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SEC Wants to Shed Light on Funds’ ESG Claims With New Disclosure

Oct. 1, 2021, 10:00 AM

Mutual fund giants like BlackRock and Vanguard are facing a new SEC proposal that would trigger greater investor scrutiny about how their proxy ballot votes correspond to their environmental, social, and governance claims.

The Securities and Exchange Commission this week proposed rules that would require funds to more clearly disclose their votes on shareholder and management proposals—on a wide range of ESG topics from greenhouse gas emissions to board diversity—through categories that are set and standardized by the SEC.

BlackRock Inc., Vanguard Group Inc., and other firms that offer mutual funds to investors already must release their proxy voting records annually in Form N-PX. But SEC rules give firms wide discretion in how they report the information and categorize it, leading to disclosures that are vague, inconsistent, and hard to compare across funds, according to the agency.

Current disclosure rules, which date back to 2003, don’t allow investors to easily evaluate proxy votes to see whether funds are meeting their ESG claims, said Dorothy Lund, a USC Gould School of Law professor, who has studied mutual fund voting.

“There’s a strong need for more transparency on what mutual funds are doing with their votes,” she said. “There’s a lot of talk these days about BlackRock on sustainability, Vanguard on climate.”

The SEC has made ESG matters a priority under President Joe Biden. The voting disclosure plan is the SEC’s first formal proposal with an ESG element to come out with Democratic Chair Gary Gensler at the helm.

More sweeping SEC disclosure proposals on climate change, corporate board diversity, and companies’ workforces are expected in the coming months.

Representatives of BlackRock and Vanguard declined to comment.

Republican Concerns

The proposal has drawn concern from Republican SEC Commissioners Hester Peirce and Elad Roisman, who have raised questions about the usefulness of the ESG disclosures.

Under the proposed plan, the SEC would establish dozens of categories and subcategories in Form N-PX that funds can use to correspond and report their votes on ESG and other topics, such as mergers and audits. For example, if a fund voted on a proposal about a company’s carbon footprint, it would put the vote under the greenhouse gas emissions category.

There also is a catchall “other” category, which would require funds to provide a brief description about any votes they include in that group.

Votes could go under multiple groups, if necessary, according to the agency.

The proposed classifications are based on matters that received frequent fund votes in 2020 and the experience of SEC staff, the agency said.

In a Sept. 29 commission meeting to consider the proposal, Roisman said he anticipated a large amount of feedback from funds unsure about what categories like “environmental justice” and “water issues” mean and how to determine any differences between them.

“This ambiguity is typical of ESG issues more broadly,” Roisman said. “The terms mean different things to different people, who have different objectives and interests in obtaining information.”

Firms take their voting obligations “very seriously,” said Dorothy Donohue, deputy general counsel of the Investment Company Institute, which advocates for mutual funds.

“We will review the proposal and carefully assess how it could affect regulated funds’ proxy voting practices,” Donohue said in a statement. “We intend to comment and look forward to engaging with the SEC.”

Analysis Tool

The proxy voting disclosure plan has its roots in a 2010 proposal that would have required institutional investors to report how they voted on executive compensation.

The proposed say-on-pay requirements, which the Dodd-Frank Act mandated, stalled at the SEC. The agency revived them as part of the new plan to boost proxy voting reporting.

“This would allow investors to more easily understand and analyze proxy voting information,” Gensler said at the commission’s meeting.

Firms may need some more clarity about what the SEC wants and need some time to comply with any new proxy voting disclosure requirements, but they’ll figure it out, said Rich Goode, managing director of ESG services at consulting firm Alvarez & Marsal.

History has shown that firms have been able to make disclosures they once thought would be too difficult to make, he said.

Companies once said it was impossible to report whether minerals in their supply chains came from central Africa, as Dodd-Frank required, Goode said. Now, conflict minerals reporting is commonplace, he said.

“This is probably a lot easier than figuring out whether this container of dirt came from Africa than whether or not you voted a certain way on a water proposal,” Goode said.

To contact the reporter on this story: Andrew Ramonas in Washington at

To contact the editors responsible for this story: Michael Ferullo at; Roger Yu at