Jhe Securities and Exchange Commission is facing backlash from the financial industry as it tries to follow through on an ambitious program of liberal goals.
Led by SEC Chairman Gary Gensler, the Wall Street watchdog has proposed a series of rule changes in a bid to increase ESG, which stands for environmental, social and governance principles. In addition to pushing for more ESG, the SEC’s proposals hope to prevent “greenwashing” by big companies.
Greenwashing occurs when companies hide the truth about the content of their investment vehicles in order to reap the benefits of the ESG label without following through (ESG-focused funds tend to have much higher fees than traditional indices).
But the effort to reduce greenwashing and improve ESG disclosure is meeting resistance due to the perception that the agenda will cost a lot of time and money and could hurt investors.
One proposal would increase disclosure requirements for ESG investment funds, and another would expand SEC rules governing names suggesting funds are ESG oriented. The proposals aim to prevent fund managers from “greenwashing” investors who prioritize ESG.
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The Investment Company Institute, an association of regulated funds, pushed back against the proposed rule in a lengthy comment letter to the SEC. He argues that the rule would create “substantial and unnecessary complexity, burden and cost without commensurate benefits”.
ICI Chairman and CEO Eric Pan says the SEC’s current fund name rule is already working as intended and investors understand there’s much more to the underlying than a name. , including detailed documents provided by the funds that explain their investment strategies and objectives.
“The SEC’s proposed name rule is a brutal instrument that would impose enormous costs on funds to comply with this complex new regime,” Pan said in a statement. “These costs will ultimately be paid for by investors. The proposal also puts the Commission in a position to question the way investment professionals choose investments and execute strategies.
The SEC has also proposed a disclosure rule that it says would help “promote consistent, comparable and reliable information for investors” about how their funds and advisers integrate ESG factors.
The proposal requires advisers to provide more specific information in fund prospectuses, annual reports and adviser brochures based on how they pursue ESG strategies. For example, funds that prioritize or focus on the environment would be required to disclose information about greenhouse gas emissions in their investment vehicles.
BlackRock, one of the world’s largest and most influential fund managers, recently filed a letter with the SEC pushing back against certain aspects of the proposal. The company said that while it supports the SEC’s goal of cracking down on greenwashing and providing effective oversight, the disclosure rule could be misleading for investors.
“The proposed requirements would increase the potential for greenwashing and lead to investor confusion,” BlackRock said. “The granular nature of the requirements will inevitably lead to the disclosure of proprietary information about these strategies, thereby reducing the competitive advantage of this unique information.”
The pushback is notable as BlackRock has been at the forefront of pushing the ESG movement forward. BlackRock CEO Larry Fink has become something of a bugbear among some on the right.
Earlier this year, Sen. Ted Cruz (R-TX) blamed some of the blame for the country’s rising gas prices on Fink’s “woke” push for greater corporate involvement in the fight against climate change.
“There’s a Larry Fink supplement every time you fill up. You can thank Larry for the huge and inappropriate [environmental, social, and governance] pressure,” Cruz said on CNBC. “What Larry Fink is doing is unprecedented in the rise of ESG.”
Like ICI and BlackRock, the Managed Funds Association, an industry group that represents major hedge funds, has also spoken out against the SEC’s ambitious agenda. He says the ESG disclosure framework is too broad and could confuse investors and make the term ESG “overused and hollow”.
“The alternative asset management industry fundamentally disagrees with the SEC’s one-size-fits-all, tick-the-box, approach to ESG that fails to recognize the diversity of industry strategies,” said Bryan Corbett, Chairman and CEO of MFA.
“The proposed framework will confuse the market and force investors, such as pension funds, foundations and endowments, to distinguish between ESG factors that are considered as part of an ESG strategy and factors ESG that can be part of a broader financial and risk management analysis,” he added in a statement.
The SEC is required to conduct studies of the expected economic effects of its proposed rules. This sets up a battle between Gensler’s SEC and the financial industry over the proposals.
A litigious economic dispute involves estimated compliance costs. For the fund name rule, the SEC predicts compliance costs would be between $50,000 and $500,000 per fund. Pan argues that the SEC’s economic analysis is understated.
“This is a huge range, and the total costs could easily be at the upper end of the spectrum or even exceed it, a dire consequence for fund shareholders,” he said.
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These aren’t the only ESG-focused proposals the SEC is evaluating. The SEC previously voted to propose a rule requiring companies to disclose climate-related risks. The proposal stipulates that companies must report direct and indirect greenhouse gas emissions, with an external party then verifying these reports.
While self-reporting of climate data is already commonplace at many companies, the SEC’s proposal, if approved, would take it a step further by mandating the practice and could be seen as a form of pressure. indirectly on fossil fuel companies.