The US Securities and Exchange Commission has proposed two new rule changes that aim to prevent greenwashing in ESG funds.
The regulator voted yesterday (25 May) to issue a proposal that would broaden the SEC's fund naming rules, while the other would increased disclosure requirements for ESG funds.
The SEC already holds that if a fund's name suggests a focus on particular industries, geographies or investment types, it has to invest at least 80% of its portfolio in those assets.
Yesterday's proposal would expand these rules to cover ESG factors, as well as strategies such as value or growth.
An SEC official said that the regulator expects the rule to now cover about 75% of funds, compared to 62% before, while barring funds from using the ESG label if it was not central to their investment decisions.
"What we are trying to address is truth in advertising," said SEC chairman Gary Gensler in a press conference. "A fund's name is often one of the most important pieces of information that investors use in selecting a fund."
However, the proposed change has come under criticism for still allowing under 20% investment that goes against the fund's philosophy. For example, Blackrock's Low Carbon Transition fund has 33 fossil fuel companies representing 7.53% of holdings.
Survey: Greenwashing concerning but not a deterrent to impact investing
The second proposal would bring more disclosure requirements to ESG funds, categorising certain types of ESG strategies broadly and requiring funds and advisers to provide more specific disclosures in fund prospectuses, annual reports and adviser brochures.
Notably, funds which consider environmental factors will be required to disclose the greenhouse gas emissions from their portfolio investments, while funds that use proxy voting as a significant means of implementing their ESG strategy would be required to disclose information regarding their voting and engagement on ESG issues.
"When it comes to ESG investing, though, there is currently a huge range of what asset managers might disclose or mean by their claims," Gensler said. "People are making investment decisions based upon these disclosures, so it is important that they be presented in a meaningful way to investors."
On Tuesday, the SEC fined the investment adviser arm of BNY Mellon $1.5m in penalties following "misstatements and omissions" on its ESG approach to managing funds.
"Right now, ESG investing in mutual funds and ETFs is the Wild West due to the voluntary nature of ESG-related disclosures, absence of widely accepted terminology and limited to no enforcement," said Andrew Behar, CEO of As You Sow, a shareholder advocacy non-profit.
"The proposed rules acknowledge the problem and are a good first step in stopping funds with ‘ESG' in their names from continuing to hold dozens of fossil fuel companies and coal-fired utilities. However, the new rule continues to use the flawed 80/20 framework.
"On the plus side, fund managers will be required to define ESG in the prospectus, how they vote proxies and use a very simple set of standardised definitions and categories. While a good first step, investors were hoping for a new structure to close loopholes and eliminate confusion and misleading marketing."
