SEC commissioners vote for ESG disclosure rules to counter greenwashing

The US Securities and Exchange Commission has moved toward adopting a rule that would mandate advisers and fund managers make disclosures to counter “greenwashing”, affiliate publication Regulatory Compliance Watch reported on Wednesday.

Commissioners approved – by three votes to one – a proposed rule that would mandate disclosures and other filings designed to clearly inform investors of the composition of ESG investments.

The 362-page proposal, which will be open for comment for 60 days after it appears in the Federal Register, would establish standardised disclosures to ensure registered funds are not “appearing to be something that they’re not”, said SEC staffer Jessica Wachter.

The proposal would impact investment advisers, including some that are exempt from registration, mutual funds and ETFs. Some index funds would also face new disclosures. The proposal would require additional disclosures in registration statements, annual reports, fund prospectuses and other SEC filings.

Advisers would have to describe their use of ESG factors, their strategies, methods of analysis and how they voted relevant proxies. The amount of disclosure would depend on the extent of ESG investing by a fund. Three categories would be created:

• Integration funds (in which ESG plays a smaller part)
• ESG-focused funds (rely on one or more ESG factors)
• Impact funds (designed to achieve a certain ESG goal)

Global assets invested in ESG securities hit $2.7 trillion last year with US assets making up $357 billion of this amount, according to commissioner Allison Herren Lee. The US portion surged by 51 percent in the past year. Given this rising interest, there is an increasing need for “consistent, comparable and reliable information” in support of the proposal, she added.

Commissioner Caroline Crenshaw noted that some funds use terms such as “sustainable” or “green” as marketing tools rather than investment philosophies. She added that the SEC has long required registrants to disclose material information to investors and the proposal does just this.

The lone commissioner dissenter, Republican Hester Peirce, said the proposal “misses the mark”, would provide little benefit to investors and would make enforcement difficult because it fails to define ESG. “‘I’ll know it when I see it’ is not currently recognised in administrative law,” she said.

Pierce described the proposal as “proscriptive almost to the point of parody” and the one-year compliance timetable after a final rule as “laughingly short”. The proposal’s mandate that compliance P&Ps must insist that meeting minutes where ESG is discussed are documented would amount to “micromanagement of asset management”, she said.

A more palatable alternative would be to tackle “greenwashing” through enforcement, Peirce said.

The proposal comes two days after the SEC fined an adviser $1.5 million over ESG-related disclosures, and one month after Brazilian mining giant Vale was charged with misleading investors over the safety of its Brumadinho dam over the three years before its collapse killed 270 people. 

“I think investors should be able to drill down to see what’s under the hood of these funds,” said SEC chairman Gary Gensler. “This gets to the heart of the SEC’s mission to protect investors, allowing them to allocate their capital efficiently and meet their needs.”

An example of a Form ADV brochure change within the proposal rule instructs an adviser that uses “criteria or a methodology for evaluating, selecting or excluding investments in your significant investment strategy or method of analysis based on the consideration of ESG factors, [to] describe that criterion and/or methodology and how you use it for each applicable significant investment strategy or method of analysis”. The Form ADV brochure provides details about a firm, including fee structure and AUM.