SEC Releases Proposed Rules to Curb Misleading ESG Funds

The measures would provide guidance on marketing and investment practices.

May 27, 2022

ESG Data and Research

WASHINGTON—The U.S. Securities and Exchange Commission (SEC) has proposed two rules that would help mitigate misleading or deceptive claims by U.S. funds on their ESG qualifications and increase disclosure requirements for those funds, reports CNBC.

The proposed changes would apply to certain registered investment advisers, advisers exempt from registration, registered investment companies and business development companies.

“I am pleased to support this proposal because, if adopted, it would establish disclosure requirements for funds and advisers that market themselves as having an ESG focus,” SEC Chair Gary Gensler said in a statement. “ESG encompasses a wide variety of investments and strategies. I think investors should be able to drill down to see what’s under the hood of these strategies. This gets to the heart of the SEC’s mission to protect investors, allowing them to allocate their capital efficiently and meet their needs.”

The proposed amendments seek to categorize certain types of ESG strategies broadly and require advisers to provide more specific disclosures in fund prospectuses, annual reports and adviser brochures based on the ESG strategies they pursue.

Funds focused on the consideration of environmental factors generally would be required to disclose the greenhouse gas emissions associated with their portfolio investments. Funds claiming to achieve a specific ESG impact would be required to describe the specific impact(s) they seek to achieve and summarize their progress on achieving those impacts.

Under the proposal, funds that use proxy voting or other engagement with issuers as a significant means of implementing their ESG strategy would be required to disclose information regarding their voting of proxies on particular ESG-related voting matters and information concerning their ESG engagement meetings.

Finally, to complement the proposed ESG disclosures in fund prospectuses, annual reports and adviser brochures, the proposal would require certain ESG reporting on Forms N-CEN and ADV Part 1A, which are forms that funds and advisers report census-type data that inform the SEC’s regulatory, enforcement, examination, disclosure review and policymaking roles.

The proposing release will be published in the Federal Register, and there will be a comment period open for 60 days after publication in the register.

In March, the SEC proposed rules that would require publicly traded companies to disclose their ESG plans. The proposed rules state that companies must show to investors how certain climate-related risks can affect their finances. Some companies also will need to disclose their emissions, which includes data from their suppliers and customers.

To fully understand the drivers behind ESG planning and reporting, the Fuels Institute published a white paper that provides a history and outlook on ESG to help guide businesses. Download the Fuels Institute white paper “The Case for Developing an ESG Plan.”

A recent Convenience Matters podcast episode explores ESG planning, and the NACS Magazine article “Challenge or Opportunity” looks at how ESG is affecting the convenience retailing industry.