Sierra Club Applauds SEC for New Rule Standardizing How ESG Funds Can Be Named

WASHINGTON, DC — The Securities and Exchange Commission (SEC) today announced the approval of amendments to its Investment Company Names Rule, which regulates how investment funds — including mutual funds and exchange-traded funds (ETFs) — should be named in order to avoid misleading investors about an investment company’s investment strategy. The move comes amid widespread use by investment companies of fund names using terms like “sustainable” and Environmental, Social, and Governance or “ESG.” See the final rule here.

There has been an exponential increase in total net assets managed under purported sustainable investing strategies, with total global ESG-related assets reaching $18.4 trillion in 2021, up from $113 billion in 2009. Despite growing interest in substantive ESG investment, this rise has largely been fueled by fund-rebranding. As a consequence, there is considerable mismatch between the marketing of many funds and the reality of actions taken by large asset managers on climate and sustainability in their investment strategies.

The Names Rule aims to cut down on this type of greenwashing. The final rule will broaden the scope of the 80% investment policy requirement, which had previously required only funds with certain kinds of investments to adopt a policy to invest 80% or more of their assets in line with the investment strategy suggested by their names. Under the new rule, funds with names indicating that investment decisions consider certain characteristics — such as ESG factors — must now abide by this policy. Terms that would trigger the 80% investment policy include “sustainable”, “green”, and “socially responsible”. The rule will also require improved disclosures and recordkeeping.

The final rule excluded a key provision the SEC had originally proposed, prohibiting the use of ESG terminology in the names of funds that do not use ESG-related metrics as determinative factors in investment decisions. The widespread use of such labeling — which the SEC originally called “materially deceptive and misleading” — has been a primary cause for concern in misleading investors who want to invest responsibly. The SEC stated that it excluded this provision because it mirrors a proposal in another rulemaking on ESG Disclosures, meaning that it should be addressed shortly.

“With a growing interest in true sustainable investing that minimizes risks to both portfolio returns and to society, the SEC must protect everyday investors from deceptive greenwashing by investment companies. These rules will help cut down on greenwashing and misleading marketing so that millions of US investors can more easily ensure their money is being invested in line with their interests and their values,” said Jessye Waxman, Senior Campaign Strategist with the Sierra Club. “Although the SEC failed to include a key provision in its final ruling preventing the use of ESG-related terminology for funds that merely consult ESG metrics, we look forward to that proposal being included in a separate rule update. This provision will be key to helping the SEC crack down on some of the most egregious greenwashing on Wall Street.”

The Sierra Club and partner organizations submitted comments to the SEC in August 2022 in support of the proposed Names Rule and ESG Disclosures Rule. 

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