The US SEC has just published new rules on ESG fund names, which is expected to attract more funds to the ESG industry. Picture Getty
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- The US SEC has just published new rules on ESG fund names
- The rules are expected to attract more funds to the ESG industry
- Stockhead reached out to As You Sow CEO Andrew Behar for his insight
There’s some good news for ESG investors.
The US Securities and Exchange Commission (SEC) has just published new rules to prevent misleading or deceptive use of environmental, social, and governance (ESG) terms in mutual fund names.
The new rules modernise the Investment Company Act “Names Rule”, and will ensure that the name of a fund “adequately and accurately” represents the investment strategy of the fund.
The effort is part of the SEC’s efforts to fight greenwashing in the sustainable investment industry.
The Names Rule has previously required that funds with a name that suggested a focus on a “particular type of investment” must invest “at least 80%” of its assets in the suggested type of investment.
The new rules now extend this “80% rule” to cover ESG investment strategies, and require that fund names meet a “plain English meaning or established industry use.”
Extending this rule should prevent situations where a fund technically conforms to the 80% rule, but contradicts the fund name with the remaining portion of the holding.
An example of this is: a fund with “fossil-fuel free” in the name that includes fossil fuel holdings in the 20% basket.
Unfortunately, the final rule did not include a key section designed to prevent misleading labelling.
Under the proposed rule, if funds considered ESG factors but such ESG factors were not the principal purpose of the fund’s investment strategy, it would have been materially deceptive and misleading to use ESG or a similar term (such as sustainable, green, impact, etc.) in the name. This section was left out of the final rule.
Weeding out greenwashing
CEO of As You Sow, Andrew Behar, says these new rules will help provide needed truth in advertising, and make a statement that financial greenwashing with misleading or deceptive ESG labels is not acceptable.
“Today, we see funds with ESG in their names holding dozens of fossil fuel extraction companies and coal-fired utilities,” Behar said.
“The plain English meaning of ‘fossil free’ should rule out these holdings.
“We call on asset managers to embrace the spirit of these rules, and ensure that their ESG funds have holdings that align with the fund name and prospectus language,” he added.
Behar however believes that it’s difficult to say right now what impact this will have on the funds management industry.
“The asset management industry may choose to reformulate their holdings to match their current name, or rename funds to match holdings,” he told Stockhead.
“They will certainly update their prospectus language to explain the fund philosophy to match holdings and the name.”
More money will go to ESG funds as a result
Based on As You Sow’s 2022 research where it looked at 94 funds with ESG in their name, Behar believes two-thirds of those funds will need to make some sort of adjustment.
“This will be good for investors as there will be truth in labelling; people who sought out fossil free and low carbon funds to reduce climate risk in their portfolios will be able to invest aligned with their values with confidence,” he said.
Behar also believes the new SEC rules will lead to increased investments in ESG themed funds, as investors gain confidence from the assurance that the SEC is doing its most fundamental job.
“I also expect to see assets move from funds that were named ‘ESG’ or ‘sustainable’ into funds that actually are.
“Investors want to put their money with management teams that assess and address risk whether it is environmental risk in their supply chains, social risk with their employees, or governance risk with their board and executive compensation.”
Are there similar labelling rules in Australia?
Back home, the Australian Securities & Investments Commission (ASIC) has also released guidelines for fund managers promoting their sustainability-related products.
“It is fundamental that the sustainability-related label of a product reflects the substance of the product itself.
“You risk being misleading if your fund’s name includes sustainability-related terminology, but sustainability-related factors are not significant in the investment selection process,” said the regulator.
ASIC has also given some examples of products that aren’t true to label.
Example 1
A sustainability-related product is labelled ‘No Gambling Fund’. However, under its terms, the product may ‘invest in companies that earn less than 30% of their total revenue from gambling activities’.
Example 2
A sustainability-related product is labelled as the ‘Stewardship Equity Fund’. However, the issuer is not actively involved in stewardship activities.
Example 3
The investment manager for ‘Social Investing Fund’ balances a number of different factors when considering an investment, including traditional financial metrics and social matters such as labour practices and gender targets. However, the sustainability-related considerations (i.e. the social matters) are not significant in the manager’s investment decisions.
Elsewhere, the UK is also coming out with rules to provide truth in labelling on funds that call themselves sustainable.
“The EU has rules coming soon as well,” said Behar.
“This is the time for all asset managers to realise that investors seek truth; the era of misleading names that are not linked to holdings and prospectus philosophy are over.”
More about As You Sow
Founded in 1992, As You Sow is a 501c3 non-profit organisation focused on corporate accountability through a shareholder’s lens.
“We do deep research and produce scorecards on climate change, racial justice, workplace diversity, ocean plastics, toxins in the food system, and wage justice,” said Behar.
“We use these data to engage corporate management asking that they address material risk for all stakeholders.
“We also evaluate 3,000 mutual funds and post report cards on our ‘invest your values’ platform which is updated every month.”
The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.
Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.
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