As companies and investment managers increasingly offer products, including investment funds, whose strategies incorporate environmental, social and governance (ESG) factors, the SEC has repeatedly emphasized its intent to combat “greenwashing”—i.e., false or misleading claims by companies and advisers relating to their ESG bona fides or the extent of their products’ or practices’ positive impact on the environment and society. Greenwashing has appeared as an enforcement priority on the agenda of the SEC’s Division of Examinations since March 2021. And on May 25, 2022, the SEC released for notice and comment two proposed rules aimed squarely at the practice.
The first of the proposed rules would create enhanced disclosure requirements for three categories of registered funds that use ESG factors in investment strategies: “ESG-impact” funds (funds that seek to achieve specific ESG impacts); “ESG-focused” funds (funds for which ESG factors are a significant or main consideration); and “ESG-integrated” funds (funds that consider ESG factors, but without treating them as more significant than other non-ESG factors). The proposed rule would also generally require ESG-focused and ESG-impact funds to include greenhouse gas emissions disclosures associated with their portfolio company investments. The second proposed rule would expand the scope of the Investment Company Act’s “Names Rule,” which requires that a fund whose name suggests a certain focus invest at least 80% of the value of its assets accordingly. The expanded Names Rule would now cover funds with names that suggest that their investment decisions incorporate ESG factors.