The US Securities & Exchange Commission has proposed two new rule changes in an effort to tighten the marketing and disclosure requirements on ESG funds and to tackle growing concern about the rise of ‘greenwashing’ in the asset management industry.
The US Securities & Exchange Commission has proposed two new rule changes in an effort to tighten the marketing and disclosure requirements on ESG funds and to tackle growing concern about the rise of ‘greenwashing’ in the asset management industry.
The proposals, which are subject to public feedback over a 60-day period, are aimed at preventing false claims by funds on their environmental, social and governance credentials, and at increasing and standardising disclosure requirements on the ESG strategies that funds purport to pursue.
The SEC’s action comes amid a dramatic increase in the number and size of ESG funds being marketed to investors – with the amount of capital being raised for ESG strategies having roughly tripled in the past three years.
In the first proposed rule change, the Investment Company ACT “Names Rule” would extend the range of funds whose names suggest a focus in a particular type of investment to invest at least 80 per cent of their assets in those investments.
“As the fund industry has developed, gaps in the current Names Rule may undermine investor protection,” said SEC chair Gary Gensler. “In particular, some funds have claimed that the rule does not apply to them — even though their name suggests that investments are selected based on specific criteria or characteristics. Today’s proposal would modernise the Names Rule for today’s markets.”
In a statement, the SEC added: “Specifically, the proposed amendments would extend the requirement to any fund name with terms suggesting that the fund focuses in investments that have (or whose issuers have) particular characteristics. This would include fund names with terms such as “growth” or “value”, or terms indicating that the fund’s investment decisions incorporate one or more environmental, social, or governance factors.”
The US regulator has also proposed a rule to enhance disclosures by investment firms in a bid to promote what it calls “consistent, comparable, and reliable information to investors” concerning funds’ incorporation of ESG factors.
The proposed amendments seek to categorise 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.
Under the proposed new regime, funds focused on the consideration of environmental factors generally would be required to disclose the greenhouse gas emissions associated with their portfolio investments. Funds claiming to achieve a specific ESG impact would be required to describe the impacts that they are seeking to achieve and to summarise progress on achieving those impacts.
And funds that use proxy voting or other engagement with issuers as a means of implementing their ESG strategy would be required to disclose information regarding their voting of proxies on particular ESG-related voting matters and information concerning their ESG engagement meetings.
“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,” said Gensler. “This gets to the heart of the SEC’s mission to protect investors, allowing them to allocate their capital efficiently and meet their needs.”
