By Chris Matthews
The Securities and Exchange Commission voted Wednesday to propose new rules requiring investment funds that market themselves as “ESG” to provide standardized data backing up claims that the funds’ investments are environmentally friendly and leaders in social and governance issues.
The SEC voted 3-1 to propose the rule, with the Commission’s lone Republican, Hester Peirce, opposing the proposal.
The popularity of ESG /zigman2/quotes/231018315/composite RSPE +1.30% investments has exploded in recent years, as ESG assets under management are on pace to reach $41 trillion by the end of this year, according to a Bloomberg Intelligence estimate .
Concerns are also growing that much of these funds are engaged in so-called “greenwashing” whereby fund managers falsely market their products as environmentally friendly and socially conscious to attract the growing share of investors who want to sway company behavior through their investment decisions.
“It is important that investors have consistent and comparable disclosures about asset managers’ ESG strategies, so that they can understand what data underlies funds’ claims and choose the right investments for them,” SEC Chairman Gary Gensler said in a statement Wednesday.
The proposed rule is designed to create consistent standards for ESG disclosures, which would vary depending how central ESG factors are to a fund’s strategy. The rule would divide ESG funds into three categories:
Integration funds, which integrate ESG factors alongside non-ESG factors;
ESG Funds, where ESG factors are the main consideration when selecting securities and
Impact funds, which target a specific environmental, social or governance goal
Each of these tiers would be required to provide different types of disclosure based on their marketing strategies.
For funds that are environmentally focused, the rule would require additional disclosure regarding greenhouse gas emissions associated with the funds investments.
“The funds would be required to disclose the carbon footprint and the weighted average carbon intensity of their portfolio,” according to an SEC factsheet. “The requirements are designed to meet demand from investors seeking environmentally focused fund investments for consistent and comparable quantitative information regarding the GHG emissions.”
In opposing the rule, Commissioner Hester Peirce said the SEC “seems to have assumed that today’s investor is driven by concern for environmental, social and governance matters, not an anachronistic desire to earn returns on their hard earned money.”
She added that these new rules will be unenforceable because ESG factors are impossible to objectively define.
The SEC also proposed a rule regulating how funds can be named, so that investors are not mislead about what they are investing in. The rule would expand current requirements so that any fund with a name that suggests a fund follows a particular strategy, like “value” or “growth” must invest 80% of its assets in investments suggested by the name.
The public will have 60 days to submit comments to the SEC before it revises the rules and schedules a final vote on their implementation.