a price-to-
earnings ratio).
    We are proposing to require an Integration Fund to describe how it
incorporates ESG factors into its investment selection process because
we believe this is important information for investors that should be
available for them to review in the same location in different funds'
prospectuses.\46\ At the same time, we are not proposing more extensive
disclosure requirements in the summary prospectus. Requiring a more
detailed discussion of ESG factors could cause an Integration Fund to
overemphasize the role ESG factors play in the fund's investment
selection process by adding ESG disclosure requirements that could
result in a more detailed description of ESG factors than other
factors. This overemphasis could impede informed investment decisions
because ESG factors discussed at length would not play a central role
in the fund's strategy.\47\ For these reasons, we are proposing a
layered disclosure approach for Integration Funds. Specifically, we are
proposing to complement the concise description discussed above with a
more detailed description of how an Integration Fund

incorporates ESG factors into its investment selection process in an
open-end fund's statutory prospectus or later in a closed-end fund's
prospectus.\48\ This more detailed description would provide
information about the fund's integration of ESG factors in its
investment strategy to facilitate informed decision making by providing
investors more detail about the extent to which the fund considers
those ESG factors as compared to other factors in the fund's investment
selection process.\49\
---------------------------------------------------------------------------

    \46\ For purposes of our proposed rule, investment selection
encompasses the decision to invest in a particular security as well
as the size or weighting of the particular security investment.
    \47\ Further, in a separate proposal, we are proposing to define
the names of ``integration funds'' as materially deceptive and
misleading if the name includes terms indicating that the fund's
investment decisions incorporate one or more ESG factors. See 17 CFR
270.35d-1 [rule 35d-1 under the Investment Company Act] (the ``names
rule''); Investment Company Names, Investment Company Act Release
No. 34593 (May 25, 2022) (``Names Rule Proposing Release''),
published elsewhere in this issue of the Federal Register.
    \48\ See Proposed Instruction 1(a) to Item 9(b)(2) of Form N-1A
[17 CFR 274.11A]; Proposed Instruction 9.a(1) to proposed Item
8.2.e(2)(B) of Form N-2 [17 CFR 274.11a-1].
    \49\ See supra Section II.A.1.3. (``The Need for Specific ESG-
Disclosure Requirements'') (discussing why additional detail about
the fund's integration of ESG factors in its investment selection
process is important and necessary as the lack of a more specific
ESG-disclosure framework may result in a fund marketing or labelling
itself as ``ESG,'' ``green,'' or ``sustainable'' to attract
investors even though the fund's consideration of ESG-related
features in its investment strategy is limited).
---------------------------------------------------------------------------

    In addition to this general requirement, which would apply to all
ESG factors that a fund considers, we are proposing a specific
requirement for Integration Funds that consider GHG emissions to
provide more detailed information in the fund's statutory prospectus or
later in a closed-end fund's prospectus. Specifically, if an
Integration Fund considers the GHG emissions of portfolio holdings as
one ESG factor in the fund's investment selection process, we are
proposing to require such a fund to describe how the fund considers the
GHG emissions of its portfolio holdings.\50\ This disclosure must
include a description of the methodology that the fund uses as part of
its consideration of portfolio company GHG emissions. For example, an
Integration Fund that considers GHG emissions might disclose that it
considers the GHG emissions of portfolio companies within only certain
``high emitting'' market sectors, such as the energy sector. The fund
in this example would also be required to describe the methodology it
uses to determine which sectors would be considered ``high emitting,''
as well as the sources of GHG emissions data the fund relied on as part
of its investment selection process.
---------------------------------------------------------------------------

    \50\ See Proposed Instruction 1(b) to Item 9(b)(2) of Form N-1A
[17 CFR 274.11A]; Proposed Instruction 9.a(2) to proposed Item
8.2.e(2)(B) of Form N-2 [17 CFR 274.11a-1].
---------------------------------------------------------------------------

    As discussed in more detail below, some investors have expressed
particular demand for information on the ways in which funds consider
GHG emissions as a factor in the investment selection process so that
they can make better informed investment decisions, which can create an
incentive for funds to overstate the extent to which portfolio company
emissions play a role in the fund's strategy and therefore warrants
specific disclosure requirements regarding the process for integrating
this data. Moreover, as discussed below, there has been increasing
acceptance and convergence around particular methodologies for
calculating certain GHG emissions metrics,\51\ but Integration Funds
might vary substantially in how they utilize GHG emissions metrics data
or otherwise consider portfolio company GHG emissions, which can impede
informed decision-making if investors believe Integration Funds that
consider GHG emissions do so in the same way or by reference to the
same framework. We believe requiring more specific disclosure for
Integration Funds that consider portfolio company GHG emissions,
including the methodology the fund used for this purpose, will assist
investors in better understanding how the fund integrates GHG emissions
in its investment selection process and compare that process to that of
other Integration Funds.
---------------------------------------------------------------------------

    \51\ See infra at text accompanying footnote 119.
---------------------------------------------------------------------------

    We are proposing to require funds to place this information outside
of an open-end fund's summary prospectus and later in a closed-end
fund's prospectus where more detailed information is available on a
range of topics to balance the need for investors to have access to
this information while mitigating the risk of overemphasis of ESG
factors by an Integration Fund as discussed above.
    We request comment on all aspects of our proposed approach to
Integration Fund disclosure, including the following items:
    3. Is the proposed definition of an Integration Fund appropriate
and clear? Are there other alternative definitions we should consider?
For example, is the aspect of the definition specifying that ESG
factors ``may not be determinative in deciding to include or exclude
any particular investment in the portfolio'' sufficiently clear? Would
it be clearer to provide that ESG factors are ``not necessarily''
determinative, or would that imply a greater role of ESG factors than
may be the case for many integration funds? Is the proposed definition
over- or under- inclusive? For example, are there funds that do not
currently consider themselves to integrate ESG factors but would fall
under this definition and be required to provide disclosures?
Conversely, are there funds that do not meet the proposed definition
that do consider themselves to integrate ESG factors?
    4. Will funds that engage in fundamental-oriented analysis, i.e.,
funds that analyze a portfolio company's value by examining related
economic and financial factors about their portfolio companies
generally, consider themselves to be Integration Funds? Should such
funds be Integration Funds because of their long-standing
considerations of governance factors in their investment selection
processes? For ESG disclosure requirements, should there be an
Integration Fund category, as proposed, or should we limit disclosure
requirements to ESG-Focused Funds? Alternatively, should there be
additional categories of funds other than Integration Funds, ESG-
Focused Funds, and Impact Funds, as proposed?
    5. Should we, as proposed, require an Integration Fund to provide a
brief description of how the fund incorporates any ESG factors into its
investment selection process, including what ESG factors the fund
incorporates? Should we require a fund to include example(s)? Should we
require a specific type of example? What additional disclosure about an
Integration Fund would be helpful for an investor? Where should that
additional disclosure be located?
    6. Should we, as proposed, require an Integration Fund that
considers the GHG emissions of its portfolio holdings as an ESG factor
in its investment selection process, to disclose how it considers the
GHG emissions of its portfolio holdings? Should the description, as
proposed, include a description of the methodology such a fund uses for
this purpose? Would investors find this narrative disclosure useful to
make better informed investment decisions? Should we require
Integration Funds to disclose quantitative information or other GHG
metrics, in addition to or in lieu of, the narrative disclosure? If so,
what type of quantitative information of GHG metrics should be
disclosed? For instance, should we require Integration Funds that
consider GHG emissions as a part of their investment selection process
to disclose the same standardized GHG metrics we are requiring of
certain ESG-Focused Funds? Would such quantitative data be useful to
investors?
    7. Should Integration Funds provide the tabular disclosure we are
proposing for ESG-Focused Funds, as discussed below? Would that
disclosure overemphasize the role ESG factors play in an Integration
Fund's portfolio or,

