On the heels of the Securities and Exchange Commission’s ESG Task Force settlement order of $1.5 million with BNY Mellon Investment Advisor, Inc., the SEC on May 25, 2022, approved two significant proposals that would increase the disclosure requirements for funds and advisors that make ESG related investments. The SEC anti-greenwashing rules are touted to provide investors with consistent and comparable information about ESG factors that investors can then use when choosing their investment strategy.
The latest action by the SEC underscores the incredible importance of taking a measured approach to all types of advertising, marketing, ESG statements, or other information disclosures that touch on ESG factors, as well as ensuring that promised ESG analysis takes place in appropriate fashion. Firms that fail to do so are likely opening themselves up to significant risk of enforcement action and penalties.
SEC ESG Task Force
In March 2021, the SEC formed the Climate and Environmental, Social and Governance Task Force (ESG Task Force) within its Division of Enforcement. Hand in hand with the legal world’s attention on greenwashing in 2021, the SEC’s ESG Task Force was created for the sole purpose of investigating ESG-related violations. At the same time, the SEC also announced that it intended to create rules for company disclosures related to ESG factors, including climate disclosures. The goal of the SEC ESG decision is to create standardized, comprehensive disclosure requirements, making it easier for investors to compare between companies.
The SEC’s actions were well-timed, as 2021 saw an enormous increase in investor demand for ESG-related and ESG-driven portfolios. There is considerable market demand for ESG portfolios, and whether this demand is driven by institute influencers or simple environmental and social consciousness among consumers is of little importance to the SEC – it simply wants to ensure that ESG activity is being done properly, transparently and accurately.
SEC Anti-Greenwashing Rules
One of the proposed rules that the SEC approved yesterday requires funds that include terms such as “ESG” or “sustainable” to disclose specific information to show support for the claims related to ESG. The new rule comports with a prior SEC rule that has been around for many years – the “80% rule” – that requires investment companies to invest at least 80% of assets in the types of investments that the name suggests. The SEC’s May 25, 2022 approved rule would extend the 80% rule to funds being touted as ESG related in some way. The rule, according to the SEC, will ensure that investors know that they the type of fund being invested in is actually an accurate representation of the fund’s contents.
The SEC’s second proposal takes direct aim at trying to standardize ESG disclosures, and applies to investment companies, business development companies and some advisors that are exempt from registration with the SEC, but who utilize ESG strategies. Under the new rule, these companies would be required to disclose additional information on registration statements, annual reports, brochures, and prospectuses. Environmental-focused funds would be required to disclose greenhouse gas emissions information related to the investments contained in the funds. In addition, funds that claim to achieve “a specific ESG impact” must detail precisely what the ESG impact is and the progress towards achieving the impact.
The rules were approved 3-1 by the SEC voting members. Voters approving the rule felt that the rules would generally provide more transparent information to investors, hold investment firms to more unified standards, and further promulgate SEC anti-greenwashing rules that the SEC has promised over the past yea or two.
Significance of SEC ESG Task Force Settlement
This week’s ESG Task Force settlement and the vote to approve the two SEC anti-greenwashing rules show that the SEC is committed to pursuing companies that it believes are deliberately misrepresenting ESG related information to the public and to investors. Any statements, disclosures, prospectus materials, or even marketing materials must be scrutinized closely for accuracy, while sound and reasonable marketing statements that touch on ESG factors must be the standard for companies to follow.
CMBG3 Law LLC has represented clients in ESG’s environmental and social related issues for years. We regularly consult with private equity, banking, and investment world firms to identify future risk potentials from portfolios under consideration, and assist issuers and investment world firms alike with ESG related issues. For more information about our ESG and risk assessment consulting services, please contact John Gardella (617-279-8225).