SEC targets ESG funds with a pair of proposals

This blog from PracticalESG.com’s Lawrence Heim summarizes the pair of ESG fund proposals that the SEC voted upon yesterday. Here’s an excerpt about what this means:

Investment fund compliance can get very complex, very fast – so I’m not going to get into the weeds here. For companies that might be included in fund portfolios, these rules are yet another sign that the SEC is cracking down on perceived “greenwashing” in an industry that reached $2.78 trillion in assets during the first quarter of this year, up from less than $1 trillion only two years ago, according to this WSJ article and Morningstar data. These proposals follow an enforcement action against an ESG investment fund earlier this week.

With investors under pressure to prove their ESG credentials and provide enhanced disclosure, they’ll in turn be passing more information requirements along to portfolio companies. That means it’s more important than ever to be in regular conversation with your investors, so that you aren’t caught flat-footed by information requests – and to stay in line with peers and emerging best practices (because demands can accelerate quickly).

It also means there’s an opportunity for ESG-focused companies that are seeking capital. There may be a big rush to ESG assets if funds are faced with the choice between compliance or a name change. The ESG investment fund space may also shrink, which is what happened in the EU when regulators realized that so-called ESG funds were not actually performing screens. As I noted in my book, Killing Sustainability (available to PracticalESG.com members on our “Guidebooks” page):

“The EU Commission passed the Sustainable Finance Disclosure Regulation (SFDR), which became effective March 2021. in anticipation of the effective date, however, ESG-tagged investments in Europe shrank by $2 trillion from $14 trillion in 2018 as funds deleted references to ESG, responsible or green in their names/descriptions.”

Comments for both of the proposals are due 60 days after the date the proposal is published in the Federal Register. It is interesting that this proposal was given a 60-day comment period initially, in contrast to the climate disclosure rule. You may want to wait to submit your comments until after the proposal is published in the Federal Register since the climate disclosure proposal was actually modified between the time it was approved by the Commission and it being published.

By the way, the American College’s Maguire Center for Ethics in Financial Services is holding an “ESG Forum” on June 22nd in NYC…