conversely, would investors find the disclosure informative?
    8. Is the placement of the proposed disclosure appropriate for
funds? If not, is there a different place that would be more
appropriate?
    9. We are proposing to require an Integration Fund to provide a
brief disclosure in the summary section of an open-end fund's
prospectus and in the general description of the fund for a closed-end
fund. The brevity of this disclosure is designed to avoid giving
investors the impression that Integration Funds incorporate ESG factors
more than they actually do as a result of lengthy ESG disclosure. Is it
feasible for funds to meet the elements of the proposed disclosure
requirement with a brief description or example? If not, should we
modify any aspects of the disclosure requirements to promote brevity?
Should we impose a word limit or use another method to ensure brevity,
beyond including the general requirement that the disclosure be brief?
Are there other ways to ensure balanced disclosure that would not
overemphasize the role of ESG factors while also fostering meaningful
disclosure about ESG factors? Conversely, should we delete the
requirement that the disclosures be brief?
    10. A fund is permitted to add a statement of its investment
objectives, a brief description of its operations, or any additional
information on its front cover page. That other information may include
a text or design feature. Should we address a fund's use of a text or
design feature on its front cover page? For example, should we provide
that it would be materially deceptive and misleading for an Integration
Fund to use a text or design feature on its front cover page that
implies a focus on one or more ESG factors? Should we place limitations
on the ability of an Integration Fund to use a text or design feature
on its front cover page to indicate that the fund's investment
decisions incorporate one or more ESG factors on the basis that such
features might be misleading? Conversely, are there other formatting
requirements that would help improve the salience and prominence, such
as font size and bolding, that we should address?
    11. Should we, as proposed, require an Integration Fund to provide
a more detailed description of how the fund incorporates ESG factors
into its investment selection process in an open-end fund's statutory
prospectus or later in a closed-end fund's statutory prospectus? Would
investors find this information useful for understanding the ESG
integration process? Would this information overemphasize the extent to
which an Integration Fund considers ESG factors in its investment
selection process? Would the layered disclosure format that we are
proposing be appropriate for Integration Funds? Should all or more
information about the fund's ESG integration process be in the summary
section of the prospectus? Conversely, should we require Integration
Funds to put most or all of the information about their ESG integration
process in the statutory prospectus (or, for closed-end funds, later in
the prospectus), as proposed?
(b) Proposed ESG-Focused Fund Prospectus Disclosure
    We are proposing to require an ESG-Focused Fund, which would
include an ESG Impact Fund, to provide specific disclosure about how
the fund focuses on ESG factors in its investment process. 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.\52\ Thus, ESG-Focused Funds under this
proposed definition would include, for example, funds that track an
ESG-focused index or that apply a screen to include or exclude
investments in particular industries based on ESG factors.\53\ The
category would likewise include a fund that has a policy of voting its
proxies and engaging with the management of its portfolio companies to
encourage ESG practices or outcomes.\54\
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    \52\ See Proposed Item 4(a)(2)(i)(B) of Form N-1A [17 CFR
274.11A]; Proposed Item 8.2.e.(1)(B) of Form N-2 [17 CFR 274.11a-1].
    \53\ While we are not suggesting any ESG-related minimum
characteristics that such index or screen would have, an ESG-Focused
Fund that uses the index or screen to focus on one or more ESG
factors by using them as a significant or main consideration in
selecting investments would be required, as discussed below, to
provide disclosure about the index or screen under our proposed
amendments.
    \54\ See infra at section II.A.1.b.3 for the discussion of what
we propose constitutes engagement for these purposes.
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    Additionally, to help ensure that any fund that markets itself as
ESG provides sufficient information to investors to support the claim,
the proposed definition of an ESG-Focused Fund explicitly includes (i)
any fund that has a name including terms indicating that the fund's
investment decisions incorporate one or more ESG factors and (ii) any
fund whose advertisements or sales literature indicates that the fund's
investment decisions incorporate one or more ESG factors by using them
as a significant or main consideration in selecting investments.\55\
Accordingly, any fund that markets itself, whether through its name or
marketing materials as having an ESG focus, would be required to
provide the proposed ESG Strategy Overview Table discussed below.\56\
We believe this aspect of the proposed definition can help deter funds
from making exaggerated claims by requiring funds that market
themselves as, for example, ``ESG,'' ``green,'' ``sustainable,'' or
``socially conscious'' to provide specific information in their
prospectuses to substantiate such claims.
---------------------------------------------------------------------------

