The Managed Funds Association (MFA), the global alternatives investment body, has called on the Securities and Exchange Commission to learn lessons from the EU’s anti-greenwashing legislation in a comment letter pushing back on the US financial watchdog’s proposed ESG disclosures rule.
The submission comes just a month after the European Commission released a wide-ranging consultation on the future of the bloc’s Sustainable Finance Disclosure Regulation (SFDR) regime.
The commission’s 44-page questionnaire covers topics including proposals to abolish the Article 8 and 9 system, potential changes to disclosure requirements, and whether the purpose of the regulation is still relevant.
Under SFDR, Article 8 funds are those that promote environmental or social characteristics, while Article 9 ones must pursue environmental or social objectives.
Since the regulation came into effect in 2021, concerns have been raised that SFDR terminology could be used by the market as a label that attests to a fund’s sustainability rather than purely as a classification that determines the disclosure obligations it must comply with under EU law.
The MFA, whose 160 members represent $2 trillion in assets under management, urged the SEC in its letter to consider the EC’s experience – “specifically, the ways in which the EC now acknowledges that the SFDR’s classification regime has potentially contributed to greenwashing rather than mitigating it”.
It noted that, just as the original goals for SFDR were “notably similar” to those put forward by the SEC with its proposal, so too are the criticisms.
“These problems that the EC has identified with the current SFDR framework are strikingly similar to those that MFA and other industry stakeholders have flagged with the ESG framework proposed by the [SEC],” it wrote.
The SEC’s proposed rule, published in 2022, is titled Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social and Governance Investment Practices.
It put forward three disclosure categories: ESG-integration (in which ESG plays a smaller role); ESG-focused (rely on one or more ESG factors); and ESG-impact (designed to achieve a certain ESG goal).
In a comment letter in August 2022, the MFA warned that the requirement that investment advisers provide enhanced disclosures on their integration of ESG factors “no matter how incidental the considerations may be” will result in “undue emphasis on an otherwise immaterial strategy (or aspect thereof)”.
“This is likely to lead to greater investor confusion and frustration as the term ‘ESG’ becomes overused and hollow,” it added. “We believe this result would be contrary to the [SEC’s] stated goal of reducing the risk of ‘greenwashing’ by creating a misleading impression of the importance of ESG factors to an adviser’s strategy, fund or investment process.”
The Principles for Responsible Investing also warned at the time that the SEC’s rule could be viewed as a “marketing” tool by investment firms and advisers subject to it.
The MFA concluded its most recent letter by arguing that learning lessons now from SFDR, ahead of the release of the final version of the SEC’s rule, “will enable the [SEC] to effect crucial cost-savings, to contribute to beneficial allocations of resources, and to avoid meaningful investor confusion with respect to ESG-related financial products”.
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