SEC Proposals Broaden ESG Accountability

The Securities and Exchange Commission (SEC) has voted to propose regulations that establish mandatory disclosure requirements for funds and advisers that market themselves as having a green, sustainable, low-carbon, or ESG focus and that update the SEC’s fund ‘Names Rule’.  

Under the SEC’s ‘Names Rule’ proposal, a fund must adopt a policy to invest at least 80% of the value of its assets in the type of investment suggested by its name or it is not permitted to use ESG or similar terminology in its name. Doing so would be defined to be “materially deceptive or misleading”, the SEC proposal said. In addition, a fund must not make a substantial investment that contradicts its name, as well as ascribe a central role to ESG factors in determining investment weights. 

The SEC’s new pair of ESG proposals arrived only two days after the SEC slapped BNY Mellon Investment Adviser with a $1.5 million fine for allegedly misstating and omitting ESG considerations for some of the mutual funds that it manages. It also follows another ESG-related enforcement filing against the NYSE-listed Brazilian mining company, Vale, that seemed aimed at demonstrating the SEC’s commitment to putting ESG disclosures on a similar footing to existing corporate disclosures. 

In that complaint, the SEC alleged that Vale used its ESG disclosures to make false and misleading claims about the safety of its dams prior to the January 2019 collapse of its Brumadinho dam, which killed 270 people and led to a loss of more than $4 billion in Vale’s market capitalization. 

For the US securities regulator, its new ESG disclosure rule proposal, which is meant to provide consistent standards for ESG disclosures, marks a departure from past practice as the SEC has not generally prescribed specific disclosures for particular investment strategies. 

“[But] ESG strategies differ in certain respects that we believe necessitate specific requirements and mandatory content to assist investors in understanding the fundamental characteristics of an ESG fund or an adviser’s ESG strategy in order to make a more informed investment decision,” the new ESG disclosure rule proposal said. 

According to SEC Chairman Gary Gensler, the proposal gets to the heart of the SEC’s mission to protect investors. “Investors should be able to drill down to see what’s under the hood of these funds,” he said during an open meeting on Wednesday. 

The SEC’s says that this proposal would enhance disclosure because it calls for additional specific reporting requirements regarding ESG strategies in fund prospectuses, annual reports, and adviser brochures; implements a layered, tabular disclosure approach for ESG funds to allow investors to compare ESG funds at a glance; and requires certain environmentally-focused funds to disclose the greenhouse gas emissions associated with their portfolio investments.

The SEC’s latest ESG rule proposals will enter 60-day comment periods after they are published in the Federal Register. Earlier this month, the SEC, seemingly in response to commenter requests, extended the comment period for its landmark climate proposal, released in March, to June 17th.