Brian Daly Quoted by PE Law Report on SEC’s ESG Rules

Private Equity Law Report has quoted Akin Gump investment management partner Brian Daly for its article “SEC’s Proposed ESG Rules: Nuanced Concerns About Three ESG Categories and Other Form ADV Requirements (Part One of Two).”

The article discusses the Securities and Exchange Commission’s proposed rules on environmental, social and governance (ESG) disclosures, noting that, although registered funds are the focus of the proposed rules, private fund managers should also familiarize themselves with the rules and “to think critically about how it meshes with their existing ESG strategies, compliance practices and disclosure processes.”

On the topic of integration strategies, described as existing when a manager “takes one or more ESG factors into account in addition to non-ESG factors” and incorporates them into their investment processes, Daly said that the proposed rules’ definition of an “integration strategy” means that every private fund is an ESG fund if the manager considers any ESG factor: “It will have the unintended effect of requiring substantially all managers – perhaps other than quantitative hedge fund managers – to label every fund an ESG integration fund because, at some point, it will look at a company’s governance or how the company interacts with a social structure, rule or goal.”

He also said that, by broadly defining an integration fund, inadvertent greenwashing may appear in managers’ Forms ADV, noting that few would be confident in saying that there are no ESG factors in their analysis, and, consequently most managers would tick the “integration” box in Part 1A of Form ADV. He added, “Many of those same managers will then need to include clarifying language in their Part 2A brochures confirming that they consider non-determinative ESG factors but that they don’t believe those factors are particularly meaningful in most cases.”

On the topic of impact strategies, defined in the proposed rules as a subset of ESG-focused strategies seeking to make a specific ESG impact, Daly said that these are funds that seek both to make money and have some kind of measurable ESG impact on, for example, a company or industry, noting “[I]t is a two-fer in a sense: investment return plus impact.”

On the proposed requirement that managers complete Item 8.D of Part 2A to disclose each significant investment strategy for which they have considered ESG factors, he said that the problem is that fund managers and PE sponsors may find the specificity challenging: “Many PE sponsors do not have a specific checklist or set of filters they apply to investing. Instead, they weigh and assess various considerations at different times and, depending on the investment, in different ways.” He added that disclosing that functional process would be confusing to investors and possibly incongruent with Item 8.D’s requirements.