The sustainability nonprofit Ceres submitted comments today in support of the U.S. Securities and Exchange Commission’s (SEC) proposed rules which aim to strengthen protections and address increasing confusion and greenwashing concerns around the rapid growth of ESG-oriented funds.
In recent years, investor demand for climate and ESG investing has increased tremendously. In response to this demand, asset managers have put forth a wide array of new investment products. This explosive growth has resulted in significant controversy in public discourse, including many assertions of funds overstating the extent to which they consider ESG factors—a phenomenon referred to as greenwashing.
One proposal, Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices, requires U.S. investment companies and advisors to state whether they use ESG criteria and disclose data that shows how funds meet those criteria if they have them. The second proposal, Investment Company Names, would strengthen the fund names rule to give investors more confidence that a fund name reflects its composition.
In its comment letter, Ceres recommends changes that would make it easier for asset managers to comply with these rules without diminishing their effect. There are also some places in the Enhanced Disclosures rule where the SEC may wish to extend these disclosure requirements to other types of funds in separate rule makings. Ceres applauds the SEC for these proposals that fit squarely within their well-established mandate to protect the U.S. investing public.
“Ceres strongly supports the SEC’s efforts to address greenwashing by requiring new disclosures of funds that make climate- and ESG-related claims and ensuring that fund names and marketing materials use ESG terms in a legitimate manner,” said Steven Rothstein, Managing Director of the Ceres Accelerator for Sustainable Capital Markets at Ceres.“These disclosures and limitations will bolster investor confidence in ESG funds and allow investors to make more educated decisions. We’re especially pleased to see ESG funds would be required to disclose their greenhouse gas emissions.”
Assets managed with a sustainable mandate in the U.S. grew to over $17 trillion in 2020. This shift in asset allocation is evidence of the growing understanding that ESG factors are significant drivers of long-term investment performance. An analysis of over 11,000 mutual funds and ETFs showed that funds incorporating ESG criteria provide comparable financial returns to traditional funds, with less downside risk.
Ceres is a nonprofit organization working with the most influential capital market leaders to solve the world’s greatest sustainability challenges. The Ceres Accelerator for Sustainable Capital Markets is a center of excellence within Ceres that aims to transform the practices and policies that govern capital markets to reduce the worst financial impacts of the climate crisis. It spurs action on climate change as a systemic financial risk—driving the large-scale behavior and systems change needed to achieve a net-zero emissions economy through key financial actors including investors, banks, and insurers. The Ceres Accelerator also works with corporate boards of directors on improving governance of climate change and other sustainability issues. For more information, visit: ceres.org and ceres.org/accelerator and follow: @CeresNews.