    \55\ For purposes of the proposed definition of an ESG-Focused
Fund, the term ``advertisements'' is defined pursuant to 17 CFR
230.482 under the Securities Act of 1933, and the term ``sales
literature'' is defined pursuant to 17 CFR 270.34b-1 under the
Investment Company Act of 1940.
    \56\ For example, ABC Solar Energy ETF invests in the securities
that comprise the XYZ solar index. Because the fund has a name that
indicates it considers ESG factors based on the industry in which
the fund invests, the fund would be required to provide the proposed
ESG-Focused Fund disclosure. As another example, DEF Growth Fund has
sales materials that state it focuses on companies that ``provide
solutions to sustainability challenges.'' DEF Growth Fund would be
required to provide the ESG-Focused Fund disclosure because its
marketing materials indicate that ``sustainability'' is a
significant consideration in selecting investments. Providing the
proposed disclosure for ESG-Focused Funds would not provide
assurance or a safe harbor that such name or marketing materials are
not materially deceptive or misleading. Funds must continue to
consider the application of the Federal securities laws including,
but not limited to, the general antifraud provisions and the names
rule to their name or other marketing materials. See Names Rule
Proposing Release, supra footnote 47.
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    A fund's use of advertisements or sales literature that mention ESG
factors, but not as a ``significant or main consideration'' in the
fund's investment or engagement strategy, would not alone cause the
fund to be an ESG-Focused Fund. This aspect of the proposed definition
of an ESG-Focused Fund would permit Integration Funds to discuss the
role of ESG factors in their advertisements or sales literature--
including the relationship between ESG factors and other investment
factors and that ESG factors might not be dispositive--while deterring
marketing materials that imply that ESG factors are a significant or
the main consideration of a fund.
    We also propose to define an ``Impact Fund'' as an ESG-Focused Fund
that seeks to achieve a specific ESG impact or impacts.\57\ For
example, a fund that invests with the goal of seeking current income
while also furthering the fund's disclosed goal of financing the
construction of affordable housing units would be an Impact Fund under
the

proposal. A fund that invests with the goal of seeking to advance the
availability of clean water by investing in industrial water treatment
and conservation portfolio companies is another example of an Impact
Fund under the proposal. As these examples illustrate, an Impact Fund's
stated goal of pursuing a specific impact is what would distinguish
Impact Funds under the proposal from other ESG-Focused Funds. An Impact
Fund would be required to provide the disclosures proposed for all ESG-
Focused Funds. Additionally, and as discussed further below, an Impact
Fund would have additional disclosure requirements, including how the
fund measures progress towards the stated impact; the time horizon used
to measure that progress; and the relationship between the impact the
fund is seeking to achieve and the fund's financial returns.\58\ We
believe additional disclosure requirements are appropriate for these
funds to clarify the impact the fund is seeking to achieve as well as
to allow investors to evaluate the fund's progress in achieving that
impact.
---------------------------------------------------------------------------

    \57\ Proposed Item 4(a)(2)(i)(C) of Form N-1A [17 CFR 274.11A];
Proposed Item 8.2.e.(1)(C) of Form N-2 [17 CFR 274.11a-1].
    \58\ See infra at Section II.A.1.b.(2).
---------------------------------------------------------------------------

    ESG-Focused Funds would provide key information about their
consideration of ESG factors in a tabular format--an ESG Strategy
Overview table--in the fund's prospectus. An open-end fund would be
required to provide the disclosure at the beginning of its ``risk/
return summary,'' the section of the prospectus that summarizes key
information about the fund's investments, risk and performance, while a
closed-end fund would provide the table at the beginning of the
discussion of the fund's organization and operation.\59\ The disclosure
would be in the following tabular format:
---------------------------------------------------------------------------

    \59\ Proposed Item 4(a)(2)(ii)(B), Instruction 1 of Form N-1A
[17 CFR 274.11A]; Proposed Item 8.2.e.(2)(B), Instruction 1 of Form
N-2 [17 CFR 274.11a-1] (providing that the ESG Strategy Overview
table would precede the risk/return summary (for open-end funds) or
discussion of the fund's organization and operation (for closed-end
funds), and disclosure in the table need not be repeated in the
narrative disclosure that will follow the table in the risk/return
summary of discussion of the fund's organization and operation).
[GRAPHIC] [TIFF OMITTED] TP17JN22.008

    Requiring all ESG-Focused Funds to provide concise disclosure, in
the same format and same location in the prospectus, is designed to
provide investors a clear, comparable, and succinct summary of the
salient features of a fund's implementation of ESG factors. This
information would help an investor determine if a given ESG-Focused
Fund's approach aligns with the investor's goals. We are proposing
consistent titles in the rows of the table to help investors to compare
and analyze different ESG-Focused Funds

more easily as they make investment decisions.\60\
---------------------------------------------------------------------------

    \60\ Proposed Item 4(a)(2)(ii)(B), Instruction 3 of Form N-1A
[17 CFR 274.11A]; Proposed Item 8.2.e.(2)(B), Instruction 3 of Form
N-2 [17 CFR 274.11a-1]. A fund would be allowed to replace ``ESG''
in each row with another term that more accurately describes the
applicable ESG factors the fund considers. Similarly, a fund would
be permitted to replace the term ``the Fund'' in each row with an
appropriate pronoun, such as ``we'' or ``our.'' Id.
---------------------------------------------------------------------------

    To facilitate a layered disclosure approach, the amendments would
require an ESG-Focused Fund to complete each row with the brief
disclosure required by that row--and only the information required by
the relevant form instructions--with lengthier disclosure or other
available information required elsewhere in the prospectus.\61\ In an
electronic version of the prospectus, that is, a prospectus posted on
the fund's website, electronically delivered to an investor, or filed
on EDGAR with the Commission, the fund also would be required to
provide hyperlinks in the table to the related, more detailed
disclosure later in the prospectus to help investors easily access the
information.\62\ We discuss the disclosure that would be required by
each row of the table further below.
---------------------------------------------------------------------------

    \61\ Proposed Item 9(b)(2), Instruction 2 of Form N-1A [17 CFR
274.11A]; Proposed Item 8.2.e.(2)(B). Instruction 9.b of Form N-2
[17 CFR 274.11a-1].
    \62\ Proposed Item 4(a)(2)(ii)(B), Instruction 3 of Form N-1A
[17 CFR 274.11A]; Proposed Item 8.2.e.(2)(B), Instruction 3 of Form
N-2 [17 CFR 274.11a-1].
---------------------------------------------------------------------------

