SEC eyes tightening of ESG fund rules

March 11, 2022

The US financial regulator is considering new rules for investment funds marketing themselves as environmental, social and governance (ESG) themed.

The Securities and Exchange Commission's (SEC) chair Gary Gensler said he had asked the regulator's staff to "build upon our naming rules and conventions, and consider recommendations about whether fund managers should disclose the criteria and underlying data they use in so-called ESG investing".

In a video posted earlier this month by the SEC, Gensler said that the information for regular equity or bond funds gave investors "a window into the criteria and data" that sit behind a fund's name.

With ESG funds, however, the range of data and interpretations was far broader, Gensler said, reflecting the different kinds of funds that exclude or target certain sectors or themes.

"Which data and criteria are asset managers actually using to ensure they're meeting your goals as investors?" Gensler said in the consumer-oriented video. "I think investors should be able to drill down and see the ingredients underlying these funds."

The SEC estimates that there are more than 800 registered investment funds purporting to be 'green' or 'sustainable' in some way in the US, managing more than $3 trillion between them.

The US regulator has been mulling changes to its naming rules for some time in relation to ESG funds. Its current rule, in place since 2001, dictates that US mutual funds must have at least 80% of their portfolios invested in line with what their names suggest.

However, the SEC and other organisations have previously raised concerns that the loose and varied definitions of green, sustainable or ESG investing could make it difficult for fund buyers to gain confidence in the credentials of products.

The regulator previously called for industry input into its naming rules two years ago, but no action was taken.

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