After debuting broad rules in March that require publicly traded companies to disclose how climate change affects their business, SEC is now requiring more disclosure from ESG funds.
The Securities and Exchange Commission proposed amendments to rules and reporting forms that will require ESG funds and advisers to provide more specific disclosures in fund prospectuses, annual reports, and brochures on the environmental, social and corporate governance strategies they pursue.
The rules would aim to provide more transparency, consistency, comparability, and reliable information for investors about ESG practices funds claim to take part in, in order to address the mounting concerns that some funds engage in greenwashing, seeking to just profit from the rise in green investing.
The proposed changes and new rules would apply to certain registered investment advisers, advisers exempt from registration, registered investment companies, and business development companies.
The proposals will be published in the Federal Register and after, there will be a comment period open for 60 days, during which companies, investors, and other market participants can comment on and suggest changes to the rules.
One of the new policy suggestions requires funds with “ESG” in their name to clearly define the term and then ensure that 80% of the assets in the fund adhered to that definition.
“As the fund industry has developed, gaps in the current Names Rule may undermine investor protection. 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,” said SEC Chair Gary Gensler.
Additionally, funds focused on the environment generally would be required to disclose the greenhouse gas emissions associated with their portfolio investments.
Funds claiming to achieve a specific ESG impact would be required to describe the specific impact(s) they seek to achieve and summarize their progress on achieving them.
Investments in ESG funds increased from $285 billion in 2019 to a record $649 billion in 2021 through Nov. 30, according to data from financial services firm Refinitiv Lipper. That means ESG funds now comprise about 10% of worldwide fund assets.
That is why SEC issued new proposals in March to tackle greenwashing as companies engage in such practices. Now they would need to provide more information on the impact their operations have on the environment and carbon emissions.