The US Securities and Exchange Commission (SEC) is mulling over whether to issue rules that would require so-called “sustainable” fund managers to disclose the criteria and underlying data they use when making investment decisions.
The regulator’s Asset Management Advisory Committee (AMAC) held a panel discussion last week to discuss environmental, social, and governance (ESG) investing and the asset management industry. SEC Chair Gary Gensler indicated at the meeting that he was concerned about “greenwashing” by asset managers. Greenwashing is a deceptive tactic in which investors are misled into believing an investment vehicle is ESG-friendly or sustainable based on terms used to describe or name the investment.
“The basic idea is truth in advertising. We’ve seen a growing number of funds market themselves as ‘green,’ ‘sustainable,’ ‘low-carbon,’ and so on,” Gensler said in prepared remarks before the committee. “When it comes to sustainability-related investing, though, there’s currently a huge range of what asset managers might mean by certain terms or what criteria they use.”
Gensler cited estimates that there are at least 800 registered investment companies with more than $3 trillion in ESG assets last year. “What information stands behind those claims that a fund is ‘green’ or ‘sustainable’?” he said, adding that “investors should be able to drill down to see what’s under the hood of these funds.”
The AMAC was also presented with a report that included recommendations from its subcommittee on diversity and inclusion. The report said the evidence is clear that investment performance by diverse asset managers is equal to or greater than the performance of companies that lack diversity in ownership and senior leadership.
The report also said that artificial barriers, such as the size of assets under management and length of track record, “have been constructed that, when applied dispositively, directly and indirectly exclude women and people of color from the opportunity to compete within the industry.” The report added that “peer-reviewed academic research indicates that diversity in life experiences is additive to investment performance.”
The establishment of ESG disclosure rules was supported by the majority of SEC commissioners attending the meeting, including Commissioner Caroline Crenshaw, who said the SEC has “a role to play in promoting diversity and inclusion in the asset management industry.”
However, Commissioner Hester Peirce, referring to the Financial Accounting Standards Board (FASB), urged the committee in prepared remarks “to think further about how differences between financial reporting and ESG reporting could make a FASB-like standard-setting entity for ESG unworkable and imprudent, even in the longer term.”
Earlier this month Peirce said in a statement that she objected to the International Financial Reporting Standards’ proposal to create an international sustainability standards board, saying that doing so would “improperly equate sustainability standards with financial reporting standards,” and “raise serious governance concerns.”