Environmental and social justice-focused funds are booming — so much so that the Securities and Exchange Commission is mulling new regulations to clamp down on funds that fail to back up certain altruistic claims.
On Wednesday, the SEC proposed broadening the scope of its Names Rule, which enables the agency to take action against mutual and exchange-traded funds with misleading names. The amendment would require funds that use ESG (environmental, social and governance) or similar terminology in their names to put at least 80% of their holdings into those assets.
According to the SEC, the update “would help to prevent potential ‘greenwashing’ in fund names by requiring a fund’s investment activity to support the investment focus its name communicates.” The SEC first floated such a change in 2020. Should the proposal pass, it would be the first amendment to the Names Rule since it was adopted more than two decades ago.
The agency also proposed upping disclosure rules for funds that market themselves under the ESG banner, mandating that they explain how they plan to track their progress toward such goals.
For example, “funds focused on the consideration of environmental factors generally would be required to disclose the greenhouse gas emissions associated with their portfolio investments,” the SEC said in a statement. The agency will seek public comment for 60 days before announcing final decisions on the proposed rules, which are just one component of the regulator’s efforts to crack down on dubious environmental claims.
Earlier this week, the SEC slapped the Bank of New York Mellon Corp with a $1.5 million fine over “misstatements and omissions” about its ESG investments.
The SEC is also pondering new climate-disclosure rules. The floated updates would require public companies to disclose their emissions as well as warn investors of the ways that climate change threatens their bottom line.