SEC continues its efforts to prevent the misleading use of “ESG”

Today’s investors have more access to information on the companies and funds in which they invest than ever before. Many of these investors are prioritizing social responsibility along with financial performance as they choose where to place their money. This has given rise to the consideration of environmental, social, and governance (ESG) factors as private investors and investment advisors analyze data on prospective investments

Unfortunately, some public companies and investment funds have made deceptive or misleading statements about their ESG practices. That’s why the U.S. Securities and Exchange Commission (SEC) is taking steps to prevent what has become known as “greenwashing.”

How the new proposals expand on recent rule changes

In March, the SEC announced new rules that would require more complete disclosure by publicly traded companies of the impact of their processes on climate change. Now it has followed up with two new proposed rules to help prevent misleading claims on their ESG qualifications by U.S. funds.

One proposed rule would amend the Names Rule that requires a fund’s name to reflect at least 80% of its investments. The proposed change would expand on that to require that at least 80% of investments in a fund with ESG in its title would have to meet the requirements of that acronym and clearly state how the fund defines it.

Will new requirements really make a difference?

SEC Chairman Gary Gensler says, “ESG encompasses a wide variety of investments and strategies. I think investors should be able to drill down to see what’s under the hood of these strategies. This gets to the heart of the SEC’s mission to protect investors….”

However, some climate activists don’t think the proposed changes go far enough. One says, “The new rule acknowledges the problem but does not fully address it. Investors still need clarity on exactly what ‘sustainable’ and other terms like ‘fossil-free,’ ‘low-carbon,’ and ‘ESG’ mean.”

Indeed, it’s easy to find buzzwords that sound good. However, if you’re not a scientist or even an investor who’s done considerable due diligence, it can be difficult to know just what they mean in practical terms. Nonetheless, the SEC’s recent moves to address ESG investments are bound to increase the level of transparency and accuracy.

Each new administration brings its priorities to federal agencies, including the SEC. It’s crucial for investment professionals to remain current on securities regulations to avoid unnecessary compliance issues.

The information contained in this publication should not be construed as legal advice. Should further analysis or explanation of the subject matter be required, please contact the lawyer with whom you normally consult. No attorney-client relationship is created by this post. 

For more information or advice concerning your corporate and regulatory compliance efforts, please contact Daniel TeJumson, or any member of the firm’s corporate and securities regulatory practice.