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Evolving Regulatory Framework addressing ESG for Financial Institutions and Registered Investment Companies

Financial institutions and investment companies, like in many other industries, are under increasing pressure to demonstrate a commitment to addressing environmental, social and governance (“ESG”) issues.  ESG strategies have become a focus for regulators, institutional and individual investors and ratings agencies, as well as customers and employees.   More and more stakeholders are scrutinizing investment and lending practices of financial institutions to determine whether they align with their values on how to address ESG issues. 

Last year, President Biden issued an executive order that directs the Financial Stability Oversight Council to identify ways to assess climate-related financial risk. In addition, the Federal Reserve Board and the Office of the Comptroller of the Currency are exploring ways to require banks to measure such risks, while the Securities and Exchange Commission (the “SEC”) has proposed rules regarding how public companies, registered investment companies, business development companies and certain investment advisers should assess and disclose ESG-related risks and considerations.

As a result, many entities are increasing their attention to ESG policies and are proactively implementing initiatives to address ESG, while also looking at the impact of environmental considerations on risk within lending and investment portfolios.  Consideration of ESG is more than a matter of regulatory compliance. It is about the broader view of all stakeholders versus only shareholders, which includes how employees and customers prioritize ESG as well as what the regulators suggest or require.

The Three Prongs of ESG

The three aspects of ESG are as follows:

  • Environmental: The environmental aspect refers to climate change. Specifically, it refers to how organizations negatively or positively contribute to the climate and what steps they take to mitigate negative environmental effects. This concept encompasses things like the use of natural resources, pollution, waste, and leveraging environmental opportunities to help assess whether organizations are being good stewards of the planet.


  • Social: The social aspect of ESG pertains to an organization’s approach toward making its community a better place to live and work. It also encompasses the importance of diversity, equity, and inclusion and refers to considerations of human capital, social opportunities, social responsibility, product liability, stakeholder engagement and being a good corporate citizen.


  • Governance: Governanceincorporates corporate governance, business behavior and integrity, corporate culture, and social media practices.


Developing Regulatory Guidance Related to Financial Institutions


Various frameworks for regulatory guidance continue to emerge, such as those recommended by the Financial Stability Board’s Task Force on Climate-Related Financial Disclosures, and the International Integrated Reporting Council and the Sustainability Accounting Standards Board (the Value Reporting Foundation).  Institutions are analyzing customer data to customize the recommendations to fit their own business models and to assess how such models should evolve over time to meet sustainability goals. This process typically includes the evaluation of the investment and lending decision-making process from an ESG perspective to determine what metrics should be included in the decision-making process.

SEC Proposed Rules for Certain Investment Companies and Advisers


The SEC recently released the following two proposals to require registered investment companies, business development companies, certain advisers exempt from registration and registered investment advisers to provide additional information regarding ESG investment practices:

  1. “Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices” to require certain investment advisers and companies to provide ESG-related disclosures; and
  2. “Investment Company Names” (known as the “Names Rule”) to broaden regulation of investment companies.

The SEC’s proposal would require certain companies and advisers to:

  • Provide certain disclosures on ESG strategies in prospectuses, annual reports, and adviser brochures;
  • Provide the greenhouse gas emissions of their investments if the company has a specific environmental focus;
  • Provide census-type information related to ESG factors considered or strategies implemented on a revised Form N-CEN; and
  • Use the Inline eXtensible Business Reporting Language tags on ESG-related disclosures.

The extent to which the enhanced disclosure requirements would apply to a fund largely depends on whether the fund is deemed an Integration, ESG-Focused or Impact Fund (from least disclosure requirements to most).

  1. Integration Funds would be required to summarize how the fund incorporates ESG factors into investment strategies and describe what ESG factors the fund considers.
  2. ESG-Focused Funds use ESG factors as a significant consideration in selecting investments or in its engagement strategy with the companies in which it invests. This includes funds that track an ESG-focused index or that apply a screen to include or exclude investments in particular industries based on ESG factors, and those with a policy of voting its proxies and engaging with the management of its portfolio companies to encourage ESG practices or outcomes.
  3. Impact Funds are ESG-Focused Funds that seek to achieve a specific ESG impact. These funds would be required to provide additional information about how the fund measures progress towards its stated ESG impact, the relationship between the impact and financial returns and key factors in both qualitative and quantitative terms, and to summarize its progress on achieving its specific impact(s) and the key factors that materially affected the fund’s ability to achieve the impact(s), on an annual basis.

Relatedly, the SEC’s Proposed “Names Rule” currently requires registered investment companies whose names suggest a focus in a particular type of investment (among other areas) to adopt a policy to invest at least 80 percent of the value of their assets in those investments. The proposed amendments require more funds to adopt an 80 percent investment policy.


Stakeholders and investors are increasingly interested in ESG transparency so they can evaluate how a board of directors manages ESG oversight and how a company’s management team assesses and manages ESG risks and opportunities.  In addition, the focus of regulators on disclosure standards and new proposed rules by the SEC indicate that there is broad interest in ESG issues and should encourage companies to review their ESG policies and investment strategies and assess ESG related risks.  Initiatives related to ESG should be effectively disclosed and communicated to regulators and stakeholders, including investors, customers and employees. 

The rules and guidance with respect to ESG continue to develop and evolve and could have substantial impact on organizations of all sizes.  In planning for anticipated final rules and additional guidance and the further need to address ESG issues, companies should ensure that management has the information necessary to assess ESG-related risks and a plan for providing ESG information to its board of directors.  In addition, companies should ensure they have the appropriate internal controls, policies and personnel in place to accurately track and disclose ESG information.  Proactively addressing these matters and challenges can create strategic advantage for your organization.

This alert is just a brief overview of a rapidly evolving topic as it relates to certain entities generally, and by no means is intended as an exhaustive summary of ESG considerations and disclosures for all types of entities.  If you would like additional information or assistance in evaluating your own needs related to ESG or establishing and reviewing ESG policies and disclosures, please contact us.

Jennifer L. DiBella is a Shareholder in UKS’ Hartford office, practicing in the areas of Financial Institutions and Transactions, Securities, Commercial Lending and General Corporate Law.  She can be reached at or 860.548.2630.

Evan S. Goldstein is a Shareholder in UKS’ Hartford office, practicing in the areas of Commercial Litigation/Creditor Rights and General Corporate Counsel.  He can be reached at or 860.548.2609.

Updike, Kelly & Spellacy, P.C. would like to thank UKS Summer Associate Caitlyn M. Doerr for her contribution to this client alert.

Disclaimer: The information contained in this material is not intended to be considered legal advice and should not be acted upon as such. Because of the generality of this material, the information provided may not be applicable in all situations and should not be acted upon without legal advice based on the specific factual circumstances.