The United States Securities and Exchange Commission (SEC) established a criteria framework to comprehend how a company is involved with environmental, social, and governance issues. The specifics of these societal factors vary, but what is consistent is the requirement that investment strategies adopting ESG Integration must include at least one ESG factor along with non-ESG components to gauge investment decisions. Integration concerns the level of involvement that the company implements ESG criteria into its strategy.
Consistent criticism over the SEC’s framework has led to the organization releasing a reform proposal. Within the proposal, there is an attempt to clarify the categories of ESG investment strategies and what they entail. The three proposed categories are ESG Integration, ESG-Focused, and Impact.
To clarify the information and understanding of investment strategies, the SEC’s take on ESG integration is to help investors make educated decisions regarding the ESG products they invest in. Beyond this, it is up to the individual funds and their advisor to determine what ESG means to them. Read on for a closer look at the SEC’s take on ESG Integration.
The SEC’s Take On ESG Integration
According to the SEC’s take on ESG integration, specifications of ESG are left up to the firms and advisors. The SEC wants to avoid being the authority of a situational term to avoid scrutiny. While this gives more freedom to establish investment strategies, it is not yet clear how to verify the level of commitment a company is making to its sustainability efforts.
What Is Required
Moreover, ESG Integration funds are not required to look at every issue pertaining to ESG. There are, however, minimum requirements that require funds to disclose information supporting their involvement with ESG. ESG Integration funds are expected to indicate the ESG factors involved, provide a summary of how ESG factors are being incorporated into investments by the fund, and specify which ESG factors are considered.
Even with these specifications, these “rules” are only proposed. No rigid requirements prevent a company from misleading consumers and investors by greenwashing and manipulation.
What Is Not Necessary For This Investment Strategy
The ESG categories run from the least to the most committed to social responsibility and sustainability, as follows: ESG Integration, ESG-Focused, and Impact.
Here are some of the ways that ESG Integration showcases the least amount of commitment to sustainability efforts, based on the SEC’s take on ESG integration:
- The fund is not required to investigate or be involved with every ESG-related matter.
- The included ESG factors may not be the main reasons that fund managers select or eliminate securities for a related fund.
- Profit may be prioritized over sustainability.
Focus on building strong portfolios.
More work is needed to clarify what ESG involvement means in terms of investment strategy. For now, the SEC’s take on ESG integration indicates that firms and investors looking to take ESG Integration seriously should focus on building investment portfolios that prioritize companies that maximize human benefit and contribute the least harm to society.
