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As the Biden administration is working on rules to increase the transparency of environmentally sustainable investment funds, advocacy groups are urging the Securities and Exchange Commission (SEC) to ensure that financial institutions are not simply paying lip service to “green” investments.
The groups argue that some institutions engage in so-called greenwashing, i.e., the marketing of a product or service as environmentally friendly when in reality it is not.
The proposed regulations would affect the rapidly growing area of investing known as environmental, social, and governance (ESG) funds. During the mandatory comment period, which ended last week, many consumer advocacy organizations stressed the need for stringent disclosure rules in this area.
“Many financial institutions use the current ESG framework to paint themselves as climate-friendly and collect money hand over fist from investors,” said Jessye Waxman, senior campaign representative in the Sierra Club’s Fossil-Free Finance campaign. “Yet, they continue to invest billions in fossil fuels, showcasing how their actions fail to live up to their public commitments.”
Along with the new proposed rules comes a litigation risk for companies accused of misleading investors. The SEC has already investigated multiple such companies. Recently, BNY Mellon Investment Adviser was ordered to pay $1.5 million after making misstatements and omissions about ESG considerations regarding investment decisions for mutual funds it managed.
The SEC has proposed rule changes to ensure the funds live up to companies’ claims. These include requiring managing ESG funds to disclose information about practices and standards such as greenhouse gas emissions for companies included in their portfolios. Also, if a fund defines itself as an ESG fund, at least 80 percent of investors’ money must go to companies that meet those reported ESG standards.
Some investment management companies, while supporting certain aspects of the proposed rules, are warning of the unintended consequences that disclosure requirements may have.
BlackRock, one of the most well-known asset management firms, said that the disclosure rules may give investors the impression that the funds are more impactful than they truly are.
“We believe that disclosing ESG Integration in the prospectus would overemphasize the importance of integration, with the unintended consequence of greenwashing,” said Paul Bodnar, global head of sustainable investing, and Elizabeth Kent, managing director at BlackRock.
Various financial industry watchdog groups wrote the agency in support of the new rules.
“As an organization that focuses on retail investor protection, we agree with the [SEC] that the name of a fund signifies its nature to investors,” said Public Citizen, a consumer advocacy nonprofit, in a comment on the rules. “We support the Commission’s goals of addressing misleading or materially deceptive names, especially as marketplace use of the terms ‘environmental, social, and governance,’ or ‘ESG’ has evolved in recent years.”
Public Citizen also stressed that the burden of proof should be on those managing the funds and not on consumers looking for a way to invest in a responsible manner.
“Retail investors shouldn’t have to waste their energy, time, and resources to find out whether the funds they are invested in are truly committed to workers’ rights, climate resilience, or racial equity,” said Natalia Renta, senior policy counsel for corporate governance and power at Americans for Financial Reform Education Fund.
Advocacy groups that support the new guidelines stress that they will serve to protect not only the environment — by incentivizing sustainable business practices — but also investors.
“Research indicates that corporate extraction of natural resources poses environmental, social, operational, political, legal, and reputational risks for businesses and the advisers and companies that invest in them,” the Action Center on Race an Economy (ACRE) wrote in its letter supporting the new guidelines.
As an example of the reputational and financial risks connected to investments in extractive industries, ACRE references the Dakota Access Pipeline. According to its letter, “ETP, Phillips 66, and Enbridge Energy Partners — all partial owners of DAPL — are present in ESG funds, such as a BlackRock ‘ESG Aware’ fund, which lists Enbridge as one of the top holdings.”
Investors who purchased ESG funds containing these energy companies thought their money was being used for sustainable and racial equity interests, but instead found they were invested in “companies that owned a pipeline that was the target of one of the most public resistance efforts in recent history.”
Had the fund managers disclosed the potential business and environmental risks associated with that project, ACRE writes, consumers could have “made a decision about whether or not this investment was a sound one for this ESG portfolio based on the disclosed information.”
Watchdog groups stress the importance of ensuring ESG funds live up to their claims.
“Right now, most ‘green’ funds are not even Paris Agreement-aligned,” said Alex Martin, senior climate finance policy analyst at Americans for Financial Reform Education Fund, “and the worst offenders are loaded with fossil fuels. Without these rules, Wall Street will continue to get away with duping investors who want products that align with their needs and values.”
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