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US SEC proposes rules to crack down on greenwashing claims

25 May 2022 Amena Saiyid

Firms professing to consider environmental, social, and governance (ESG) factors in their investments will have to back up their claims with data, strategies, and criteria under a rule the US Securities and Exchange Commission (SEC) proposed 25 May.

Designed to avoid "greenwashing" claims amid the growing interest in ESG investing, SEC Chairman Gary Gensler said the proposed rule will help "investors get a window into the criteria used by the asset managers for the fund and the data that underlies the claim."

The SEC had indicated in March it would issue a separate rulemaking to complement a proposal it has already released requiring greater disclosure from publicly traded companies about climate-related financial risks.

The latest proposed rule would amend the Investment Advisers Act of 1940 and be open for public comment for 60 days following its publication. At the same time, the SEC proposed another amendment to this 1940 law that would require the name of a company to match up with its investment focus, say ESG.

SEC Commissioner Caroline Crenshaw described the name proposal as "a rose by any other name." The idea being to avoid "company names that are likely to mislead investors about an investment company's investments and risks."

Peirce argues enforcement work, rule not a high priority

Both SEC proposals were released two days after the SEC fined BNY Mellon Investment Adviser $1.5 million for making misleading claims about ESG considerations.

Although agreeing with Gensler that greenwashing claims should be addressed, SEC Commissioner Hester Peirce said it should not be a high priority. Alluding to the enforcement proceedings against BNY Mellon, she added, "we already have a solution: when we see advisers that do not accurately characterize their ESG practices, we can enforce the laws and rules that already apply."

Sustainable investments in the US have increased from $639 billion in assets under management (AUM) in 1995 to $17.1 trillion by 2020, according to the latest US Sustainable Investing Forum (SIF) trends report.

In the report, US SIF said ESG fund numbers expanded from 55 in 1995, to 1,002 in 2016, and 1,741 in 2020.

Wide array of ESG funds

Ceres, a network of sustainable investors, said the tremendous growth in the number and variety of ESG funds available underscores the need for better and consistent disclosures to help investors take advantage of this dynamic and growing market.

"While we have just begun reviewing these proposed rules, the actions taken by the SEC would address concerns about greenwashing, and result in greater investor confidence that sustainable funds are what they say they are," said Steven Rothstein, managing director for Ceres' Accelerator for Sustainable Capital Markets.

When it comes to ESG factors, Gensler said, there's a whole range of what asset managers might disclose or mean by their claims.

"It is important that investors have consistent and comparable disclosures about asset managers' ESG strategies so they can understand what data underlies funds' claims and choose the right investments for them," he added.

ESG investing is no longer niche

Socially conscious investing has transitioned from niche to mainstream, and a greater number of funds and financial institutions are now offering ESG-labeled products to accommodate the shift in investor preferences, according to S&P Global Commodity Insights Financial and Capital Markets Director Conway Irwin.

"Some of these funds may be less concerned with the impact than the optics of their ESG-focused funds, and others may simply not have the in-house expertise to make assessments about which investment targets reasonably qualify," Irwin told Net-Zero Business Daily by S&P Global Commodity Insights. "Establishing clear standards and requiring reporting can help to resolve both of these issues."

As part of its effort to provide greater clarity, the SEC is proposing that ESG-focused funds disclose the criteria they use to screen companies, the indices they follow in their annual reports, and how they cast proxy votes with companies on ESG issues.

In addition, it is also proposing that ESG-focused funds disclose metrics for GHG emissions in their annual reports.

For impact funds, or ESG funds designed to achieve specific impacts such as clean water, the SEC is seeking progress reports in both quantitative and qualitative terms as well as disclosure of key factors that "materially" affect the fund's ability to achieve those impacts. For example, the SEC said if an impact fund has made clean water its target then it should not only include the timeline for achieving that goal, but also the criteria it is using to measure that goal.

Advertising ESG won't cut it

The SEC made it clear that a fund's use of advertisements or sales literature that mention ESG factors, but not as a "significant or main consideration" in the fund's investment or engagement strategy, would not alone qualify the fund as an ESG-Focused Fund.

To police the ESG crackdown, in March 2021, the SEC set up a Climate and ESG Task Force within the Division of Enforcement charged with analyzing disclosure and compliance issues relating to investment advisers' and funds' ESG strategies.

In investigating BNY Mellon, SEC uncovered that the firm made various statements between July 2018 and September 2021 "that all investments in the funds had undergone an ESG quality review, even though that was not always the case."

As Adam Aderton, co-chief of the Enforcement Division's Asset Management Unit and a member of the task force, noted on 23 May, the SEC will hold "investment advisers accountable when they do not accurately describe their incorporation of ESG factors into their investment selection process."

Posted 25 May 2022 by Amena Saiyid, Senior Climate and Energy Research Analyst



This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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