SEC to rule out ESG claims, standardization of disclosures

SEC to rule out ESG claims, standardization of disclosures

WASHINGTON BOSTON Reuters - The US Securities and Exchange Commission SEC will propose rule changes to stamp out unfounded claims by funds on their environmental, social and corporate governance ESG credentials and enforcing more standardization of disclosures.

According to people who have spoken to the SEC on the measures, the proposal will outline how ESG funds should be marketed and how investment advisors should disclose their reasoning when labeling a fund.

The proposal would mandate investment funds with terms such as ESG, sustainable and low-carbon disclosure of the criteria and underlying data used to support the label, the people said.

The new rules will affect all funds, but their target is ESG funds, which drew $649 billion globally through Nov. 30, up from $542 billion and $285 billion in 2020 and 2019 respectively, according to Refinitiv Lipper data.

Regulators and activists have become concerned that U.S. funds are trying to cash in on the popularity of ESG investing by misleading shareholders over their products' underlying holdings, a practice known as greenwashing. We are hopeful that the new rule will require fund managers to follow basic naming guidelines. Andrew Behar, president of the climate activist group As You Sow, said that this will help in removing confusion and misleading marketing, and discussed the potential rules with the SEC.

He said market participants have exploited a loophole in the current rules when naming funds.

SEC Chair Gary Gensler said that asset managers may confuse investors with conflicting names or certain terms or criteria when it comes to sustainability-related investing.

Industry groups warn that the agency's aim to standardize ESG labels could reduce investor choice.

Janay Rickwalder, a spokeswoman for the Investment Adviser Association, said she objected to actions that would substitute for the regulator's judgment on investment strategy for that of professional fiduciaries.