    We request comment on all aspects on the proposed definitions of
ESG-Focused Fund and Impact Fund, the general approach to layered
disclosure and the design of the ESG Strategy Overview Table, including
the following items:
    12. Are there additional distinctions that the disclosure rules
should make besides the proposed distinctions between Integration Funds
and ESG-Focused Funds, as proposed, for the level of detail required in
prospectus disclosures?
    13. Should we, as proposed, define an ESG-Focused Fund as a fund
that focuses on one or more ESG factors by using them as a significant
or main consideration in selecting its investment or its engagement
strategy with issuers of its investments?
    14. As discussed above, a fund that applies a screen to include or
exclude investments based on ESG factors would meet the proposed
definition of an ESG-Focused Fund. Should our definition of an ESG-
Focused Fund specifically reference a fund that follows an ESG-related
index or a screen based on ESG factors to include or exclude
investments? Should our definition take into account whether a fund's
use of an ESG-related index or screen is to promote ESG goals? Should
the reference to engagement be a means of identifying Impact Funds,
rather than ESG-Focused Funds generally?
    15. Should we include the proposed elements in the definition of
ESG-Focused Fund related to the use of ESG-related names or advertising
or other materials? In particular, does the proposed definition provide
appropriate flexibility to allow an Integration Fund to describe its
integration process accurately in advertising or other materials, while
assuring that funds that market themselves as having an ESG focus
provide sufficient information to support such claim?
    16. An Integration Fund may be categorized by a third-party
marketer or a third-party rater as an ESG-Focused Fund. Are there
circumstances where we should attribute the third party
characterization to the fund and require the fund to report as an ESG-
Focused Fund? For example, should we require such reporting if the
fund's adviser has explicitly or implicitly endorsed or approved the
information after its publication (such as by including it in the
fund's marketing materials), or has involved itself in the preparation
of the information?
    17. Would the ESG Strategy Overview table's layered disclosure
approach provide a concise presentation for investors who want a
comprehensive summary of ESG-related aspects of the fund in one place,
with more detailed information available later in the prospectus? Are
there alternatives that would be more helpful to investors?
    18. Should we, as proposed, limit the disclosure in the ESG
Strategy Overview Table to the information required by the
instructions? Is there any information we should permit but not
require?
    19. Should we, as proposed, require that the ESG Strategy Overview
table precede the other disclosure required in the section of the
prospectus to which we propose to add the table (i.e., Item
4(a)(2)(ii)(B) of Form N-1A or proposed Item 8.2.e.(2)(B) of Form N-2)?
    20. Since closed-end funds do not have a summary section of the
prospectus, we have proposed an alternative approach by requiring the
ESG Strategy Overview Table to precede other disclosures in that Item
8.2.e.(2) of the prospectus, while permitting the more detailed ESG
information to be disclosed later in the same item. Is this approach
appropriate for closed-end funds? Are there alternatives we should
consider?
    21. Should we require a fund to provide a cross-reference or
hyperlink in the prospectus to other parts of the registration
statement, as proposed? Are there other sections of the registration
statement where we should permit an ESG-Focused Fund to provide a
cross-reference or hyperlink? If so, to what sections should we permit
an ESG-Focused Fund to provide that cross-reference or hyperlink in the
registration statement?
    22. Should we, as proposed, permit a fund to replace the term
``ESG'' in the ESG Strategy Overview table with another term or phrase
that more accurately describes the ESG factors that the fund considers?
Should a fund be required to replace ESG with a different term in
certain circumstances, such as when it focuses on a particular issue or
set of issues? Should we mandate that funds choose from a list of
alternative terms to improve comparability, and, if so, what terms
should those be?
    23. Should we allow flexibility in how funds label each row in the
table beyond the flexibility provided regarding the term ESG and the
pronouns used?
    24. Should ESG-Focused Funds disclose information other than what
we have proposed about their ESG strategy? By contrast, is there any of
the proposed disclosures that an ESG-Focused Fund would make that
should not be adopted by the Commission?
Overview of the Fund's ESG Strategy
    First, in the row ``Overview of [the Fund's] [ESG] strategy,'' we
are proposing that an ESG-Focused Fund provide a concise description in
a few sentences of the factor or factors that are the focus of the
fund's strategy.\63\ For example, a fund might disclose that it focuses
on environmental factors, and in particular, on greenhouse gas
emissions. Further, the fund would be required to include a list of
common ESG strategies as indicated in the ESG Strategy Overview table
and, in a ``check the box'' style, indicate all strategies in that list
that apply.\64\ These check boxes would identify common ESG strategies,
namely, the tracking of an index, the application of an exclusionary or
inclusionary screen, impact investing, proxy voting, and engagement
with issuers. An ESG-Focused Fund would not be required to check any of
the boxes if none of the common ESG strategies applied to the fund, and
instead, would check the ``other'' box.

This ``check the box'' presentation is designed to allow an investor
immediately to identify the ESG strategies a fund employs. Together,
the disclosure in this row is designed to help investors quickly
compare different funds' area of focus and approaches to ESG investing
and to provide context for the more specific disclosure in the rows
that follow.
---------------------------------------------------------------------------

    \63\ Proposed Item 4(a)(2)(ii)(B), Instruction 4 of Form N-1A
[17 CFR 274.11A]; proposed Item 8.2.e.(2)(B) Instruction 4 of Form
N-2 [17 CFR 274.11a-1].
    \64\ Id.
---------------------------------------------------------------------------

    25. Should we, as proposed, require an ESG-Focused Fund to provide
a concise description in a few sentences of the ESG factor or factors
that are the focus of the fund's strategy? Is beginning the table with
an overview helpful? Would it give investors a way to quickly discern
the particular ESG-focus of the fund?
    26. Should we, as proposed, require funds to include the types of
common ESG strategies in a ``check box'' format? Is this format useful
to an investor so that the investor can quickly and easily understand
the fund's ESG strategy and compare it with the ESG strategies used by
other funds? Alternatively, as opposed to listing all the strategies
and checking the ones that apply, should funds list only the ESG
strategies that apply to them?
    27. Should the instructions include definitions or descriptions for
each common strategy on the list, or are they sufficiently self-
explanatory?
    28. Would there be instances where a fund might face ambiguity as
to whether a strategy on the list accurately describes a technique the
fund utilizes? For example, are there instances where it might be
ambiguous whether a fund applies an inclusionary or exclusionary
screen? If so, is there alternative disclosure a fund should provide?
    29. Are there any common ESG strategies that should be included on
the list, or any that we proposed that should be excluded? Would the
``other'' box, as proposed, be helpful in allowing funds to identify
that they pursue a strategy other than those specified in the other
check boxes or, conversely, would that result in funds tending to
select ``other'' and making the check-box disclosure less informative
to investors?
    30. The ESG Strategy Overview table provides a number of check
boxes for common ESG strategies. Does the number of those check boxes
present the possibility that a fund could overstate and/or present the
appearance to an investor of overstating the fund's ESG strategy
because of the number of those check boxes? Should certain of those
check boxes be combined? If so, which ones? Are there other
alternatives to the check boxes that would be consistent with the
disclosure goals of the check boxes?
(1) Description of the Fund's Incorporation of Any ESG Factors in
Investment Decisions
    Second, in the row ``How the Fund incorporates [ESG] factors in its
investment decisions,'' we are proposing that an ESG-Focused Fund
summarize how it incorporates ESG factors into its process for
evaluating, selecting, or excluding investments.\65\ Funds would be
required to provide specific information in this row and supplement the
overview in this row with a more detailed description later in the
prospectus.\66\ The fund would provide specific information, in a
disaggregated manner, with respect to each of the common ESG strategies
applicable to the fund as identified by the ``check the box''
disclosure.\67\ For example, a fund would have to explain an
inclusionary screen distinctly from an exclusionary screen. To help
ensure this information would be presented in a clear format, a fund
would be permitted to use multiple rows in the table or other text
features to clearly identify the disclosure related to each applicable
common ESG strategy.\68\ We discuss below each of the disclosures that
would be required in this row, if applicable.
---------------------------------------------------------------------------

