SEC adopts ‘greenwashing’ rule for ESG and growth funds
Zachary Halaschak
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The Securities and Exchange Commission has adopted a new rule that tightens restrictions surrounding the naming of investment funds that prioritize environmental or social concerns.
The rule, first proposed last year, targets increasingly popular ESG funds. ESG investing, short for environmental, social, and governance, is an investment model that doesn’t solely look at maximizing profit but also other elements like an investment’s effect on the climate. The rule aims to prevent money managers from “greenwashing” by overstating funds’ adherence to ESG principles.
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Greenwashing is when firms obfuscate the truth about what is in their investment vehicles in order to reap the benefits of the ESG label without following through. ESG-focused funds tend to have much higher fees than traditional index funds.
“As the fund industry has developed over the last two decades, gaps in the current Names Rule may undermine investor protection,” SEC Chairman Gary Gensler said in a statement. “Today’s final rules will help ensure that a fund’s portfolio aligns with a fund’s name. Such truth in advertising promotes fund integrity on behalf of fund investors.”
The rule tightens regulations preventing money managers from giving their funds an ESG label if it is not merited. Specifically, the rule mandates that if a fund implies an ESG focus or a focus on a class of companies with certain characteristics, then 80% of the value of their assets must be in the class the name suggests.
The rule also targets funds using terms such as “growth” and “value” — which the finance industry has pushed back on because different firms define those strategies differently.
The SEC proposal is an update to the 20-year-old “Names Rule,” which requires fund names to mesh with the included assets.
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But the rule has big opponents. The Investment Company Institute, an association of regulated funds, had pushed back on the move in a letter to the SEC, saying that the existing rules worked as intended and that investors understood the documentation provided by funds justifying their names.
American Securities Association head Chris Iacovella said that Wednesday’s rule is “another example of the commission adopting sweeping, disruptive, and duplicative proposals that will confuse investors and create numerous problems for firms and the SEC alike.”