ESG update: SEC to tighten ESG investment claims

US battling Greenwashing with enhanced disclosure requirements

The US securities regulator is taking aim at exaggerated ESG credentials in investment products. The new rules seek to bring some clarity to the sustainable investment industry which has topped $3tn in value. The SEC wants to fight ‘greenwashing’ through enhanced evidence requirements for sustainable asset funds, making sure impact investments actually deliver on what they are supposed to do.

The proposed amendments will broadly categorise certain types of ESG strategies and require more specific disclosures in fund prospectuses, annual reports, and advisor brochures. This means funds focused on environmental factors for example will generally be required to disclose the greenhouse gas emissions associated with their portfolio investments.

Funds will have to describe the specific impacts they seek to achieve and report on their progress to achieving those issues. This also includes the use of proxy voting.

The new rules will capture investment funds which claim to highlight sustainability within their names. This means that funds that have terms like “ESG,” “sustainability” or “low-carbon” in their names will be expected to disclose information into how ESG is incorporated and actioned.

The SEC has been taking concerned action against greenwashing in recent months. In May, the SEC settled with BNY Mellon over allegations the investment bank misstated and omitted information about ESG criteria for some of the mutual funds it managed.

These rules for ESG build on requirements of investors that have been around for over two decades. Since 2001, funds have been required to invest at least 80% into assets in a way suggested by their name. For example a stock fund would not be able to hold more than 20% in cash or bonds. The SEC now expects funds with names such as “ESG impact” or “Sustainable assets” to have at least 80% of their investments into products that live up to their name.

This is part of the SEC’s effort to catch up to regulators in Europe. The EU’s sustainable finance taxonomy, which details what are eco-friendly economic activities, is expected to be passed by the European Parliament in the coming weeks.

Ultimately this will require funds, and the businesses they invest in, to provide accurate ESG data about their activities. Tracking emissions is part of it, but also ensuring high standards of governance and social matters such as health and safety and labour relations. Action from the SEC is making it clear that not only is ESG important, but that the data must be accurate, too.

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