SEC proposes anti-greenwashing fund reforms

By James Langton | May 25, 2022 | Last updated on May 25, 2022
3 min read

The U.S. Securities and Exchange Commission (SEC) is proposing a series of fund industry reforms that, among other things, aim to combat greenwashing and improve ESG disclosure to investors.

To start, the regulator proposed changes to the rules that govern fund names.

The existing rules require that funds with names that suggest a specific focus invest at least 80% of their portfolios in assets that meet that description. For instance, a “large-cap equity” fund would have to hold 80% of its assets in large-cap equities but could have the other 20% of its portfolio in cash and other assets.

Now, the SEC is proposing to broaden that approach to capture ESG funds, and funds that claim to follow a “growth” or “value” approach to investing, to ensure that funds’ portfolios match their names.

However, environmental advocates criticized the proposed changes to the naming rules as too modest.

Shareholder advocacy group As You Sow called the SEC’s proposals “a good first step” but said the rules lack specifics to reduce risk in mutual funds and ETFs.

“Right now, ESG investing in mutual funds and ETFs is the Wild West due to the voluntary nature of ESG-related disclosures, absence of widely accepted terminology, and limited to no enforcement,” said Andrew Behar, CEO of As You Sow, in a release.

“While a good first step, investors were hoping for a new structure to close loopholes and eliminate confusion and misleading marketing,” he added.

In particular, the group criticized the policy of allowing firms to hold 20% of their portfolios in assets that may be contrary to the fund’s name — a practice that, it said, has been abused to allow funds to call themselves low-carbon while still holding fossil fuel companies in their portfolios.

“The new rule acknowledges the problem but does not fully address it,” Behar said. “Investors still need clarity on exactly what ‘sustainable’ and other terms like ‘fossil-free,’ ‘low-carbon’ and ‘ESG’ mean.”

Alongside the proposed changes to the fund naming rules, the SEC proposed a series of changes that would require investment funds and advisers to provide more specific disclosures in prospectuses, annual reports and the communications about the ESG strategies they pursue.

They would also require funds focused on environmental considerations to disclose the greenhouse gas emissions associated with their portfolio investments. And funds claiming to achieve a specific ESG impact would be required to disclose their specific impact objectives, and to report on their progress in achieving those impacts.

Additionally, the proposals would require funds that use proxy voting and other forms of engagement to implement their ESG strategies to disclose information about their ESG-related voting and their ESG engagement meetings.

“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,” said SEC chair Gary Gensler in a release.

“ESG encompasses a wide variety of investments and strategies,” he said. “I think investors should be able to drill down to see what’s under the hood of these strategies.”

Both sets of the SEC’s proposals will be out for a 60-day comment period after they’re published in the Federal Register.

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James Langton

James is a senior reporter for and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.