New federal rules released Wednesday could help ensure that investment funds labeled as environment, social and governance (ESG) actually deserve the name — and the high fees they command.
The Security and Exchange Commission (SEC) proposed a new regulation to combat the practice of “greenwashing,” the misleading marketing of unsustainable investments under the ESG label.
If adopted, the measure would require funds marketing themselves as ESG-focused to disclose additional information to investors.
Different categories of funds would be required to report varied information. Those that are focused on considering environmental factors would be required to share the climate contributions associated with their investments and those that claim to have certain impacts would need to summarize their progress.
“The lack of specific disclosure requirements tailored to ESG investing creates the risk that funds and advisers marketing such strategies may exaggerate their ESG practices or the extent to which their investment products or services take into account ESG factors,” it said.
A related rule, also introduced Wednesday, would require any fund that labeled itself as ESG-focused to put at least 80 percent of its money into such investments.
“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,” SEC Chair Gary Gensler said in the statement.
Large asset managers, who often struggle to identify which investments are truly green, applauded the measure.
“Brokers, advisors, and investors must have clarity,” CEO Chris Iacovella of the American Securities Association, which represents large asset managers, said in a statement.
So did civil society groups such as Public Citizen, which have long pushed for more regulation of sustainable finance.
“In the current marketplace, retail investors don’t have a clear picture of what it means to invest in a fund whose marketing says it’s ‘sustainable,’ ‘green,’ or ‘ESG,’” said Public Citizen democracy advocate Rachel Curley in a statement.
“The SEC’s new rules will help retirement savers understand what is in their portfolios and whether their investments will help them achieve their long-term financial and ethical goals,” Curley added.
But brokers themselves were less pleased — as was the lone Republican voice on the SEC.
“The proposal for some funds to disclose emissions related to their holdings seems to be unworkable,” Eric Pan of the Investment Company Institute told The Wall Street Journal.
Hester Peirce, the commission’s sole conservative, pushed back as well, arguing that the rule is ambiguous and will be difficult to enforce.
For example, a fund adviser would have to provide different ESG-related factors “for each significant investment strategy or method of analysis,” Peirce said.
“Given the ambiguity and breadth of the proposed requirements, the planned one-year compliance date for funds and advisers to get their Es, Ss, and Gs in order is laughably short,” she added.
A great deal of money is at stake: Investment in funds marketed as sustainable was $2.77 trillion at the end of March — a slight dip from a late 2021 peak, but two and a half times the amount invested at the beginning of 2020, according to data from Morningstar.
It is often difficult, however, for investors — or regulators — to determine what “sustainable” means.
A January study by climate nonprofit As You Sow found two-thirds of ESG-advertised funds invested in unsustainable industries like fossil fuels.
The investigation found that formal SEC filings from the “greenwashing companies” were difficult to distinguish from more legitimate ones, according to a statement.
Telltale signs included a reliance on wiggle words such as “may consider,” “seek,” “believe,” “pursue,” “may” and “might,” As You Sow found.
The new proposals are just the latest action from the commission to require additional environment-related disclosures. In March, it separately proposed a rule that would require companies to disclose how their businesses may be affected by climate change and how much they contribute to it.