SEC proposes new rules against greenwashing in ESG funds

June 10, 2022

The proposal sets out three types of ESG funds and what they are required to disclose.

The US Securities and Exchange Commission (SEC) has introduced a proposal aiming to standardise disclosures for ESG funds.

As greenwashing continues to be a prominent issue within the industry, the proposal will clarify specific environmental values to ensure the information provided by companies is accurate.

https://www.old.manifest.co.uk/sec-fines-bny-mellon-over-false-esg-statements/

Read Minerva's past coverage of the SEC's fight against greenwashing

Detailed within a 350-page document, the proposal outlines various changes that could be made to ensure validity in ESG funds. This includes definitions of the types of ESG funds, clarification of the ESG strategies used in investments, disclosure requirements around how a fund votes its proxies or engages with companies, as well as detailed guidance on KPIs, and index funds.

The proposal details three types of ESG funds including integration, ESG-focused and impact investing. Funds are required to provide an overview of their ESG strategy and how the fund will incorporate ESG factors into its investment decision.

An impact fund must additionally disclose how the fund measures progress towards the specific impact including KPIs, the time horizon for the fund to progress, and the relationship between the impact the fund is seeking to achieve and the financial return.

Under the new proposal, funds must describe how they interact with firms or votes their proxies on ESG issues. This could detect ‘proxy washing’. The percentage of ESG voting matters during the reporting period must also be disclosed to ensure validity.

Funds will also be expected to disclose the number or percentage of issuers in which the fund held ESG engagement meetings and total number of ESG meetings. ESG-focused funds that consider environmental factors must also disclose carbon footprints and weighted average carbon intensity.

In reference to index funds, the proposal requires all index funds to report identifying information about the index.

On the back of the DWS greenwashing probe in August 2021, the new proposal could support the validity of the ESG funds and ensure that environmental factors are valid within the funds and index.