    \65\ Proposed Item 4(a)(2)(ii)(B), Instruction 5 of Form N-1A
[17 CFR 274.11A]; Proposed Item 8.2.e.(2)(B), Instruction 5 of Form
N-2 [17 CFR 274.11a-1].
    \66\ Open-end funds would provide the additional information in
response to Item 9 of Form N-1A, as we propose to amend it, which
covers a fund's investment objectives, principal investment
strategies, related risks, and portfolio holdings. Closed-end funds
would provide the additional information in response to Item 8 of
Form N-2, as we propose to amend it, which requires a general
description of the fund, including its investment objectives and
policies and other matters. Proposed Item 9(b)(2), Instruction 2 of
Form N-1A [17 CFR 274.11A]; Proposed Item 8.2.e.(2)(B), Instruction
9 of Form N-2 [17 CFR 274.11a-1].
    \67\ Proposed Item 4(a)(2)(ii)(B), Instruction 4 of Form N-1A
[17 CFR 274.11A]; Proposed Item 8.2.e.(2)(B), Instruction 4 of Form
N-2 [17 CFR 274.11a-1].
    \68\ Id.
---------------------------------------------------------------------------

    First, if the fund applies an inclusionary or exclusionary screen
to select or exclude investments, the fund's summary must briefly
explain the factors the screen applies, such as particular industries
or business activities it seeks to include or exclude, and if
applicable, what exceptions apply to inclusionary or exclusionary
screen.\69\ In addition, such fund would be required to state the
percentage of the portfolio, in terms of net asset value, to which the
screen applies, if less than 100%, excluding cash and cash equivalents
held for cash management and to explain briefly why the screen applies
to less than 100% of the portfolio.
---------------------------------------------------------------------------

    \69\ Id.
---------------------------------------------------------------------------

    We understand that many ESG-Focused Funds commonly apply
inclusionary or exclusionary screens to select investments based on ESG
criteria. A fund applying an inclusionary screen would use the screen
to select investments based on the fund's ESG criteria. This includes,
for example, funds that select companies that perform well relative to
their industry peers based on ESG factors, such as greenhouse gas
emissions or workforce diversity. Conversely, a fund applying an
exclusionary screen would start with a given universe of investments
and then exclude investments based on ESG criteria, such as by
excluding investments in companies that operate in certain industries
or that engage in certain activities.
    Requiring funds that apply inclusionary or exclusionary screens to
explain briefly the factors the screen applies, as well as the
percentage of the portfolio covered by the screen if applicable, is
designed to help investors understand how ESG factors guide the fund's
investment decisions. A fund applying an inclusionary screen to select
investments based on a company's performance on certain ESG factors
relative to peers in its sector might disclose an overview of this
process and the primary ESG factors it considers to select investments.
A fund applying an exclusionary screen might disclose, for example,
that it invests in the securities of a given index, excluding companies
in the index that derive significant revenue from the extraction or
refinement of fossil fuels or sale of alcohol. This would allow an
investor to understand the kinds of investments a fund was focusing on
or avoiding and determine if the fund's approach aligned with the
investor's own view of ESG investing. Finally, we are proposing to
require a fund to state the percentage of the portfolio, in terms of
net asset value, to which the screen is applied, if less than 100%,
excluding cash and cash equivalents held for cash management, and to
explain briefly why the screen applies to less than 100% of the
portfolio. We believe that knowing that a portion of the portfolio is
selected without regard to a particular screen would be important to an
investor so that the investor would understand the extent to which the
fund considers ESG factors. We propose to provide an exception for cash
management to make clear that funds that generally apply the screen to
their entire portfolio do not have to include disclosure in this row
regarding small portions held for

operational purposes, such as meeting redemptions.
    As with other items discussed in this row, the fund also would be
required to provide a more detailed description of any inclusionary or
exclusionary screen later in the prospectus. That disclosure would
cover the factors applied by any inclusionary or exclusionary screen,
including any quantitative thresholds or qualitative factors used to
determine a company's industry classification or whether a company is
engaged in a particular activity.\70\ This disclosure would allow an
investor that is interested in the additional detail to understand how
a fund applies the inclusionary or exclusionary screen. To build on the
examples above, the fund might disclose in the prospectus how it
analyzes whether a company derives significant revenue from the
extraction or refinement of fossil fuels or sale of alcohol, including
how a fund defines ``significant'' for this purpose, such as a specific
percentage of a company's revenue derived from fossil fuels or alcohol.
---------------------------------------------------------------------------

    \70\ Proposed Item 9(b)(2)(d) of Form N-1A [17 CFR 274.11A];
Proposed Item 8.2.e.(2)(B), Instruction 9.b.(4) of Form N-2 [17 CFR
274.11a-1].
---------------------------------------------------------------------------

    Second, if the fund uses an internal methodology, a third-party
data provider, or a combination of both, in evaluating, selecting, or
excluding investments, the fund's disclosure in this row must describe
how the fund uses the methodology, third-party data provider, or
combination of both, as applicable.\71\ We understand that some ESG-
Focused Funds evaluate, select, or exclude investments using internal
methodologies, and/or base their investment decisions, at least in
part, on the data or analysis of a third-party data provider, such as
scoring or ratings provider, that evaluates or scores portfolio
companies based on the provider's ESG criteria. This disclosure, if
applicable, would help an investor understand how these methodologies
and/or providers guide the fund's investment decisions. Specifically,
we understand that different advisers or third-party data providers
conducting internal analyses can disagree on how to analyze how
companies fare on various ESG factors.\72\ Accordingly, funds that have
a similar ESG strategy and focus could have different, sometimes even
contradicting, views on an investment depending on the analysis the
funds conduct or the third-party data provider they use.\73\ The
required disclosures protect investors by providing them detailed
information to help determine whether the fund's process for analyzing
investments aligns with the ESG-related priorities of the investor.
---------------------------------------------------------------------------

