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The US Securities and Exchange Commission (SEC) is proposing to strengthen its rules to make information on claims made by firms concerning environmental, social and corporate governance (ESG) funds more consistent, comparable and reliable.
Earlier this week, the SEC proposed two rule changes to enhance disclosures about ESG claims and to extend its so-called "name rule" to ESG products.
The enhanced disclosure rule would require SEC-registered investment firms to disclose more information regarding ESG strategies in fund prospectuses, annual reports and advisor brochures and employ a layered, tabular disclosure approach for ESG funds.
The agency also proposes to expand its "name rule", which requires funds with certain names to invest 80 percent of their assets in the investments suggested by that name. The change, if finalised, would broaden this requirement to fund names that suggest an ESG aspect.
The proposals come amid growing interest from investors in ESG funds. According to Bloomberg Intelligence, ESG equities and loans exceeded $1.6trn in 2021, more than double the amount of 2020 and three times the amount issued in 2019. The news agency estimates that ESG assets are set to grow to $50trn by 2025.
Despite the significant interest, the SEC says there is little consistency in what asset managers might disclose or mean by their claims when it comes to terms such as “green”, “sustainable” or “low-carbon”.
This makes it difficult for investors to compare ESG funds and leaves the door open for companies to take advantage of investors' interests by overstating their ESG focus.
The proposed rules are intended to ensure that ESG-focused funds disclose relevant metrics and provide comparable and reliable information for investors.
Growing regulatory focus on ESG
Sustainable finance is increasingly coming to the forefront of central banks’ consideration as they are pursuing their core mandates, such as financial stability or reserve management.
For example, the EU, which is among the most advanced regions in this regard, requires fund managers to disclose how sustainability risks are integrated into their investment decisions.
Similarly, the UK published a roadmap to sustainable investing last October with the intent to make the UK “the best place in the world for green and sustainable investment” and in January, the country adopted climate-related financial disclosure regulations.
In the US, ESG came into the centre of regulators' focus as soon as Joe Biden took over the presidency of the country and made “tackling the climate emergency” a top priority for his administration.
Taking a leading role in ESG regulatory efforts, in March, the SEC set out broad rules that would require publicly traded companies to disclose how climate change risks affect their business and provide more information on the impact their operations have on the environment and carbon emissions.
The agency has also stepped up its enforcement activities in the field.
In April, the SEC’s climate and ESG task force issued its first enforcement action, alleging that a Brazilian mining company regularly misled local governments and investors about “the safety of the Brumadinho dam through its environmental, social, and governance (ESG) disclosures”.
In another first case of its kind, last week, the agency charged BNY Mellon with making misstatements and omissions about ESG considerations in its investment decisions.
In parallel to the SEC’s efforts, in order to facilitate sustainable investments, the Department of Labor proposed a rule to make it easier to invest workplace retirement savings into ESG funds.
The proposed rule has particular importance in the US where a significant proportion of ESG investments are made in individual retirement accounts but not in workplace retirement savings.
The proposal, however, provoked wide-ranging protest.
In December, 23 states, led by Utah, registered their objection, arguing the rules would facilitate investments “that benefit social causes and corporate goals even if it adversely affects the return to the employee.”
‘ESG is a scam’
Undoubtedly, as regulatory attention on ESG investments grows, so does the protest against it.
Its critics are pushing more loudly for abandoning or easing environmental standards in favour of energy independence.
On Tuesday, US Senator Ted Cruz spoke out against “woke” ESG policies and blamed the White House’s policies for the surge in gas prices. Cruz also has a history of denying climate change.
It followed a speech by former US Vice President Mike Pence and a potential candidate for the 2024 Republican presidential nomination last week, saying that large investment firms are pushing a "radical ESG agenda”.
These arguments further escalated when, on Wednesday, Elon Musk lashed out at S&P 500’s ESG index after Tesla was removed from the list over concerns about racial discrimination and poor working conditions.
The S&P list’s annual rebalance saw Meta, Johnson & Johnson and Chevron removed from the list alongside Tesla, but oil giant Exxon was rated top ten best for ESG.
