As a reminder, SEC-registered investment advisers with a fiscal year end of December 31 must submit an annual amendment to their publicly-filed Form ADV by March 31, 2021.1 In the context of preparing an annual amendment, advisers should keep in mind that environmental, social and governance (“ESG”) related issues have been an area of continued focus for the SEC.2 In addition, many allocators are increasingly requesting information about how advisers are approaching ESG considerations. As a result, we recommend that advisers, especially those who (i) have adopted ESG policies and procedures, (ii) have integrated ESG into their investment process, and/or (iii) manage impact investing and/or ESG-focused strategies, consider whether their Form ADV fully and accurately discloses how ESG impacts their businesses and their provision of advisory services. This client alert discusses certain areas of the Form ADV Part 2A (the “Brochure”) that may be particularly affected by ESG-related considerations.
Expenses. Item 5 of the Brochure requires the adviser to describe types of fees or expenses clients may pay in connection with the adviser’s advisory services. Advisers should review whether any ESG-related expenses have been fully disclosed, including how such expenses may be allocated among the adviser and its clients, and among the adviser’s clients. ESG-specific expenses may include, among others, the fees and expenses of a third-party ESG rating agency or ESG-related research expenses.
Methods of Analysis, Investment Strategies and Risk of Loss. Item 8 of the Brochure requires the adviser to describe the methods of analysis and investment strategies the adviser uses in formulating investment advice and explain the material risks involved for each significant investment strategy or method of analysis. Advisers should consider specific disclosure regarding how ESG considerations are integrated into their investment processes, together with any material ESG-specific strategy risks.
Proxy Voting. Item 17 of the Brochure requires the adviser to describe its voting policies and procedures and how the adviser addresses conflicts of interest with respect to voting client securities. Advisers should consider whether disclosure is required as to how ESG affects their voting of client proxies, including, for example, how the adviser determines which, and to what extent, ESG factors should be considered when voting proxies and how the adviser determines that factoring in ESG considerations when voting proxies is in the best interest of its clients. In addition, advisers should also disclose if they are using any third-party proxy services in determining how to vote client proxies.
S&K Observations
In view of the SEC’s ongoing focus on the adequacy and accuracy of disclosures related to advisers’ approaches to ESG, as well as increased investor interest in this area, we recommend that advisers consider addressing ESG matters in their Brochure disclosures. Seward & Kissel LLP, and our compliance consulting service SKRC (Seward & Kissel Regulatory Compliance), are available to assist advisers with the issues discussed herein and other ESG-related considerations.