    \71\ Id.
    \72\ See infra section II.A.1.b.
    \73\ See supra footnote 33 and accompanying text.
---------------------------------------------------------------------------

    In addition, because the description of an internal methodology or
third-party data provider's methodology can be lengthy, the summary in
the table would be complemented by a more detailed description later in
the prospectus.\74\ There, the fund would provide, if applicable, a
more detailed description of any internal methodology used and how that
methodology incorporates ESG factors. If the fund used a third-party
data provider, the fund would provide a more detailed description of
the scoring or ratings system used by the third-party data provider. We
believe the placement of information about additional third-party data
providers later in the prospectus balances the benefits of the
information to investors regarding the use of third-party data
providers generally, while encouraging brevity in the ESG Strategy
Overview Table and limiting disclosure to those analyses most likely to
directly influence investment selection. For both scoring providers and
other third-party data providers, the disclosure would be required to
include how the fund evaluates the quality of the data from such
provider, which we believe would help protect investors by allowing
them to assess the reliability of the information and the extent of the
independent analysis performed by the fund's adviser.\75\
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    \74\ Proposed Item 9(b)(2), Instruction 2 of Form N-1A [17 CFR
274.11A]; Proposed Item 8.2.e.(2)(B), Instruction 9.b of Form N-2
[17 CFR 274.11a-1].
    \75\ Id.
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    Third, if the fund tracks an index, the summary must identify the
index and briefly describe the index and how it utilizes ESG factors in
determining its constituents.\76\ For example, a fund tracking the XYZ
Sustainability Index would disclose that it tracks this index and
provide an overview of the kinds of companies included in the index.
This would inform an investor that the fund's investments are driven by
the composition of the index, as well as how that index is constructed.
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    \76\ Proposed Item 4(a)(2)(ii)(B), Instruction 5.(c) of Form N-
1A [17 CFR 274.11A]; Proposed Item 8.2.e.(2)(B), Instruction 5.c. of
Form N-2 [17 CFR 274.11a-1].
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    Because the description of an index's methodology can be lengthy,
the summary in the table would be complemented by a more detailed
description later in the prospectus. Specifically, a fund tracking an
index also would provide later in the prospectus the index's
methodology, including any criteria or methodologies for selecting or
excluding components of the index that are based on ESG factors.\77\
The disclosure in the ESG Strategy Overview table would give investors
an overview of the index's construction--and thus the fund's
investments--with additional information in the prospectus about the
index methodology thereby protecting investors by providing them
sufficient information to determine whether an index's methodology
aligns with the ESG-related priorities of the investor.
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    \77\ Proposed Item 4(a)(2)(ii)(B), Instruction 5(a) of Form N-1A
[17 CFR 274.11A]; proposed amended Item 9(b)(2), Instruction 2(a) of
Form N-1A [17 CFR 274.11A]; Proposed Item 8.2.e.(2)(B), Instruction
9.b.(1) of Form N-2 [17 CFR 274.11a-1].
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    Finally, we are also proposing that an ESG-Focused Fund provide in
this row an overview of any third-party ESG frameworks that the fund
follows as part of its investment process.\78\ Consistent with our
approach to the other disclosure items required by the row, the fund
would provide an overview of those standards in the row, with the more
detailed description of any applicable ESG framework and how it applies
to the fund later in the prospectus. We recognize that many advisers to
ESG-Focused Funds have expressed a commitment to follow frameworks,
such as the United Nations Sustainable Development Goals (``UN SDG'')
or the United Nations Principles for Responsible Investing (``UN
PRI'').\79\ In these cases, requiring a fund to disclose that the
fund's investments will follow such a framework would help an investor
understand how the fund considers such ESG frameworks in its investment
strategy. For example, under the proposed amendments, a fund might
disclose in its ESG Strategy Overview table that the fund's investment
objective is to seek long-term capital appreciation while also
contributing to positive societal impact aligned to the UN SDG by
limiting the fund's investments to companies that contribute to at
least one of those goals. The fund would then be required to disclose
later in its prospectus more information about any UN SDG goal on which
the fund focuses and how the fund determines that a portfolio company
contributes to that goal.\80\
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    \78\ Proposed Item 4(a)(2)(ii)(B), Instruction 6 of Form N-1A
[17 CFR 274.11A]; Proposed Item 8.2.e.(2)(B), Instruction 6 of Form
N-2 [17 CFR 274.11a-1].
    \79\ These standards are just examples included for illustrative
purposes. More information about the UN SDG is available at https://sdgs.un.org/goals. More information about the UN PRI is available at
https://www.unpri.org.
    \80\ Proposed Item 9(b)(2), Instruction 2(e) of Form N-1A [17
CFR 274.11A]; Proposed Item 8.e.2.(2)(B), Instruction 9.b.(5) of
Form N-2 [17 CFR 274.11a-1].

