The U.S. Securities and Exchange Commission (SEC) wants to prevent ESG (Environmental, Social, and Governance) funds from greenwashing. The SEC published a fact sheet with amendments calling for funds to show proof of their claims and to disclose how they choose companies and vote at annual meetings.
This news comes after Tesla was recently removed from the S&P 500 ESG Index. After all, it doesn’t make sense that oil companies, which pollute way more than Tesla, are considered by the index to have a better ESG score than a company whose entire mission is focused on sustainability. What kind of upside-down world are we in?
According to the SEC fact sheet, the ESG funds will have to also report greenhouse gas emissions related to the portfolio. It said:
“The proposed changes would apply to registered investment companies, business development companies (together with registered investment companies, “funds”), registered investment advisers, and certain unregistered advisers (together with registered investment advisers, “advisers”).”
The SEC added that the rules and form amendments would enhance disclosure by the following three things:
- Requiring additional specific disclosure requirements regarding ESG strategies in fund prospectuses, annual reports, and adviser brochures.
- Implementing a layered, tabular disclosure approach for ESG funds to allow investors to compare ESG funds at a glance.
- Generally requiring certain environmentally focused funds to disclose the greenhouse gas (GHG) emissions associated with their portfolio investments.
The recent proposal of amendments shows that the SEC wants to prevent ESG funds from greenwashing or making misleading claims to promote deceptive environmentally-friendly products, policies, and so on.
A Look At The Amendments Proposed by the SEC
I’m going to do a short dive into the proposed amendments by the SEC. There are three and they are:
- ESG Strategy Disclosure for Funds and Advisers.
- Additional Disclosure Regarding Impacts and Proxy Voting or Engagements.
- GHG Emissions Reporting
ESG Strategy Disclosure for Funds and Advisers
The SEC wants funds to disclose additional information regarding their strategy. The SEC states:
“The amount of required disclosure depends on how central ESG factors are to a fund’s strategy and follows a ‘layered’ framework, with a concise overview in the prospectus supplemented by more detailed information in other sections of the prospectus or in other disclosure documents, all of which would be reported in a structured data language.”
The SEC added that advisors who consider ESG factors would be required to “make generally similar disclosures in their brochures with respect to their consideration of ESG factors in the significant investment strategies or methods of analysis they pursue and report certain ESG information in their annual filings with the Commission.”
Additional Disclosure Regarding Impacts and Proxy Voting or Engagements
The SEC wants particular ESG-focused funds to provide additional information about their strategies. This includes information about the impacts they want to achieve and key metrics to assess progress, and would also require the funds to use proxy voting or engage with issues as a key way of implementing their ESG strategy to provide additional information about their proxy voting or ESG engagements.
GHG Emissions Reporting
This last proposal would require ESG-focused funds that use environmental factors in their investment strategies to disclose information on greenhouse gas emissions (GHG) that are associated with their investments.
These funds will have to disclose the carbon footprint and weighted average carbon intensity of their portfolio. They can’t just say, “Oh, Exxon got a better score because they have a carbon strategy while Tesla doesn’t and we can’t take Tesla’s mission for its word.” No, these funds need to show proof that they are worthy of their ESG scores.
If an oil company can have a better ESG score than an EV and clean energy company, the SEC wants to see more evidence of such. We already know that Exxon is a top polluter in the nation. The plant in my city, which is around five miles from my apartment, hit a peak of 350 pounds of particulate matter per hour in 2020. The missions averaged around to 255 pounds per hour during a test, exceeding the Louisiana Department of Environmental Quality’s (LDEQ) limit of 234 pounds of particulate matter per hour.
If Exxon and other companies had to produce their GHG impact, I doubt they would be included in an ESG fund — at least, without massive amounts of greenwashing.
The SEC added that its proposal would require ESG-focused funds to disclose additional information regarding GHG emissions associated with their investments. They would have to disclose their carbon footprint and the weighted average carbon intensity of their portfolio.
The SEC stated, “The requirements are designed to meet demand from investors seeking environmentally-focused fund investments for consistent and comparable quantitative information regarding the GHG emissions associated with their portfolios and to allow investors to make decisions in line with their own ESG goals and expectations.”
For funds that disclose that they don’t consider GHG emissions as part of their ESG strategy, they will not be required to report this information. Integration funds that do consider GHG emissions would have to disclose how the fund considers GHG emissions. This includes the methodology and data sources the fund would use as part of its consideration of GHG emissions.
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