Ceres welcomes two new proposed rules issued today by the U.S. Securities and Exchange Commission (SEC) which aim to strengthen protections and address increasing confusion around the rapid growth of ESG-oriented funds.
One proposal, Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices, requires U.S. investment companies and advisors to state whether they use ESG criteria and disclose data that shows how funds meet those criteria if they have them. The other proposal, Investment Company Names, would strengthen the fund names rule to give investors more confidence that a fund name reflects its composition. These proposals follow the climate disclosure rule proposal, put forth by the SEC in March 2022.
“While we have just begun reviewing these proposed rules, the actions taken by the SEC would address concerns about greenwashing, and result in greater investor confidence that sustainable funds are what they say they are,” said Steven Rothstein, Managing Director of the Ceres Accelerator for Sustainable Capital Markets at Ceres. “The tremendous growth in the number and variety of ESG funds available shows that analysis of ESG risks and opportunities is a mainstream strategy to create long-term value for investors. But better, more consistent disclosures are sorely needed to help investors take advantage of this dynamic and growing market.”
Assets in climate-focused funds doubled during 2021, to $408 billion according to a recent study by Morningstar. This same study counted some 860 mutual funds and exchange-traded funds with climate-related mandates. These funds spanned a wide range of investment styles and strategies, including climate solutions, clean energy and technology, green bonds, low emissions, and many others, which do not yet have a standard definition in the marketplace. The SEC correctly asserts that such terms in fund names should be defined in their summary prospectuses, and that the methodologies and data used to undergird such claims be disclosed.
Kirsten Spalding, Senior Program Director, Ceres Investor Network added, “Investors increasingly recognize that their investments are exposed to the financial risks of climate change and want to invest in funds that manage those risks. Many also want their investments to contribute to the fight against climate change and support sustainability. It is critical that investors be able to understand which funds consider climate risks and opportunities for purely financial reasons, which seek to have an impact, and how funds intend to achieve those goals. The SEC must ensure that investors are armed with the information they need to select funds that meet their objectives.”
Some financial regulators around the globe have already required such disclosures, such as the European Commission’s Sustainable Funds Disclosure Regulation. It is critical that US fund managers provide better ESG information to US investors, and that the SEC participate in this global process to provide more structure and clarity in the ESG market.
The unprecedented inflows and growth in new climate-aligned and ESG funds demonstrate meaningful change that requires new thinking and regulation. The SEC’s proposal is the latest of a trend of actions that financial regulators are taking around the world.
The public comment period will end no earlier than July 24, 2022.