The Securities and Exchange Commission is set to vote next week on rules that would crack down on the Wild West that has become environmental, social and governance (ESG) investing.
The agency said today that it will meet next Wednesday to consider whether to propose rules that would push financial firms such as asset managers to lay bare more details about their sustainability-related activities and investment products.
The SEC’s notice indicated that the agency will vote on rules that could do so in two key ways. The first would be by proposing amendments to address “investment company names that are likely to mislead investors about an investment company’s investments and risks.” The second would entail proposing amendments that would ask fund managers and investment companies to disclose, in a standardized manner, ESG-related information.
It’s too soon to say what the details of the rules would entail. But SEC Chair Gary Gensler has provided several high-level hints.
Since taking the agency’s helm more than one year ago, Gensler has made clear that the agency during his tenure would zero in on investment funds that market themselves as “green,” “sustainable,” “low-carbon” and more. Amid rising investor demand for sustainable finance options in recent years, the universe of those labels — and funds that don them — has exploded.
Gensler is among those who have raised concerns about the lack of standards that guide which funds merit such labels, and if they are misleading sustainability-minded investors (E&E Daily, Sept. 15).
In a speech last July, Gensler emphasized that “there’s currently a huge range of what asset managers mean by certain terms or what criteria they use.” While some of the funds say they exclude particular industries, for example, others make statements about the planet-warming emissions or water risks of their underlying assets.
“I think investors should be able to drill down to see what’s under the hood of these funds,” Gensler said. “Thus, I’ve directed staff to consider recommendations about whether fund managers should disclose the criteria and underlying data they use. I’ve also asked staff to consider whether we might take a holistic look at the Names Rule.”
Democrats aren’t the only ones concerned about the proliferation of ESG marketing. SEC Commissioner Hester Peirce, who is a Republican and was appointed by former President Trump in 2017, has also voiced concerns about the investors who are pouring dollars into the growing number of ESG products provided by asset managers.
“While the demand for these products is clear, less clear is what exactly these investors are buying,” she said in a speech in 2020, also noting that “funds must clearly disclose their investment strategies” so investors can make more informed decisions.
Peirce stopped short, however, of saying the SEC should “standardize what it means to have an ESG strategy” — a signal that the move could face opposition both inside and outside the agency.
The notice comes amid intense partisan debate over the SEC’s other, more prominent, sustainability-related effort: landmark rules that would require public companies to disclose their greenhouse gas emissions and climate risks.
