Inclusive Development International joined Accountability Counsel and Friends of the Earth-US this week to submit comments responding to the U.S. Securities and Exchange Commission’s (SEC) proposed rules for “ESG” oriented investment funds, or funds that consider environmental, social and governance factors in their investment decisions. The groups commended the SEC for taking steps to address the widespread problem of ESG greenwashing, in which investment funds market themselves as ESG friendly when, in fact, many corporations in their portfolios have contributed to significant adverse social and environmental impacts. However, they urged the SEC to go beyond disclosure requirements and actually define ESG in order to crack down on the false and misleading marketing of many ESG funds more directly and to regulate the flawed data collection and ESG ratings systems that inform their portfolios.
“ESG funds capitalize on consumer interest in responsible investing without doing the work to deliver on that promise,” said David Pred, Executive Director of Inclusive Development International, which launched the Stop #ESGreenwashing campaign earlier this year. “Without setting some standards for what ESG actually means and doesn’t mean, the industry remains a cash cow for asset managers and ratings firms, while continuing to funnel capital to corporations with horribly unsustainable and irresponsible business practices. This doesn’t just mislead and misdirect the money of people who want to invest responsibly, it undermines efforts to hold corporate offenders accountable for the impacts of their irresponsible and abusive practices.”
The two proposed SEC rules aim to tackle this issue by placing additional requirements on funds to disclose information about their ESG-related methodologies and by restricting the use of misleading ESG labels in the names of funds. While these new measures would shed some light on the opaque practices of ESG funds and introduce basic safeguards against false advertising, the groups argue that much more is needed to ensure that ESG-labeled funds stop investing in companies implicated in human rights abuses, environmental harms, corruption and other serious societal harms.
The groups proposed three specific recommendations for strengthening the SEC’s proposed rules:
- Move beyond a disclosure-based framework, which requires that funds share information on their ESG-related methodologies but does little to ensure those methodologies meaningfully advance ESG-related goals. The SEC should specifically define what should and should not be included in an ESG fund. At a minimum, investment companies should be required to provide specific, delineated criteria for how they assess each aspect of ESG.
- Increase the SEC’s oversight to include third party data providers—the companies that conduct research and data collection that informs how ESG funds’ portfolios are constructed. These companies wield enormous influence over investment allocation decisions, but under the proposed rules they would still not be subject to any specific, tailored regulatory oversight.
- Adopt a standard of materiality that goes beyond financial impact and includes impacts on people and the environment. Adopting such a “double materiality” standard that explicitly reflects the interests of ESG investors—and helps prevent them from being misled—is crucial to upholding the SEC’s mandate and fulfilling the stated goal of the ESG investing industry.
More detail on these recommendations and how they would impact ESG investing is available in the groups’ submission to the SEC.