SEC Issues ESG Labelling Rules for Mutual Funds

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by KnowESG
KnowESG_SEC Issues ESG Labelling Rules for Mutual Funds
Image courtesy of https://www.investmentweek.co.uk/

The US Securities and Exchange Commission (SEC) has recently unveiled a set of updated regulations aimed at curbing the deceptive labelling practices surrounding ESG (Environmental, Social, and Governance) funds.

This amendment brings significant changes to the 'Names Rule' outlined in the Investment Company Act, with a key focus on ensuring that the names of these funds accurately portray their investment strategies.

The SEC, in its announcement, emphasised the importance of fund names aligning adequately with the fund's actual investment approach.

Furthermore, these regulations take a specific aim at funds that employ terms such as 'growth' and 'value,' which are often confused due to varying interpretations across different financial firms.

Previously, the 'names rule' stipulated that funds bearing names suggestive of a specific investment type should have a minimum of 80% of their assets invested in that suggested category. Now, this requirement extends to ESG funds as well, demanding that their names adhere to "plain English meaning or established industry use."

These amendments have been put in place to combat the issue of greenwashing, where a fund technically complies with the 80% threshold but contradicts its name through the remaining 20% of its holdings. For instance, a fund labelled 'fossil-fuel free' will no longer be able to include fossil fuel holdings in that 20% allocation.

It's worth noting that the SEC acknowledged that a provision intended to prevent misleading labelling was not ultimately included in the final regulations.

Under the initially proposed rules, funds that considered ESG factors but did not primarily focus on them in their investment strategy would have been deemed "materially deceptive" if they used ESG or similar terms in their labels. However, this provision did not make its way into the finalized rules.

Andrew Behar, the CEO of the national shareholder representative organisation As You Sow, commented on these changes. He expressed that when investors choose 'ESG' or 'fossil-free' funds, they expect to reduce their exposure to climate risk and not hold investments in major oil, coal, or deforestation industries.

Behar noted that these new regulations represent a significant step towards ensuring transparency and truthfulness in fund marketing, sending a clear message that misleading or deceptive ESG labelling is unacceptable.

Behar emphasised the need for asset managers to align their ESG funds' holdings with the fund's name and prospectus language. He highlighted instances where funds bearing 'ESG' in their names still held substantial stakes in fossil fuel extraction companies and coal-fired utilities, calling for greater consistency between fund labels and their actual holdings.

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Source: Investment Week

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