SEC Publishes New Rules to Address ESG Labeling in Mutual Funds
New rules seek to prevent “greenwashing” funds from misleading investors
FOR IMMEDIATE RELEASE
MEDIA CONTACT: Sophia Wilson, swilson@asyousow.org, (341) 600-1832
BERKELEY, CALIFORNIA—SEPT. 20, 2023—Today, the U.S. Securities and Exchange Commission (SEC) published new rules to prevent misleading or deceptive use of environmental, social, and governance (ESG) terms in mutual fund names. The new rules modernize the Investment Company Act “Names Rule” to ensure that the name of a fund adequately and accurately represents the investment strategy of the fund, as part of the SEC’s efforts to fight greenwashing in the sustainable investment industry.
The Names Rule has previously required that funds with a name that suggested a focus on a “particular type of investment” must invest “at least 80%” of its assets in the suggested type of investment. The new rules extend this “80% rule” to cover ESG investment strategies and require that fund names meet a “plain English meaning or established industry use.” Extending this rule should prevent situations where a fund technically conforms to the 80% rule but contradicts the fund name with the remaining portion of the holding. An example of this is a fund with “fossil-fuel free” in the name that includes fossil fuel holdings in the 20% basket.
Unfortunately, the final rule did not include a key section designed to prevent misleading labeling. Under the proposed rule, if funds considered ESG factors but such ESG factors were not the principal purpose of the fund’s investment strategy, it would have been materially deceptive and misleading to use ESG or a similar term (such as sustainable, green, impact, etc.) in the name. This section was left out of the final rule.
Andrew Behar, CEO of As You Sow, made the following statement:
“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. 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.”
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As You Sow is the nation’s leading shareholder representative, with a 30-year track record promoting environmental and social corporate responsibility and advancing values-aligned investing. Its issue areas include climate change, ocean plastics, pesticides, racial justice, workplace diversity, and executive compensation. Click here for As You Sow’s shareholder resolution tracker.