The SEC proposes more disclosure requirements for ESG funds

The financial industry – between asset managers and those who buy their products – is divided over the need for more Securities and Exchange Commission oversight over ESG funds. The Investment Firm Institute, which lobbies Washington on behalf of asset managers, said it plans to review the proposals with its members closely, but it has a number of concerns, including about costs it said investors will ultimately incur.

The boom in what advocates call green, or sustainable investing, has posed an increasing challenge to regulators in recent years. Assets in funds that claim to focus on sustainability or environmental, social and corporate governance factors reached $2.78 trillion in the first quarter, up from less than $1 trillion two years ago, according to the

morning star.

Although the fees charged by these funds are usually much higher than what investors pay for low-cost index funds, there are few consistent standards for what constitutes Stock, Bond, or ESG Strategy.

“What we’re trying to address is the truth in the ad,” Securities and Exchange Commission Chairman Gary Gensler told reporters at a virtual news conference after the committee vote.

Hester Pierce, the only Republican on the four-person panel, voted against both proposals, saying they would impose undue burdens on asset managers and push them toward capital allocation decisions that only some investors prefer.

One suggestion would fix the requirements on fund names.

Under a rule passed two decades ago, if a fund’s name implies a focus on certain industries, geographic regions or investment types, it must invest at least 80% of its holdings in such assets.

Wednesday’s proposal would expand the so-called base of names to cover funds that indicate a focus on environmental, social and governance factors, or on strategies such as growth or value. A fund that considers ESG factors in tandem with – but not more than – other inputs will not be allowed to use ESG or related terms in its name.

“The name of the fund is often one of the most important information investors use in choosing a fund,” Gensler said.

The Investment Company Institute CEO, Eric Ban, said in an emailed statement that the fund’s name is “a tool for communicating with investors…and not the only source of information for investors about the fund’s investments and risks.”

A second proposal released on Wednesday will require funds that consider environmental, social and corporate governance in their investment operations to reveal more information. So-called impact funds that pursue an ESG-related goal must disclose how they will measure progress toward that goal. Funds for which investing in ESG is a significant or essential consideration would be required to fill out a consolidated table as well as additional information about the greenhouse gas emissions that companies or issuers produce in their portfolios.

“It appears that it is impractical to suggest that some funds disclose emissions related to their holdings – some of the information may not be publicly available,” Mr. Ban said.

But Mr. Gensler likened this information to the nutritional facts printed on the back of a carton of skim milk.

“When it comes to investing in ESG, though, there is currently a wide range of what asset managers may disclose or mean by their claims,” he said on Wednesday, adding that it can be difficult for investors to understand or compare funds. “People make investment decisions based on these disclosures, so it is important that they are presented in a way that is meaningful to investors.”

The American Securities Association, a lobbying group representing regional brokerages and financial services, applauded the SEC’s proposals, saying it was appropriate to scrutinize ESG funds’ advertising, performance and fees.

“ASA supports the Securities and Exchange Commission’s efforts to stop the misleading and misleading marketing scams surrounding ESG funds,” the group’s CEO, Chris Iacovella, said in an emailed statement.

The nature of ESG investments varies greatly. Some ESG fund managers only buy shares of companies they believe already have a small carbon footprint, while others may invest in companies that have publicly committed to improving performance. Another strategy involves building a stake in a chronic polluter in hopes of winning seats on its board or forcing proxy votes that pressure the company to change its tactics.

The uncertainty has led to widespread concern among investors and regulators that banks and asset managers selling money are “laundering the environment” or exaggerating their environmental or social sustainability to boost their revenues.

Earlier this week, the Securities and Exchange Commission fined the investment management arm of

Bank of New York Mellon corp.

$1.5 million for misleading claims about the criteria you used to select ESG shares. BNY Mellon has neither admitted nor denied any wrongdoing.

The authorities are also checking

German Bank AG’s

The asset management arm after the Wall Street Journal reported last year that the DWS Group exaggerated its efforts for sustainable investing. At the time, a DWS spokesperson said the company does not comment on questions related to litigation or regulatory issues. A Deutsche Bank spokesman declined to comment.

The commissioners voted 3-1 to open the two proposals for public comment for at least two months before the Securities and Exchange Commission decides whether to issue a final rule.

Ms Pierce, the Republican commissioner, said updates to the name rule risk changing the way some funds are managed as companies seek to avoid being taken over by proposed criteria, which she described as subjective. Ms. Pierce said the new disclosure requirements will intensify pressure on funds to vote on shares or build their portfolios in line with the wishes of activist investors.

“If the demand for greenhouse gas detection becomes the norm, let’s let standards and expectations evolve organically,” said Ms. Pierce. “Let investors shape industry practices through their investment decisions, not through regulatory mandates about what investors should think.”

– Amrit Ramkumar contributed to this article.

write to Paul Kiernan at [email protected]