U.S. SEC Unveils Rules To Ensure ESG Funds' Investments Fall In Line With Their Names, Policies

The U.S. Securities and Exchange Commission (SEC) on Wednesday will vote to propose a pair of rule changes aimed at stamping out unfounded claims by funds on their environmental, social and corporate governance (ESG) credentials, and enforcing more standardization of such disclosures.

The proposals, which are subject to public input, will outline how ESG funds should be marketed and how investment advisors should disclose their reasoning when labeling a fund.

Specifically, the Fund Names measure will seek to expand the number of funds that must invest 80% of their assets in line with their names and investment policies.

An SEC official said the agency estimates the new rule would capture around 75% of all funds versus 62% currently, and would bar funds from using "ESG" labels if those factors are not central to investment decisions.

While the new rules will affect all funds, their target is ESG funds which drew a record $649 billion globally through Nov. 30, up from $542 billion and $285 billion in 2020 and 2019, respectively, according to Refinitiv Lipper data.

Regulators and activists have become concerned that U.S. funds looking to cash in on the popularity of ESG investing may be misleading shareholders over their products' underlying holdings, a practice known as "greenwashing."

"We are hopeful that the new rule will require fund managers to follow basic naming guidelines. This will help to eliminate confusion and misleading marketing," said Andrew Behar, president of climate activist group As You Sow.

He said market participants have to date exploited a loophole in the current rules when naming funds.

The other agency proposal addresses ESG disclosures for investment companies and their advisers by boosting disclosures for ESG strategies in fund prospectuses, annual reports and advisor brochures.

SEC Chair Gary Gensler said in a statement that the measures respond to growing investor demand for such details.

"It is important that investors have consistent and comparable disclosures about asset managers' ESG strategies so they can understand what data underlies funds' claims and choose

the right investments for them."

Industry groups warn, however, that the agency's aim to standardize ESG labels could reduce investor choice.

"We object to actions that would ... substitute a regulator's judgment about investment strategy for that of professional fiduciaries," said Janay Rickwalder, a spokeswoman for the Investment Adviser Association.