“This is, in large part, because of the noted absence of a concrete definition of what constitutes ESG and the absence of any measures or monitoring of fund impacts.” “The gap between ESG portfolio construction and planetary impact is consequential,” said Ken Pucker, a senior lecturer at the Fletcher School at Tufts University. Some of them disclose such information in detail, while others offer less. What they mean by certain terms can vary greatly. In the absence of a regulatory framework in the U.S., asset managers are using their own criteria in declaring that funds target ESG goals. “But what information stands behind those claims that the funds are green or sustainable?”, the SEC chief asked. Gensler noted that there are currently at least 800 registered funds, with more than $3 trillion combined, that claim to invest in assets that achieve some sort of ESG goals. The commission recently announced that it had extended the public comment period on the proposed rule until June 17, 2022. Since his confirmation as SEC chair, Gary Gensler has been pushing for a framework that would require companies and fund managers, especially those who claim their businesses or portfolios are environmentally friendly or socially responsible, to disclose more information on sustainability issues such as climate risks, human capital management, and cybersecurity.Įarlier this year, the SEC unveiled a proposed rule that would require companies to disclose their annual greenhouse gas emissions and the climate risks their businesses face. The SEC and federal prosecutors are now investigating the matter. The commission also made headlines after The Wall Street Journal reported that Deutsche Bank‘s asset-management arm, DWS Group, had overstated how much it used sustainable investing criteria to manage its assets. In 2021, the agency announced the formation of a Climate and ESG Task Force within the Division of Enforcement to “proactively identify ESG-related misconduct” and issued a risk alert on the Division of Examinations’ review of ESG investing. And the risk is that the more precise you get in delineating all of that, the smaller the universe of investible things becomes.” “You have the trade-off of describing with precision what your strategy is, and what it is you’re trying to do, and what you’re trying to invest in. This poses a challenge for funds, she added. “There is a greater demand from all participants toward being more exact in describing what you’re doing.” “The market has grown a bit more jaundiced in its view of broad-brush ESG claims,” said Margaret Peloso, lead sustainability partner at global law firm Vinson & Elkins. Many funds are labeling themselves as ESG without adequately disclosing what that means. The message from the SEC is clear: Investment firms will need to pay close attention to advertising, marketing, ESG statements, and other disclosures related to ESG factors. Aderton, co-chief of the Asset Management unit at the SEC’s Division of Enforcement, said that while ESG has been an exam priority dating back to 2020, “this is the first time it’s been elevated to this level of prominence in the priorities.”
It will also focus on possible “misrepresentations of the ESG factors considered or incorporated” into portfolio selection.Īt a conference in Washington in April, Adam S. The SEC said it would continue its focus on ESG-related advisory services and investment products, including mutual funds, exchange-traded funds, and private fund offerings, and review whether registered investment advisors and registered funds “are accurately disclosing their ESG investing approaches” in its report on examination priorities for 2022.
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