SEC unveils rules to prevent misleading ESG fund reporting

Securities and Exchange Commission Chairman Gary Gensler at SEC headquarters in Washington on July 22, 2021.

Melissa Lyttle/Bloomberg via Getty Images

The Securities and Exchange Commission on Wednesday proposed two rule changes that avoid misleading or misleading statements by US funds on their environmental, social and corporate governance (ESG) qualifications and increase disclosure requirements for these funds.

The proposals, which are subject to public comment, come amid growing concerns that some funds seeking to profit from increased ESG investing practices have misled shareholders about the contents of their holdings, a practice known as “green bleaching”.

The metrics would provide guidance on how ESG funds should market their names and investment practices. A proposal would update the naming rule to encompass ESG-related characteristics.

The current naming rule states that if a fund’s name suggests that it focuses on a particular category of investment, such as government bonds, then at least 80% of its assets must belong to that category. The change would extend the rules to “any fund name with language suggesting that the fund focuses on investments that have (or whose issuers have) particular characteristics”. Therefore, funds with “ESG” in their name should clearly define the term and then ensure that 80% of the fund’s assets adhere to this definition.

“A lot has happened in our capital markets over the past two decades. As the fund industry has grown, loopholes in the current name rule can undermine the protection investors,” SEC Chairman Gary Gensler said in a statement.

“In particular, some funds have claimed that the rule does not apply to them – even though their names suggest that investments are selected based on specific criteria or characteristics,” Gensler said. “Today’s proposal would modernize the name rule for today’s markets.”

Global ESG funds received a record $649 billion in investments in 2021 through November 30, compared with $542 billion in 2020 and $285 billion in 2019, according to data from financial services firm Refinitiv Lipper. . ESG funds now represent about 10% of fund assets worldwide.

The anti-greenwashing proposals come after the SEC launched sweeping rules in March that would require publicly traded companies to disclose how climate change risks affect their businesses, as well as provide more information on how their operations affect the environment and carbon emissions.

“ESG encompasses a wide variety of investments and strategies. I think investors should be able to drill down to see what’s under the hood of these strategies,” Gensler said. “It goes to the heart of the SEC’s mission to protect investors, enabling them to allocate their capital efficiently and meet their needs.”

Andrew Behar, president of climate activist organization As You Sow, said the new name rule will improve – but not stop – misleading labeling for investors.

“The new rule acknowledges the problem but doesn’t completely address it. Investors still need clarity on what exactly ‘sustainable’ and other terms like ‘fossil-free’, ‘low-carbon’ and ‘ESG’ mean. ‘” Behar said. “It is essential that a fund’s prospectus reflects its philosophy and intent in harmony with its name and holdings.”

Rachel Curley, democracy advocate at the nonprofit Public Citizen, said in a statement that the SEC’s new fund portfolio rules would begin to transform the landscape around “green” investing.

“In today’s market, retail investors don’t have a clear idea of ​​what it means to invest in a fund whose marketing says it’s ‘sustainable’, ‘green’ or ‘ESG’,” Curley said. “The lack of transparency for investors makes it difficult to disentangle exactly how environmentally friendly some of these products are.”

The proposals will enter a 60-day public comment period after publication in the Federal Register, during which companies, investors and other market participants can comment and suggest changes to the rules.

— CNBC’s Thomas Franck contributed to this report.

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