SEC adopts new “greenwashing” names rule for funds

Here’s a note from Tim Mohin:

It seems like each week brings a new ESG policy. Last week, we reported on California’s new climate disclosure bills, which are now certain to become law after Governor Newsom declared he would sign them.

This week, the U.S. Securities and Exchange Commission (SEC) updated a rule aimed at curbing “greenwashing” in investment funds.

The first update to the 20-year-old “Names Rule” will expand the number of labels for funds and requires that 80% of their portfolio align with the name. The rule targets funds that exploit the growing interest in environmental, social, and governance (ESG) investing by using misleading names and will affect 76% of investment funds, up from the current 60%. SEC Chair Gary Gensler said, “Today’s final rules will help ensure that a fund’s portfolio aligns with a fund’s name.”

Most have applauded the move. Stephen Hall of Better Markets said, “Investors often rely on a fund’s name when making investment decisions.” However, some in the investment community believe the names rule is too subjective and would cause confusion for investors. Eric Pan, CEO of the Investment Company Institute, “The rule sweeps more than three-quarters of all the funds in the U.S. into its dragnet, going far beyond ESG funds—the supposed root of the rulemaking—with no justification,”

Fund owners have 90 days to ensure they have taken corrective action to bring their funds within the 80% rule.