H.R. 2358: Ensuring Sound Guidance Act of 2025

This bill, titled the "Ensuring Sound Guidance Act of 2025" or "ESG Act of 2025," modifies the Investment Advisers Act of 1940 in several key areas regarding how investment advisers manage client interests and report environmental disclosures related to municipal securities.

1. Best Interest Guidelines

The bill amends the guidelines that govern how brokers, dealers, and investment advisers evaluate their clients' best interests. Specifically:

• Investment advisers must prioritize pecuniary factors (financial considerations) over non-pecuniary factors (such as environmental, social, or governance criteria) unless the client gives informed written consent to consider these non-financial aspects.
• If a client agrees to consider non-pecuniary factors, the adviser must disclose:
• The expected financial impact of these considerations over a selected time period, capped at three years.
• A follow-up report comparing the actual financial effects against a relevant index chosen by the client, including all related fees and costs.
• The term "pecuniary factor" is defined as any factor that materially affects the risk or return of an investment.

2. Studies on Environmental Disclosures

The bill requires the Securities and Exchange Commission (SEC) to conduct two studies related to municipal securities:

• Climate Change and Environmental Disclosures: The SEC will examine how often issuers of municipal securities disclose information about climate change and other environmental factors. This study includes:
• The frequency and context of such disclosures.
• Comparison of disclosures made to investors versus other contexts.
• Compliance with any voluntary or mandatory disclosure standards.
• The importance of these disclosures to investors when making investment decisions.
• After one year, the SEC will report the findings, including any financial risks associated with municipal securities and recommendations for improving disclosures.

3. Study on Municipal Securities Business Solicitation

The SEC will also investigate the solicitation process for municipal securities to ensure compliance with existing rules. The study will include:

• Evaluating the effectiveness of rules intended to prevent improper payments to officials for governmental business related to municipal securities.
• Assessing the extent of enforcement actions taken against violations of these rules.
• Analyzing the impact of these rules on small businesses and minority- and women-owned firms.

Similarly, the SEC is required to submit a report within a year detailing the study's findings and any legislative recommendations to address identified concerns.

4. Implementation Timeline

The changes related to investment advisers will take effect 12 months after the bill is enacted. The SEC will be required to implement necessary rule changes within that timeframe.

Relevant Companies

• MSCI: MSCI is a provider of investment decision support tools. Changes in how investment advisers must handle client interests regarding pecuniary and non-pecuniary factors could impact how their indices and benchmarks are used.
• SCHW: Charles Schwab Corporation, a significant brokerage firm, will need to adapt its practices and disclosures as new regulations come into effect.
• BLK: BlackRock, an asset management firm, may be directly affected as it provides services that may involve environmental considerations in investment strategies.