WASHINGTON, D.C. — Proposals by the Securities and Exchange Commission to prevent misleading use of labels on funds that weigh environmental, social and governance factors and to require critical disclosures about these funds’ strategies are a welcome step toward protecting investors who choose these types of investments.
“The SEC’s proposals released today stand for the idea that investors’ choices and goals should be honored, not undermined by misleading language or practices. For example, if investors choose funds that purport to prioritize worker well-being, climate resilience, or racial equity, they should not find themselves unwittingly investing in companies antagonistic to those priorities,” said Natalia Renta, senior policy counsel for corporate governance and power for Americans for Financial Reform Education Fund. “We look forward to providing comments on ways to strengthen these two proposals to maximize their utility for retail investors concerned with climate change, worker well-being, racial justice, and other factors.”
SEC Proposes Two Rules To Improve ESG Transparency
The SEC has issued two important proposals to tackle misleading claims and greenwashing within the environmental, social, and governance (ESG) investment fund space.
- The first aims to address investor concerns about misleading names given to investment funds or portfolios like “sustainable,” “socially responsible,” or “green.”
- The second provides a framework for standardized ESG disclosure requirements for certain types of investment funds, and also for investment advisers, which are firms or individuals who provide advice to others on their investments.
These proposals respond to rising investor demand for more clarity on the motivations, strategies, and practices of so-called “sustainable” funds they are invested in. The practice of greenwashing, which occurs when funds claim but fail to deliver ESG benefits or to consider ESG factors in a systematic way, has become widespread.
To aid in their investment decisions, investors need a higher level of transparency and standardization in the naming of ESG-related funds and associated disclosures. Recent surveys show that retail investors are concerned with ESG; 64% would prefer to invest in companies that disclose their ESG criteria and practices.