New SEC rules could make ESG funds abide by some standards, which would be refreshing given that the label that doesn’t have a whole lot of actual meaning at the moment.
Environmental, social and governance (ESG) credentials in the U.S. are pretty much useless. The rating system for funds allows asset managers to essentially define the terms for themselves, which is why an oil and gas giant like Exxon Mobil can end up on the S&P 500 ESG list while an EV company like Tesla doesn't make the cut (because of its lack of a climate plan, among other issues). Elon Musk was pretty pissed, needless to say.
With two proposed rule changes this week, the SEC aims to require asset managers to provide more clarity, both by demanding solid proof of a fund’s ESG bona fides and by targeting fund names that are potentially deceptive.
“I think investors should be able to drill down to see what’s under the hood of these strategies,” SEC Chair Gary Gensler said in a statement.
If the rules are finalized in something close to their current form, as experts anticipate they will be, it will be much more likely that a fund that self-describes as “green” or “sustainable” or “ESG” will actually have to prove it.
Steven Rothstein, who leads the Ceres Accelerator for Sustainable Capital Markets, said certain large tech companies and others that walk the ESG walk are likely to remain included in ESG funds, even as asset managers start taking a longer, harder look at their portfolios.
“Companies that are leaders in this area, that have a proven track record, that disclose more information: They will have more opportunities from investors to be considered for their fund,” Rothstein said.
While very few companies have flawless climate commitments, it is rare for a major tech company to have no plan at all. For this reason, Andrew Behar, CEO of shareholder advocacy group As You Sow, said that the SEC rules could be to the advantage of companies that have “coherent” climate plans and are more likely to fit the ESG bill. Smaller renewables companies could also benefit. If asset managers are required to choose between dropping an ESG label from their fund and dropping companies like Exxon, Behar said, Exxon will probably be on the chopping block.
“They're going to need to invest in something, so they’ll probably be investing in more renewable energy companies because they’re going to want to keep, whatever, 7-8% of their funds in energy,” he added.
The proposals come in light of widespread concerns about “greenwashing” in the ESG investment space. As sustainable investing gathers momentum — investments are set to hit roughly $50 trillion by 2025 — asset managers can slap the ESG label on funds that don’t necessarily have environmental, social and governance concerns at the center of their strategies. This is why fossil fuel corporations and other companies in similar industries sneak into ESG funds.
“I believe that we are heading toward some standardization of language, of glossary,” said Behar, noting that the European Union will also be putting out its own ESG definitions in the coming months.
And just two months ago, the SEC proposed rules to create a framework for how publicly traded companies report their emissions and climate pledges. The SEC’s latest move is a sign that it’s trying to impose some order on ESG investment and climate-related disclosures overall.
The new rules are open to public comment for 60 days, or until July 24.
