SEC Announces Disclosures and Rules Changes Intended to Combat "Greenwashing"
Today, the SEC issued two complementary press releases announcing certain proposed rules. First, the SEC announced "proposed amendments to enhance and modernize the Investment Company Act 'Names Rule'" that would "extend the requirement to any fund name with terms suggesting that the fund focuses in investments that have (or whose issuers have) particular characteristics . . . includ[ing] fund names with terms . . . indicating that the fund's investment decisions incorporate one or more environmental, social, or governance factors." In other words, if the name of an investment fund states that it is a "green" fund, then the investments made by that fund must reflect "green" investing.
Second, the SEC announced "proposed amendments to rules and reporting forms to promote consistent, comparable, and reliable information for investors concerning funds' and advisers' incorporation of environmental, social, and governance (ESG) factors." Specifically, these "proposed amendments seek to categorize certain types of ESG strategies broadly and require . . .more specific disclosures . . . based on the ESG strategies [that funds and advisers] pursue." For example, "[f]unds focus on environmental factors generally would be required to disclose the greenhouse gas emissions associated with their portfolio investments." In other words, the SEC is requiring investment funds to provide disclosures that demonstrate that these investment funds actually abide by their stated ESG strategy.
Taken together, these two proposed rules effectively compel ESG investment funds to abide by their announced purpose. The SEC's proposed disclosures would ensure that ESG investment funds demonstrate that they are, indeed, ESG investment funds, and the amendment to the names rule would preclude any non-ESG investment fund from adopting an ESG label.
These proposed rules reflect the SEC's concern with greenwashing, in which firms inappropriately assert that they fulfill certain environmental criteria--when, in actual fact, they do not. As an illustration of this enforcement priority, earlier this week, the SEC settled a case for $1.5 million against an investment advisor who had "represented or implied in various statements that all investments in the funds had undergone an ESG quality review, even though that was not always the case." And this concern over greenwashing is shared by other governments, including the UK, which identified this issue as a regulatory priority last October.
The Names Rule currently requires registered investment companies whose names suggest a focus in a particular type of investment (among other areas) to adopt a policy to invest at least 80 percent of the value of their assets in those investments (an “80 percent investment policy”). The proposed amendments would enhance the rule’s protections by requiring more funds to adopt an 80 percent investment policy. Specifically, the proposed amendments would extend the requirement to any fund name with terms suggesting that the fund focuses in investments that have (or whose issuers have) particular characteristics. This would include fund names with terms such as “growth” or “value” or terms indicating that the fund’s investment decisions incorporate one or more environmental, social, or governance factors.