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    We request comment on all aspects of our proposal with respect to
disclosure by ESG-Focused Funds regarding investment selection
disclosure for ESG-Focused Funds, including the following items:
    31. Is there additional information concerning the investment
selection process in addition to the proposed disclosures for ESG-
Focused Funds that would be helpful to investors? Should we require
that additional information be included in the table or in another
disclosure item? Is there information in this proposed requirement that
should not be in the table and should be placed elsewhere instead?
Where should that information be placed, and how will the alternative
locations(s) help ensure investors receive key information in a readily
accessible location?
    32. Should we, as proposed, require that information with respect
to each investment process be provided in a disaggregated manner if
both apply? What manner of presentation of the information would be
helpful to investors?
    33. Is the proposed level of disclosure and the division of that
disclosure between the summary section of prospectus and statutory
prospectus (i.e., Items 4 and 9 of Form N-1A) appropriate? Similarly,
is the proposed level and the division of that disclosure between
earlier and later in the prospectus (i.e., proposed Item 8.2.e.(2),
Instruction 3 and Instruction 9 of Form N-2) appropriate? Is there
information that we are proposing to require in the table that we
should consider allowing to be disclosed later in the prospectus?
Conversely, is there information that we are proposing to require later
in the prospectus that we should require earlier in the prospectus?
    34. Is the information that we are proposing to require an ESG-
Focused Fund to disclose about how the fund incorporates ESG factors
into its investment process for evaluating, selecting, and excluding
investments appropriate and sufficiently clear?
    35. Should we specifically require, as proposed, an ESG-Focused
Fund to disclose in the ESG Overview Table whether it seeks to select
or exclude issuers that engage in certain activities, or whether the
fund seeks to select or exclude issuers from particular industries?
    36. Our proposed amendments include definitions of inclusionary
and/or exclusionary screens. Should those definitions be modified? Do
definitions of the screens help a fund determine if its investment
process is considered a screen for purposes of indicating the fund uses
a screen as a strategy? Should we include examples of inclusionary or
exclusionary screens? If so, what examples should the instructions
include?
    37. As proposed, funds that apply an inclusionary or exclusionary
screen would be considered an ESG-Focused Fund regardless of how
extensive or narrow the screen is. For example, a fund that applies an
exclusionary screen to just a few industries would be an ESG-Focused
Fund and provide the ESG Strategy Overview Table. Should we prescribe
how extensive an inclusionary or exclusionary screen must be in order
for a fund applying the screen to be an ESG-Focused Fund under our
proposed amendments? For example, if an exclusionary screen would
exclude companies on the basis of an ESG criterion that involved such
an unusual set of facts that no or few companies would be excluded,
should that fund instead be considered an Integration Fund, requiring
the more streamlined disclosure as opposed to a table? Do more limited
screens raise concerns that investors would be misled into believing
the screen is more comprehensive than it is? Conversely, would the
required disclosures about the screen and the fund's ESG investing
generally address any such concerns if the fund were treated as an ESG-
Focused Fund?
    38. Should we, as proposed, require funds to describe any
exceptions to their screening mechanism? How common is it for a fund
that applies a screen to its investments to except certain investments
from its screening mechanism, that is, to make investments that
otherwise would be excluded by the screen? What methodologies or
factors do funds have for processing such exceptions? Should that
information be disclosed to investors, either in the ESG Strategy Table
or elsewhere in the prospectus?
    39. Should we require all funds to disclose the percentage of the
portfolio to which the screen applies, even if it is 100%? Are there
funds that currently apply a screen only to a portion of their
portfolio? Should we include an explicit requirement that the fund
explain its approach to applying a screen to only part of a portfolio,
as proposed?
    40. Should we, as proposed, require a fund that implements its ESG
strategy by applying an inclusionary or exclusionary screen to disclose
the percentage of the portfolio, in terms of net asset value, to which
the screen is applied, if less than 100%, excluding cash and cash
equivalents held for cash management? Should the scope of exclusions to
which the screen would be applied be expanded, such as also excluding
similar investments held for cash management and/or excluding the
amount of any borrowings held for investment purposes? Is ``cash
management'' sufficiently understood or would guidance about cash
management be helpful? Alternatively, should we specify a percentage of
any non-ESG assets, even if not for cash management, that would be
considered de minimis and not need to be disclosed?
    41. Should we, as proposed, require funds to provide disclosure
later in the prospectus about the factors applied by any inclusionary
or exclusionary screen? Should such disclosure, as proposed, include
the quantitative thresholds or qualitative factors used to determine a
company's industry classification or whether a company is engaged in a
particular activity? Should any part of this information be required to
be in the ESG Strategy Overview Table? Is there any other disclosure
that we should require funds to provide, either in the ESG Strategy
Overview Table or later in the prospectus relevant to a screen?
    42. Would the disclosure that we would be requiring in the fund's
statutory prospectus (e.g., Item 9 of Form N-1A) about the index
methodology used and how that methodology incorporates ESG factors be
difficult for retail investors to understand? Are there ways in which
we could tailor those requirements to make that disclosure more useful
at conveying information to help protect investors? Would an example be
helpful?
    43. Should we, as proposed, require funds to disclose in the ESG
Strategy Overview Table an overview of their use of third-party data
providers, such as scoring or ratings providers and/or internal
methodologies? Are there specific aspects of this disclosure that we
should require in the table? Are there any competitive concerns with
disclosing internal methodologies? Are there alternatives that would
mitigate such concerns and still achieve the goal of helping investors
understand the process of how ESG factors are used in investment
selection?
    44. To what extent do funds use multiple third-party data
providers? Should we permit or require funds to provide only the
information about the fund's primary third-party data provider
(``primary'' in the sense that a fund utilizes that third-party data
provider more than others when making investment decisions)? If so,
should we provide additional instructions for funds to determine which
scoring provider is the primary third-party data provider? Should we,
as proposed,

