WASHINGTON — Regulators have proposed new requirements for investment funds that tap into public anxiety about climate change or social justice, in an effort to address concerns about “green laundering” by investment managers. assets looking for higher fees.
The Securities and Exchange Commission voted on Wednesday to release two proposals aimed at giving investors more information about mutual funds, exchange-traded funds and similar vehicles that consider so-called ESG factors, i.e. i.e. environmental, social and corporate governance. One of the proposed rules would expand SEC rules governing fund names, while the other would increase disclosure requirements for ESG-focused funds.
Hester Peirce, the only Republican on the four-person committee, voted against both proposals, saying they would place excessive burdens on asset managers and push them toward capital allocation decisions that only some investors favor.
The rise of what proponents call green or sustainable investing has posed a growing challenge to regulators in recent years. Assets of funds that claim to focus on sustainability or ESG factors hit $2.78 trillion in the first quarter, up from less than $1 trillion two years earlier, according to Morningstar.
Although the fees charged by these funds are generally much higher than what investors pay for low-cost index funds, there are few consistent standards for what constitutes a stock, bond or ESG strategy.
“What we’re trying to address is truth in advertising,” SEC Chairman Gary Gensler told reporters during a virtual press conference after the committee vote.
Some ESG fund managers only buy shares of companies they believe already have a low carbon footprint, while others might invest in companies that have publicly pledged to do better. Another strategy is to take a stake in a chronic polluter in hopes of winning seats on its board of directors or forcing proxy votes that cause the company to change its ways.
The ambiguity has led to widespread concern among investors and regulators that banks and asset managers who sell funds are “greenwashing”, or exaggerating their environmental or social sustainability to bolster their own revenues.
Earlier this week, the SEC fined the investment management arm of Bank of New York Mellon Corp.
$1.5 million for misleading claims about the criteria used to select ESG stocks. BNY Mellon has neither admitted nor denied wrongdoing.
Authorities are also investigating Deutsche Bank AG
asset management arm after the Wall Street Journal reported last year that DWS Group had overstated its sustainable investing efforts. At the time, a spokesperson for DWS said the company does not comment on issues related to litigation or regulatory matters. A Deutsche Bank spokesperson declined to comment.
The first proposal on the SEC’s filing Wednesday would revise fund name requirements.
Under a rule passed two decades ago, if a fund’s name suggests it focuses on certain sectors, geographies or types of investments, it must invest at least 80% of its holdings in such assets .
Wednesday’s proposal would broaden the scope of the so-called name rule to cover funds that suggest focusing on ESG factors, or strategies such as “growth” or “value”. A fund that simply considers ESG factors alongside, but no more than, other inputs would not be permitted to use ESG or related terms in its name.
“A fund’s name is often one of the most important pieces of information investors use to select a fund,” Gensler said.
The second proposal being considered would require funds that take ESG into account in their investment processes to disclose more information. So-called impact funds that seek to achieve an ESG-related objective should disclose how they measure progress towards that objective. Funds for which ESG investing is a material or primary consideration would be required to complete a standardized table as well as additional information on the greenhouse gas emissions produced by the companies or issuers in their portfolios.
Gensler often compares this information to the nutritional information printed on the back of a skim milk carton.
“When it comes to ESG investing, however, there is currently a huge range of what asset managers might disclose or mean by their claims,” he said on Wednesday, adding that it can be difficult for investors to understand or compare funds. “People make investment decisions based on this information, so it’s important that it is presented to investors in a meaningful way.”
Commissioners voted 3-1 to open both proposals for public comment.
Ms Peirce, the Republican commissioner, said updates to the name rule risk changing the way some funds are managed as companies seek to avoid being captured by the proposed criteria which she called subjective. The new disclosure requirements, Ms Peirce said, would increase pressure on funds to vote stocks or compose their portfolios in accordance with the wishes of activist investors.
“If the demand for greenhouse gas disclosure becomes the norm, let the standards and expectations grow organically,” Ms. Peirce said. “Let investors shape industry practices through their investment decisions, not through regulatory mandates of what investors should consider.”
The American Securities Association, a lobby group that represents regional brokerage firms and financial services firms, applauded the SEC’s proposals, saying it is appropriate to review the advertising, performance and fees of ESG funds.
“ASA supports the SEC’s efforts to end misleading and misleading marketing gimmicks surrounding ESG funds,” the group’s chief executive, Chris Iacovella, said in an emailed statement.
The Investment Company Institute, which lobbies on behalf of the fund industry, did not respond to a request for comment.
—Amrith Ramkumar contributed to this article.
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