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We're Still Struggling to Define "Sustainable" and "ESG" in Securities Filings

Correspondence between the SEC Staff and an ESG-focused ETF sponsor shows that we are still struggling to define “Sustainable” and “ESG” for purposes of securities filings.  

Like other securities laws, the Investment Company Act of 1940 (the “1940 Act”) imposes reporting and disclosure requirements on registered investment companies such as mutual funds and ETFs.  The SEC and practitioners have, since the enactment of the federal securities laws in the Great Depression, refined these disclosure and reporting requirements so that investors, analysts, and others in the financial markets can make effective use of the information provided.

“ESG” and “Sustainable” have proven to be a thorn in this effort.  I am not writing to add to the wealth, breadth, and knowledge of commentators engaging in a discourse on mandating certain “ESG” disclosures and what those disclosures may add to the mix of information available to an investor and what those efforts may add to the theory of the firm.   I leave the kind reader links to an un-curated smattering of academic articles engaging in this discussion.  

Practically, though, it has proven difficult for asset managers (including BNY Mellon and Goldman Sachs, both of which have been censured by the SEC for failing to appropriately implement ESG mandates) to define and implement “ESG” and “Sustainable” programs, and how (and even whether) the SEC should define these for reporting purposes.  This comment letter publicly released recently on EDGAR in the context of the registration of an ETF further illustrates these difficulties.  

Regardless of the merits of ESG or Sustainable investing strategies, the failure or inability to define, standardize, and report data points on these investing strategies ultimately undermines the disclosure-based foundation of the federal securities laws and the efficient capital markets hypothesis that undergirds our modern economy.  Without meaningful standards, what is the point of this information?

Comment. Please revise Impax US Sustainable Economy Fund’s 80% policy to state that the Fund will invest at least 80% of its net assets in sustainable large-capitalization US equity securities, in accordance with Rule 35d-1 under the Investment Company Act of 1940, as amended (the “1940 Act”). Please also define the term “sustainable” for purposes of the Fund’s 80% policy. The Staff notes that a request for acceleration will not be granted to the Fund absent a corresponding change to the Fund’s 80% test.


securities & corporate governance