SEC Considers Stricter Disclosure Requirements for ESG Funds | ETF Trends

The Securities and Exchange Commission is set to vote on two proposals Wednesday intending to combat greenwashing and crackdown on investment products that exaggerate their environmental, social, and governance qualifications. One proposal would broaden the SEC’s rules governing fund names, while the other would increase disclosure requirements for funds with an ESG focus.

While sustainable investing has grown in popularity among investors, the standards for what constitutes an ESG strategy are inconsistent. These inconsistencies have led to concerns from investors and regulators alike over issues of “greenwashing” (i.e., paying only lip-service to investing based on ESG principles). The fees for funds labeled ESG are also typically much higher than what investors pay for index funds.

The first proposal would overhaul requirements around fund names. Under the so-called Names Rule passed two decades ago, if a fund’s name suggests a focus on certain industries, geographies, or investment types, it must invest at least 80% of its holdings in such assets. Wednesday’s proposal would expand the scope of this naming rule to cover funds that suggest a focus on ESG factors. A fund that merely considers ESG factors alongside, but not more than, other inputs would not be allowed to use ESG or related terms (such as “sustainable” or “low-carbon”) in its name.

“A fund’s name is often one of the most important pieces of information that investors use in selecting a fund,” said SEC Chairman Gary Gensler. 

The second proposal would require funds that consider ESG in their investment processes to disclose more information depending on the strategy they employ. So-called impact funds that seek an ESG-related objective would have to disclose how they measure their progress toward that goal. Funds for which ESG investing is a major consideration would be required to fill out a standardized table as well as additional information about the greenhouse gas emissions produced by the companies or issuers in their portfolios.

“When it comes to ESG investing, though, there’s currently a huge range of what asset managers might disclose or mean by their claims,” Gensler added. “People are making investment decisions based upon these disclosures, so it’s important that they be presented in a meaningful way to investors.”

If the proposals pass the commission, they’ll be open for public comment for at least two months before the SEC decides whether to issue a final rule.

“While the SEC is focused on funds that use ESG on its name it remains important for advisors to dig deeper and understand what they actually own,” said Todd Rosenbluth, Head of Research at VettaFi.

For more news, information, and strategy, visit the ESG Channel.