If the SEC’s ESG focused rules comes as proposed, there’s certainly going to be a cost to it, according to Matt Calabro, Executive Director, Compliance Services at Confluence.
“The biggest chorus that affects these proposals is the cost. There would be a big effort to get this information under control,” Calabro told Traders Magazine.
He explained that ultimately those costs are borne by the investors through lower returns or higher expenses in the funds.
“I think preparing for the change is about trying to find these data sources and try and identify what the specific requirements are,” he said.
According to Calabro, funds get their ESG data either internally from their own research team or by subscribing to one of the data services.
He added that larger funds are doing a little bit of both: they’re taking some third-party data and then enriching that data with their own research and their own analytics.
“The cost to build that out and gather all that extra data is definitely expensive,” he said.
The proposed amendments seek to categorize certain types of ESG strategies broadly and require funds and advisers to provide more specific disclosures in fund prospectuses, annual reports, and adviser brochures based on the ESG strategies they pursue.
The proposed changes would apply to certain registered investment advisers, advisers exempt from registration, registered investment companies, and business development companies, according to the SEC.
If adopted, it would establish disclosure requirements for funds and advisers that market themselves as having an ESG focus.
Calabro explained that the disclosure rule tries to divide funds in particular, but also advisers and strategies into three buckets with respect to ESG.
He further added that getting the ESG strategies fit into those three buckets would be a challenge.
“What we don’t know is if there is going to be a migration away from ESG focused funds, particularly to something that maybe has a lower burden of disclosure and might be easier to comply with,” he said.
“I don’t know whether that may be an unintended consequence of this rule, but we’ll see how that plays out,” he stressed.
Calabro also thinks that if these funds have higher expenses, there could be less investor appetite for those funds if the returns in an ESG product consistently lag the returns in a non-ESG product.
Calabro sees the rules being passed, largely is proposed: “We’re hearing there could be some softening to reduce some of the cost burden, but I think the meat of the disclosure requirements is likely to pass pretty much intact.”
Calabro said that there’s a generally decent support to improve disclosures to reduce the risk of greenwashing and to make sure that investors understand a fund‘s strategy.
“I think conceptually, everybody’s in about the same place. It’s the execution of that, that seems to be where the differences start to arise,” he concluded.
