The Securities and Exchange Commission continued its focus on environmental, social and governance investing coupled with heightened transparency for investors with its latest rule proposals aimed at combating greenwashing that, if implemented, would add a host of new requirements for fund managers and investment advisers.
"I think what you see is the SEC really putting a lot of regulatory and enforcement energy into ESG issues, whether it's company disclosures (or) representations related to ESG and sustainable investment products," said Christian D.H. Schultz, Washington-based partner with Arnold & Porter Kaye Scholer LLP. "And they're really trying to protect against what they're perceiving as greenwashing efforts. They're really trying to ensure that both Main Street investors and institutional investors have transparency into the products that are being presented to them and the representations that are being made to them by investment companies."
The SEC on May 25 issued two proposals on greenwashing — when a fund or company overstates its ESG offerings. One proposal would require investment advisers and fund managers to disclose additional information on ESG strategies in fund prospectuses, annual reports and adviser brochures. The other proposal would expand the “Names Rule” under the Investment Company Act of 1940, which requires funds with certain names to adopt a policy to invest 80% of their assets in the investments suggested by that name. The latter proposal would subject fund names with terms such as “growth” or “value” and those indicating that the fund’s investment decisions incorporate one or more ESG factors to the Names Rule.
Both proposals were approved in 3-1 votes with the dissent from the commission’s lone Republican, Hester M. Peirce, and have 60-day comment periods upon publication in the Federal Register, which as of press time hadn’t happened yet.