On Wednesday, the U.S. Securities and Exchange Commission published new rules to prevent greenwashing in mutual fund names.
From Kering to REI, fashion companies have been investing in their respective environments and communities in a call for Environmental, Social and Corporate Governance demands. So too have investors and consumers wisened to new guidance. The latest SEC amendments modernize the Investment Company Act “Names Rule” to ensure that funds match their purpose. It is the latest of the SEC’s efforts to fight greenwashing in the sustainable investment industry.
How the existing Names Rule works is that funds with a name that suggests a focus on a “particular type of investment” must invest “at least 80 percent” of assets in the suggested type of investment. This 80 percent rule will now cover ESG investment strategies and require that fund names meet a “plain English meaning or established industry use,” per the text.
Extending this rule should prevent situations where a fund appears to abide by the 80 percent rule but contradicts the fund name, as in shouting “fossil-fuel free” in the name but including fossil fuel holdings in the 20 percent basket.
“When investors put their hard-earned savings into an ‘ESG’ or ‘fossil-free’ fund, they expect to reduce their climate risk and not own big oil, coal and deforestation,” Andrew Behar, chief executive officer of As You Sow, said in a press statement. “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. 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.” As You Sow is among the nonprofits looking to shift the responsible investment landscape.
However, the rule misses a crucial aspect. If a fund mentions ESG factors but does not make it the sole purpose, terms like “sustainable,” “green,” “impact” and such can still fly under the radar.
“I caution that the term ESG is also still used loosely as a descriptor for funds in general,” added Chana Rosenthal, a sustainable business consultant. “The criteria for qualification of ESG funds is particularly lacking in the ‘S’ and therefore funds that do not have a strong S, as well as the E and G, should not be classified as such. For example, a retail company with significant efforts in environmental improvements that has a horrible track record with their suppliers should not be labeled as a part of an ESG fund.”
Overall, Rosenthal stressed that the Names Rule is moving requirements in the “right direction.”
The rule amendments will become effective 60 days after publication in the Federal Register. Fund groups with net assets of $1 billion or more will have 24 months to comply with the amendments and fund groups with net assets of less than $1 billion will have 30 months to comply.