The US Securities and Exchange Commission has proposed two new disclosure rule changes that aim to prevent greenwashing in environment, social and governance (ESG) funds.
The proposed changes would apply to certain registered investment advisers, advisers exempt from registration, registered investment companies, and business development companies.
The aim is to categorise certain types of ESG strategies and require funds and advisers to provide more specific disclosures in fund prospectuses, annual reports, and adviser brochures based on the ESG strategies they follow.
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.. “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.
The other proposals cover impact investing. Those Funds claiming to achieve a specific ESG impact would be obliged to describe the specific impacts they seek to achieve, while summarising their progress on achieving those impacts.
In addition, funds that use proxy voting or other engagement with issuers as a significant means of implementing their ESG strategy would need to disclose information regarding their voting of proxies on particular ESG-related voting matters and information concerning their ESG engagement meetings.
“ESG encompasses a wide variety of investments and strategies. Investors should be able to drill down to see what is under the hood of these strategies,” says Gensler. “This gets to the heart of the SEC’s mission to protect investors, allowing them to allocate their capital efficiently and meet their needs.”
Volker Lainer, vp of product management and regulatory affairs, at GoldenSource, says, “The proposed regulation expressly points to the risk of funds and advisers exaggerating the extent to which investment products or services take into account ESG factors, which clearly highlights the SEC’s concern around greenwashing.”
He adds, “Investors will certainly benefit from consistent information concerning how funds consider ESG factors in their strategies. Specific disclosure language and data that differentiates ‘ESG-integration.”
ESG-focused’ and ‘impact investing’ strategies will provide decision-useful information. For funds on the other hand, this will demand transparent, documented processes and procedures backed by data and analytics that are fully defensible.”
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