By Nathalie Voit
The U.S. Securities and Exchange Commission (SEC) proposed two rule changes on May 25 to prevent misleading or deceptive claims by publicly traded companies and enhance U.S. funds’ disclosure requirements on their environmental, social, and governance (ESG) practices.
The “Names Rule” would require registered investment firms whose name suggests a focus on a particular investment class to adopt an “80 percent investment rule.” For example, a fund with terms such as “value” or “growth” in its name must ensure that at least 80% of the value of its assets abides by those socially conscious criteria. The new policy would apply to ESG funds and other so-called “sustainable investments” that consider environmental, social, and governance factors.
“A lot has happened in our capital markets in the past two decades. As the fund industry has developed, gaps in the current Names Rule may undermine investor protection,” SEC Chair Gary Gensler said in a statement. “In particular, some funds have claimed that the rule does not apply to them — even though their name suggests that investments are selected based on specific criteria or characteristics. Today’s proposal would modernize the Names Rule for today’s markets.”
The second proposal aims to improve disclosure requirements by investment companies on their ESG strategies.
“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. This gets to the heart of the SEC’s mission to protect investors, allowing them to allocate their capital efficiently and meet their needs,” Gensler said in another statement.
The proposed measures would establish clear guidelines on how ESG funds must disclose information related to their operations. The SEC said funds with an environmental focus, for instance, would be required to report the greenhouse gas emissions associated with their portfolio investments. Similarly, funds purporting to achieve a specific ESG impact would be required to clearly state their objectives and describe their progress in achieving those goals.
The proposals arrive amid a rise in greenwashing by publicly traded companies seeking to profit from the growing popularity of ESG and other socially responsible “impact” investments. The proposed mandates would update criteria on how ESG funds must market their names and disclose their qualifications.
ESG-focused funds received about $649 billion in capital in 2021. By year’s end, ESG funds comprised approximately 10% of global fund assets, according to data from Refinitiv Lipper.
The proposals will be subject to a 60-day public comment period after publication in the Federal Register.
