EHS Administration, ESG

Proposed SEC Rules Tighten ESG Investment Claims

The Securities and Exchange Commission (SEC) released two press releases on May 25, 2022, announcing proposed rule changes intended to battle “greenwashing” claims by investment groups.

Names Rule

The current Names Rule requires registered investment companies with business names suggesting a focus on particular types of investments to adopt a policy to invest at least 80 percent of the value of their assets in those investments (an “80 percent investment policy”).

“A fund’s name is an important marketing tool and can have a significant impact on investors’ decisions when selecting investments, and the Names Rule addresses fund names that are likely to mislead investors about a fund’s investments and risks,” states one of the SEC press releases. “The proposal follows a request for comment the SEC issued to gather public feedback on potential reforms to the rule in March 2020.”

“A lot has happened in our capital markets in the past two decades. As the fund industry has developed, gaps in the current Names Rule may undermine investor protection,” says SEC Chair Gary Gensler. “In particular, some funds have claimed that the rule does not apply to them — even though their name suggests that investments are selected based on specific criteria or characteristics. Today’s proposal would modernize the Names Rule for today’s markets.”

The proposed changes to the Names Rule would require more investment companies to adopt the “80 percent investment policy.”

“Specifically, the proposed amendments would extend the requirement to any fund name with terms suggesting that the fund focuses in investments that have (or whose issuers have) particular characteristics,” the press release adds. “This would include fund names with terms such as ‘growth’ or ‘value’ or terms indicating that the fund’s investment decisions incorporate one or more environmental, social, or governance factors. The amendments also would limit temporary departures from the 80 percent investment requirement and clarify the rule’s treatment of derivative investments.”

The proposed Names Rule changes will be published in the Federal Register under File # S7-16-22. Upon publication, public comments will be accepted for 60 days.

ESG investment practices

The second announcement “proposed amendments to rules and reporting forms to promote consistent, comparable, and reliable information for investors concerning funds’ and advisers’ incorporation of environmental, social, and governance (ESG) factors. The proposed changes would apply to certain registered investment advisers, advisers exempt from registration, registered investment companies, and business development companies.”

“I am pleased to support this proposal because, if adopted, it would establish disclosure requirements for funds and advisers that market themselves as having an ESG focus,” Gensler continued. “ESG encompasses a wide variety of investments and strategies. I think investors should be able to drill down to see what’s under the hood of these strategies. This gets to the heart of the SEC’s mission to protect investors, allowing them to allocate their capital efficiently and meet their needs.”

The amendments seek to broadly categorize certain types of ESG strategies and require more specific disclosures in fund prospectuses, annual reports, and advisor brochures based upon the category of ESG investment strategy.

Examples include:

  • Funds focused on the consideration of environmental factors generally would be required to disclose the greenhouse gas emissions associated with their portfolio investments.
  • Funds claiming to achieve a specific ESG impact would be required to describe the specific impact(s) they seek to achieve and summarize their progress on achieving that impact.
  • Funds that use proxy voting or other engagement with issuers as a significant means of implementing their ESG strategy would be required to disclose information regarding their voting of proxies on particular ESG-related voting matters and information concerning their ESG engagement meetings.

To compliment the proposed specific disclosures, certain ESG reporting would require the use of Forms N-CEN and ADV Part 1A, “which are forms on which funds and advisers, respectively, report census-type data that inform the Commission’s regulatory, enforcement, examination, disclosure review, and policymaking roles,” continues the press release.

The proposed ESG investment practices disclosure changes will be published in the Federal Register under File # S7-17-22. Upon publication, public comments will be accepted for 60 days.