SEC to Propose More Disclosure Requirements for ESG Funds

WASHINGTON — Regulators have proposed new requirements for investment funds that tap into public anger about climate change or social justice, in an effort to address concerns about “cleaning up” green” of asset managers looking for higher fees.

The Securities and Exchange Commission voted on Wednesday to introduce two proposals aimed at providing investors with more information about mutual funds, exchange-traded funds and similar vehicles. to the so-called ESG – that is, environmental, social and corporate governance factors. One of the proposed rules would expand the SEC’s rules governing fund names, while the other would increase disclosure requirements for ESG-focused funds.

Hester Peirce, the only Republican on the four-man committee, voted against both proposals, saying they would place undue burdens on asset managers and spur them on. to capital allocation decisions that only a few investors support.

The explosion of what advocates call green or sustainable investing has posed an increasing challenge to regulators in recent years. Assets in funds that claim to be focused on sustainability or ESG factors hit $2.78 trillion in the first quarter, up from less than $1 trillion two years earlier, according to Morningstar..

Although the fees charged by such funds are often much higher than what investors pay for low-cost index funds, there are few consistent standards for what constitutes a stock, bond, or stock. or ESG strategy.

“What we’re trying to address is truth in advertising,” SEC Chairman Gary Gensler told reporters during a virtual news conference following the committee’s vote.

Some ESG fund managers only buy shares of companies that they believe have a small carbon footprint, while others may invest in companies that have publicly pledged to outperform. Another strategy involves building shares in a chronic polluter in hopes of winning seats on their board or forcing proxy votes to pressure the company to change the way it works. his consciousness.

The uncertainty has led to widespread concern among investors and regulators that banks and asset managers selling funds are “washing up” or exaggerating environmental or social sustainability. their association to increase their own revenue.

Earlier this week, the SEC fined the investment management arm of Bank of New York Mellon Corp.

$1.5 million for misleading statements about the criteria it uses to select ESG stock. BNY Mellon neither admits nor denies wrongdoing.

Authorities are also probing Deutsche Bank AG of

Asset management branch after The Wall Street Journal reported last year that the DWS Group overstated its sustainability investment efforts. At the time, a DWS spokesman said the company does not comment on questions related to litigation or regulatory issues. A spokesman for Deutsche Bank declined to comment.

The SEC’s first proposal on Wednesday would overhaul the requirements around fund names.

According to a rule passed two decades ago, if a fund’s name suggests a focus on certain industries, geographies or investment types, the fund must invest at least 80% of its equity. hold those assets.

The US quickly became the world leader in bitcoin mining after China bankrupted the cryptocurrency last year. WSJ’s Shelby Holliday examines the implications of global change for the bitcoin network, the energy industry, and the environment. Photo: Mark Felix / Agence France-Presse / Getty Images

Wednesday’s proposal would expand the scope of the so-called Rule of Names to include proposed funds that focus on ESG factors or on strategies like “growth” or “value.” A fund that merely considers ESG factors along with — but not more than — other inputs will not be allowed to use ESG or related terms in its name.

“Fund names are often one of the most important pieces of information that investors use to select funds,” Mr. Gensler said.

The second proposal under consideration would require funds that consider ESG in their investment process to disclose more information. So-called impact funds that seek to achieve an ESG-related goal will have to disclose how they measure progress toward that goal. Funds in which ESG investments are an important or primary consideration will be required to complete a standardized table as well as additional information on greenhouse gas emissions generated by listed companies or issuers. their investments.

Mr. Gensler often likens that information to the nutritional information printed on the back of a can of skim milk.

“However, when it comes to ESG investments, there is currently a lot that asset managers can reveal or mean about their claims,” he said on Wednesday, adding that there are It can be difficult for investors to understand or compare funds. “People are making investment decisions based on these disclosures, so it is important that they are presented in a way that makes sense to investors.”

The commissioners voted 3-1 to open the two proposals for public comment.

Ms Peirce, the Republican commissioner, said the updates to the Name Rule risk changing the way some funds are managed as companies seek to avoid being captured by the proposed criteria she considers. is subjective. The new disclosure requirements will increase pressure on funds to vote on stocks or compile their portfolios according to the wishes of active investors, Ms Peirce said.

“If the need to disclose greenhouse gases is becoming the norm, let standards and expectations evolve organically,” Ms. Peirce said. “Let investors shape industry practice through their investment decisions, not through regulatory regulations on what investors must consider.”

The Securities Association of America, a lobbying group representing brokerages and financial services firms in the region, welcomed the SEC’s proposals, arguing that the scrutiny of fees, effectiveness, and efficiency The rate and advertising of the ESG fund are very appropriate.

“The ASA supports the SEC’s efforts to prevent misleading and deceptive marketing gimmicks surrounding ESG funds,” the group’s chief executive officer, Chris Iacovella, said in an emailed statement.

The Investment Company Institute, which lobbies on behalf of the fund industry, did not respond to a request for comment.

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