The SEC recently issued proposed rules (Proposal) to require fund managers to categorize their environmental, social and governance (ESG) investing efforts and bolster their related disclosures on their respective Forms ADV. In some ways, the Proposal represents the culmination of several years of efforts by the SEC to wrap its arms around the scope and nature of ESG investing by private funds, as well as heated internal discussions about the best way to accomplish that goal. The Proposal, which will shape how ESG investing is embraced by the private funds industry going forward, is not, however, without flaws. Although the specific requirements in the Proposal are fairly straightforward (albeit still somewhat controversial), the best way to understand its significance is to holistically consider the ESG industry’s evolution, the SEC’s stance toward it and the unsteady ground upon which the Proposal was built. To that end, this article provides an overview of the SEC’s previous efforts toward the ESG industry; the specific components of the Proposal; the SEC’s intent behind the requirements; the significance of the SEC refusing to define E, S or G in the Proposal; and the purpose behind the compliance reaffirmations therein. See “Compliance Issues Associated With Advisers’ Integration of ESG Criteria
” (Jun. 14, 2022); and “Ways CCOs Are Approaching ESG in Light of Growing SEC Scrutiny
” (Feb. 22, 2022).