Regulation Body Scraps Planned Transparency Rules on Greenwashing Investment Funds
The United States Securities and Exchange Commission (SEC) has announced the withdrawal of a proposed rule aimed at enhancing disclosures by investment advisers and investment companies about Environmental, Social, and Governance (ESG) investment practices. This decision marks a significant shift away from the Commission's previous focus on climate and ESG issues.
The proposed rule, initially launched in 2022 under the tenure of former SEC Chair Gary Gensler, was designed to address the lack of clear rules communicating the ESG attributes of an increasing number of funds marketing themselves using terms such as "green" or "sustainable." The rule aimed to provide consistent information to investors and avoid greenwashing risk.
However, the proposed rule was withdrawn primarily due to a change in the SEC's leadership and its composition. A majority of Commissioners, under the new leadership, opposed the rule. This shift led the SEC to stop defending some of the ESG-related climate disclosure rules in court and to withdraw multiple proposed rules introduced under Gensler's administration.
The SEC's decision to withdraw the ESG disclosure rule is the latest in a series of moves shifting the SEC away from Gensler's climate and ESG-focus. The withdrawal reflects the SEC's view that the prior ESG and climate disclosure mandates potentially exceeded the agency's statutory authority. The SEC has indicated it may consider replacement, rescission, or modification of such rules, or even initiate new rulemaking processes in the future.
The withdrawn proposal required ESG-focused funds to present information in a standardized, tabular format for easy comparison with other funds. It also included disclosure requirements for ESG-focused funds to address potential exaggerated claims about ESG strategies. However, it did not address the issue of companies excluding shareholder proposals from their proxy statements, nor did it include any disclosure requirements for funds not classified as ESG-focused.
The withdrawn proposal also did not involve the SEC's legal defense of its climate disclosure rules. In March, the SEC ended its legal defense of its climate disclosure rules, citing a recent change in SEC composition where a majority of current Commissioners voted against those rules.
The SEC's statement announcing the withdrawal of the proposal indicated a potential future regulatory action in the same areas. However, the decision did not specify which areas, if any, it may pursue for future regulatory action. The SEC's current Chair, Paul Atkins, who was appointed after the change in administration, has emphasized a "return to normal" enforcement and a reduction in regulatory burdens, leading to the withdrawal of 14 proposed rules covering ESG and other areas like cybersecurity and custody standards.
This shift in the SEC's focus is expected to have a significant impact on the investment industry, particularly on funds that market themselves as ESG-focused. Investors will need to exercise caution when evaluating such funds and ensure they have a clear understanding of the ESG strategies being employed. The SEC's decision underscores the importance of transparency and accurate disclosure in the investment industry.
- The withdrawal of the proposed environmental-science-focused ESG disclosure rule by the SEC has raised concerns for science-centric financing and business practices, potentially making it challenging for investors to avoid climate-change greenwashing in their investments.
- Despite the SEC's decision to rescind ESG-related rules and disclosure mandates, one might anticipate future rulemaking processes akin to the proposed environmental-science climate-change disclosure rule, as suggested by the current SEC Chair's emphasis on transparency and the importance of accurate disclosure in the financial industry.
