Just as asset managers appear to pivot away from ESG-centric investment strategies, the Securities and Exchange Commission proposes to define the label in a bid to increase transparency. The bid to expose greenwashing comes after a stampede of capital chases meaningful as well as profitable opportunities. But the risk of pushing ESG imitators out of contention for conscious capital is only one among many, with some asset managers resistant to an increased compliance burden.
The proposed rule changes take aim at funds offering environmental, social, and governance-related investments without specifying their aims or impact. Funds calling themselves environmentally focused would have to disclose portfolio greenhouse gas emissions, what impact the fund intends to make, and provide a progress report to investors. The proposed rules also tether stated aims with action: funds must also show how they voted on ESG-related matters during proxy season.
It’s news expected to raise compliance costs on funds, Kroll’s head of financial services compliance Ken Joseph warned in an earlier interview. “The regulatory environment will become more rigorous, rules based, potentially increase the cost of compliance,” he said, noting impending rule changes spanning climate change, private fund adviser disclosures, and general partner-led secondaries. The Wall Street Journal reports institutional investors might also be lining up against the proposed changes on similar grounds.
But it’s hard to think of a better time to tighten requirements on ESG investments. Asset managers have backtracked on climate-focused strategies as market volatility drives capital into energy and commodity safe havens. Even firms that earned stalwart status in previous year are now justifying fresh investments in companies profiting from climate change.
The changes aren’t final yet, and are subject to a 60-day comment period in which critics and supporters can voice their views.
–Brandon Zero
