The US securities regulator is preparing to crack down on exaggerated environmental, social and governance credentials in investment products, setting standards for a sustainable fund industry that has rebounded to nearly $3 trillion.
The rules that are set up by the Securities and Exchange Commission define the disclosures that must be made by mutual funds that carry terms such as “ESG”, “sustainable” or “low carbon” in their names. The rules are expected to require information about how ESG funds are marketed, how ESG is incorporated into investing and how these funds are voted on at corporate annual meetings, according to people familiar with the SEC’s thinking.
Global sustainable fund assets totaled $2.77 trillion at the end of the first quarter of 2022, up from $1 trillion in 2019, according to Morningstar, the data provider. the widest Investing in ESG The category covers environmental and climate considerations, “impact” investing for the social good as well as money that screens industries such as tobacco or firearms.
“There is currently a wide range of what asset managers might mean by certain terms and what criteria they might use,” Gary Gensler, head of the SEC, said in March. “It’s easy to tell if the milk is fat-free. It might be time to make it easier to tell if the box is really what they say.”
The four-member Securities and Exchange Commission, which includes Gensler and two other Democratic appointees, is scheduled to vote Wednesday to release the draft rules for public comment.
The agency has already indicated a tougher stance on the issue. announced on Monday $1.5 million legal settlement The first relates to ESG descriptions of funds – against BNY Mellon’s investment advisor division over allegations of misrepresentation and omission of information about ESG standards for the mutual funds it manages. BNY Mellon said none of its sustainable funds were targeted by the regulator and that it had updated its funding materials.
“Greenwashing Jonathan Massey, a professor at Yale Law School, said the regulator’s law enforcement actions against BNY Mellon and its proposals for green tariffs “would have a significant impact on mutual fund disclosures about ESG.”
In the United States, 65 funds have regrouped into ESG funds since the beginning of 2019, according to Morningstar. Funds that have been struggling to attract inflows have changed their names and prospectuses to ride the wave of sustainable investing, said John Hill, director of sustainability research for the Americas for Sostainaltics, a Morningstar company.
“A lot of financial advisors are OK with recommending ESG investments if clients request it, but I’m not sure how unique they are,” Hill said. Consumers ask, ‘What is it, and is it authentic? “
SEC Draft Rules Derived from analysis from the ESG market conducted in April 2021. It is based on the “naming rule”, adopted in 2001, which requires funds to invest at least 80 percent of the assets in a manner suggested by the name. For example, a stock fund cannot hold more than 20 percent in cash or treasury bonds.
Jill Fish, professor of securities law at the University of Pennsylvania, cautioned that “setting harsh rules” in an “evolving” field like ESG “could have a chilling effect on market innovation in the field.” She added that fund disclosures are already becoming more “expansive” in a region where there is “no market consensus on what constitutes an ESG fund”.
“These are not standardized products… A rule that tries to standardize what constitutes an ESG fund would be a huge step backwards for people who want to invest in this space,” Fish said. “Standardization is not the same thing as clarity.”
The Securities and Exchange Commission (SEC) also proposed stricter guidelines on corporate climate disclosure in March The long-awaited launch of the rules It would force public companies to disclose and verify their direct emissions of greenhouse gases by a third party. The agency did not respond to requests for comment.
The committee is also prosecuting regulators in Europe. The EU sustainable finance ratingThe list of environmentally friendly economic activities is expected to be approved by the European Parliament in July.
The Association of Investment Advisers, a trade group, urged the Securities and Exchange Commission to give leeway in the ESG’s proposal for the fiduciary duties of professionals to clients. “We would be concerned if the SEC was either limited or mandated by fiduciaries looking at any factors, including the ESG,” said Gail Bernstein, general counsel for the International Securities Association.
“Any rule should help provide clarity to alternative asset managers who engage in ESG strategies and calibrate them with the different needs of institutional and individual investors,” said Jennifer Hahn, global head of regulatory affairs at the Managed Funds Association, whose membership includes hedge funds.
The Investment Company Institute, whose membership includes mutual funds and exchange-traded funds, declined to comment.
Additional reporting by Andy Bounds in Brussels
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