require funds to disclose more detailed information later in the
prospectus about a third-party data provider's and/or the fund's
internal methodologies? Does this requirement strike an appropriate
balance for providing investors with complete information while
providing investors an overview toward the beginning of the prospectus
that is not overwhelming? Should we, as proposed, require funds to
provide a description of their evaluation of the data quality from such
providers? When a fund uses multiple third-party data providers, should
the fund disclose how it considers conflicting assessments of companies
by such providers?
    45. Would the proposed requirements regarding third-party data
providers and internal methodologies produce disclosure that would be
difficult for retail investors to understand? If so, are there ways in
which we could tailor those requirements to make that disclosure more
accessible for retail investors? Would an example of how the fund
evaluates the quality of the third-party data provider's ESG
information/analysis be helpful? Are there other ways, such as through
the use of various features (such as a chart, check-the-box, or bullet
points) that might be useful in helping an investor to understand the
disclosure?
    46. The disclosure, as proposed, about any index that an ESG-
Focused Fund tracks to implement its ESG strategy is more information
than what we require about other indexes that funds may track. Would
this disclosure be useful to an investor? Would more or less
information about how the fund tracks such ESG-focused index be useful
to an investor? Are there alternatives to this proposed disclosure that
we should consider?
    47. Would the disclosure, as proposed, about any index that the
fund may track and how the index utilizes ESG factors in determining
its constituents; any internal methodology or third-party data provider
or combination thereof that the fund may use; or any inclusionary or
exclusionary screen that the fund may apply be helpful to investors?
Should any part of this information be required to be in the ESG
Strategy Overview Table?
    48. Do third-party data providers and indexes currently provide
funds with the information that we would be requiring ESG-Focused Funds
to disclose later in their prospectuses? What are the costs to a fund
to obtain and disclose this information from third-party providers?
    49. We are proposing that a fund disclose any third-party ESG
frameworks it follows. Is the level of detail about that third-party
ESG framework appropriate? Should we limit the scope of what is
reported about the third-party ESG framework? If so, how? Is there
other information about the third-party ESG framework that should be
disclosed? If so, what types of information should be disclosed? Is
there additional information about how the fund follows the third-party
ESG framework that would be helpful?
    50. Are there any licensing or other issues that a fund would have
to address if we were to require a fund to, as proposed, disclose
information concerning a third-party data provider, index, or any
third-party ESG framework? If so, what might those issues entail and
how could we mitigate any concerns or costs while still providing
investors with complete information about the ESG investment selection
process?
    51. Are there any particular asset classes that ESG-Focused Funds
would invest in that should have specific disclosure requirements? For
example, are there any particular attributes of green bonds, social
bonds and/or sustainability-linked bonds that warrant specific
disclosures tailored to these investments?
(2) Impact Fund Disclosure
    In addition to the proposed disclosures described above, an Impact
Fund, i.e., a fund that selects investments to seek to achieve a
specific ESG impact or impacts, would be required to provide in the row
``How [the Fund] incorporates [ESG] factors in its investment
decisions'' 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).\81\ As with other proposed
requirements, the fund would provide a more detailed description later
in the prospectus to complement the overview provided in the ESG
Strategy Overview Table.\82\
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    \81\ Proposed Item 4(a)(2)(ii)(B), Instruction 7 of Form N-1A
[17 CFR 274.11A]; Proposed Item 8.2.e.(2)(B), Instruction 7 of Form
N-2 [17 CFR 274.11a-1]. In addition, an Impact Fund would have to
state that it reports annually on its progress in achieving the
impact in the Fund's annual report. Proposed Item 27(b)(7)(i)(B) of
Form N-1A [17 CFR 274.11A].
    \82\ Proposed Instruction 2(f), Item 9(b)(2) of Form N-1A [17
CFR 274.11A]; Proposed Item 8.2.e.(2)(B), Instruction 9.b.(5) of
Form N-2 [17 CFR 274.11a-1].
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    This information is designed to protect investors by providing them
with specific information concerning the impact(s) the fund seeks to
achieve. Requiring the fund to disclose the desired impact(s), as well
as how the fund measures its progress toward achieving that impact and
the related time horizon, is designed to help an investor to understand
and evaluate what strategies the fund uses to achieve the impact(s). It
also would address the risk of investors being misled through
exaggerated ESG claims by distinguishing Impact Funds from other kinds
of funds that have more general aspirations or goals, or from other
ESG-Focused Funds, particularly funds that primarily use inclusionary
or exclusionary screens but without seeking to achieve any specific ESG
impact. In addition, requiring the fund to disclose relationship
between the impact(s) the fund is seeking to achieve and financial
returns is designed to require funds to disclose, if true, that
financial returns are secondary to achieving the fund's stated impact--
or conversely, that achieving the fund's stated impact is intended to
enhance financial returns.\83\ We believe an investor needs to
understand this relationship to make an informed investment decision.
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    \83\ Letter from Federated Hermes to Vanessa Countryman (May 5,
2020) (discussing the distinction between collateral benefits ESG
and risk-return ESG and how that distinction turns on the investor's
motive, and attaching Max Schanzenbach and Robert Sitkoff
``Reconciling Fiduciary Duty and Social Conscience: The Law and
Economics of ESG Investing by a Trustee,'' 72 Stan. L. Rev. 381
(Feb. 2020)) submitted in Request for Comments on Fund Names, SEC
File No. S7-04-20, available at https://www.sec.gov/comments/s7-04-20/s70420-216512.pdf.
---------------------------------------------------------------------------

    For example, an Impact Fund might disclose that it seeks total
return while pursuing investment opportunities that finance the
construction of affordable housing units. The fund also would include
how it measures progress toward this goal, such as disclosing that it
reviews as a key performance indicator the number of affordable housing
units it financed annually. Finally, the fund would discuss the
relationship between its goal of financing affordable housing units and
its goal of seeking total return over, for example, a ten-year period.
We believe such information would allow an investor to evaluate if a
fund's specific impact(s) align with the investor's own objectives and
to understand how the fund assesses progress in achieving the impact.
    In addition to disclosure in the ESG Strategy Overview table, we
also are proposing to require an Impact Fund to

disclose in its investment objective the ESG impact that the fund seeks
to generate with its investments.\84\ Open-end funds disclose their
investment objectives at the beginning of the prospectus. Because
closed-end funds are not required to disclose their investment
objectives until later in the prospectus, the proposed instruction for
closed-end funds would require an Impact Fund to disclose the ESG
impact that the fund seeks to generate with its investments where the
fund first describes its objective in the filing.\85\ For both open-
and closed-end funds, this requirement is designed to highlight for
investors any ESG-related impact an Impact Fund is seeking to achieve,
given that such specific or measurable impacts differentiate Impact
Funds from other ESG-Focused Funds. We request comment on all aspects
of our proposal with respect to disclosure by Impact Funds in the
prospectus, including the following items:
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    \84\ Proposed instruction to Item 2 of Form N-1A [17 CFR
274.11A]; Proposed Instruction 10 to Item 8.2.e.(2)(B) of Form N-2
[17 CFR 274.11a-1].
    \85\ Proposed Instruction 10 to Item 8.2.e.(2)(B) of Form N-2
[17 CFR 274.11a-1].
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    52. Are Impact Funds appropriately considered a subset of ESG-
Focused Funds, or are they sufficiently distinct that they need a
separate set of disclosure requirements in the prospectus beyond the
specific proposed instruction for Impact Funds? Should we require
additional disclosures for Impact Funds beyond what we have proposed?
Is there any disclosure about an Impact Fund we have proposed that the
Commission should not adopt?
    53. Should we, as proposed, require an Impact Fund disclose the
relationship between the impact the Fund is seeking to achieve and
financial return(s)? Should we require this disclosure of all ESG-
Focused Funds?
    54. Should we, as proposed, require an Impact Fund to disclose how
it is seeking to achieve its impact, including how it measures progress
towards impact? Should we instead define an Impact Fund as an ESG-
Focused Fund that seeks to achieve ``measurable'' ESG impact or impacts
rather than define an ESG-Focused Fund as a fund that seeks to achieve
a specific impact, as proposed?
    55. Should we require, as proposed, an Impact Fund to describe the
fund's time horizon for progressing on its impact objectives and any
key performance indicators that the fund uses to analyze or measure the
effectiveness of the its engagement?
    56. Should we, as proposed, require the statement that the fund
reports annually on its progress in achieving its impact in the fund's