Ethical investing has soared in popularity as awareness of environmental, social and governance (ESG) factors has grown among both retail and institutional investors. This has led to a proliferation of ESG-aligned investments products, presenting a challenge for those interested in assessing and understanding investment firms’ and advisors’ claims.
The extent of misalignment between the label and the content of investment products, especially among climate-themed funds, has led to widespread concerns of “greenwashing”. These are practices that Investopedia defines as giving a false impression or misleading information about how a company’s products are environmentally sound.
Securities and Exchange Commission (SEC) Chair, Gary Gensler, has made it clear that the regulator is acting in line with its mission to protect investors as it moves forward with proposals to enhance disclosures by investment firms and advisors about ESG factors. In an announcement on May 25, 2022, the SEC shared its intention that investors are able to understand what comprises their investments, allowing them to allocate their capital efficiently and according to their goals and motivations.
News media described the SEC’s move as a clear challenge to greenwashing. CNBC reported on spiraling concerns that certain funds were taking advantage of growing interest in ESG investing practices and deliberately misleading investors about ESG qualifications in their holdings. Bloomberg portrayed the SEC’s move as a war on greenwashing.
The reaction among large asset managers and industry interest groups has been mixed. An article in Citywire USA revealed that while some asset managers agreed about the need to better regulate ESG-named funds, others have pushed back and complained to the SEC that the rule change is sweeping yet vague and risks confusing investors. Reuters concludes that the number of investigations into finance-linked ESG activities still in turn means that greenwashing pressures will unlikely decrease in 2023.
Investment firms and SEC-registered advisers will be significantly impacted should the rule changes move forward. Mediant, a BetaNXT business, can keep funds informed about the implications of the SEC proposals, including Rule 35d-1, which is required for a fund name change, and how to include ESG factors in fund materials (prospectuses, annual summaries, brochures), as well as the requirements for proxy voting disclosures by advisers.
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