How to Be on Right Side of ESG Regulations | ETF Trends

Advisors and investors are hearing more and more about efforts to better regulate investment products, including exchange traded funds, positioned as environmental, social and governance (ESG) offerings.

In recent months, the Securities and Exchange Commission’s (SEC) enforcement division has been probing asset managers. They even use subpoenas to get more information on ESG products. On the surface, that sounds alarming. It’s not, but it is a reminder that ESG-inclined investors should perform some due diligence prior to allocating capital.

That task can be eased with ETFs such as the Calvert US Large-Cap Core Responsible Index ETF (CVLC). As its name implies, CVLC is an index-based fund, and while active management has proven useful on some ESG fronts, index constraints are arguably useful when it comes to constructing investment products that allay regulators’ concerns. These days, there’s value in that trait.

“Further, the fact that these actions by the SEC’s Enforcement Division are apparently targeting ‘conventional investment funds that have repurposed themselves as ESG funds’ dovetails with the SEC’s focus on the phenomenon of ‘greenwashing,’ i.e. when organizations make exaggerated or inaccurate claims about the degree to which their investments or activities are environmentally-friendly,” writes Jacob Hupart for the National Law Review.

CVLC Could Avoid Looming Crackdown

In his article, Hupart mentions the possibility of a “looming crackdown” by the SEC’s enforcement on select ESG funds and the issuers of those products. As things stand today, the enforcement arm of the SEC has a dedicated task that’s more than two years old that’s examining the erroneous use of the ESG label.

“That the SEC may now be moving towards an ‘industry sweep’ or similar enforcement action with respect to ESG issues and investment funds is consistent with their prior actions and appears to be a logical next step in a trend of increasing enforcement scrutiny of this subject area,” adds Hupart.

Fortunately, CVLC doesn’t make for a likely target of regulatory action because the Calvert ETF isn’t purporting to be something it’s not. The Calvert US Large-Cap Core Responsible Index, CVLC’s underlying benchmark, applies Calvert’s principles for responsible investment to the 1,000 largest domestic companies by market capitalization.

From there, the best-scoring firms make the cut and enter the index. In other words, ESG is a factor in deciding what stocks are eligible for CVLC’s index. That reduces the potential that index rules are being bent simply to accommodate specific securities that may or may not be legitimate ESG names. That’s the type of behavior regulators don’t like.

For more news, information, and analysis, visit the Responsible Investing Channel.