Sierra Club Urges SEC to Regulate Misleading ESG Marketing by Asset Managers

WASHINGTON, DC — The Sierra Club has submitted additional comments to the Securities and Exchange Commission (SEC) on its proposed ESG Disclosure Rule. The October 2023 letter urges the federal agency to follow through on its proposal to limit asset managers from promoting ESG-related marketing in certain investment funds called “ESG integration” funds, which are funds that claim to consider ESG factors without treating them as the main consideration when making investment and engagement decisions. It also calls for the SEC to require asset managers to make detailed disclosures to investors to back up claims that ESG-focused investment strategies are being employed. The letter pays particular attention to the growing numbers of mutual funds and ETFs that purport to address climate-related risks and opportunities.

• Read the additional comments here (link updated with correct date): https://www.sierraclub.org/sites/default/files/2023-10/ESGDisclosureRule-SupplementalComments-SierraClub-UPDATED.pdf 

The letter follows the SEC’s finalization of the Fund Names Rule in September 2023, which the Sierra Club applauded for regulating how investment funds should be named in order to avoid misleading investors about an investment company’s investment strategy. However, at that time, the SEC declined to follow through on its proposal to prohibit ESG marketing by “ESG integration” funds, indicating that the idea remained under consideration in its ESG Disclosure Rule. The Sierra Club encourages the SEC to limit ESG-related marketing to two other types of investment funds: “ESG focused” and “impact” funds.

“The SEC should ensure that any marketing of specialized ESG expertise or strategy, explicit or implicit, be limited to ESG-focused and impact funds. Allowing ESG integration funds to reference consideration of ESG factors in the context of a discussion of their fiduciary duty to consider all material risks may be appropriate. However, the SEC should prohibit ESG integration funds from using ESG labels or engaging in any other marketing that suggests the asset manager is providing specialized ESG expertise or services to investors. When undertaken by ESG integration funds, such marketing is fundamentally misleading,” reads the comment letter.

The SEC’s proposed ESG Disclosure Rule comes amid an explosion of investment funds making assertions about paying attention to climate change and fossil fuels, among other environmental and social issues. One Morningstar report found that the number of US funds with climate-related marketing grew from 200 in 2018 to 1,400 in 2023. 

“As the impacts of climate change and the energy transition continue to accelerate, growing numbers of investors are concerned about associated risks to their portfolios and overall quality of life. The failure to address climate risk could cause asset managers to lose large numbers of valuable clients.  Yet many asset managers have failed to take action on the risks and opportunities arising from climate change or, at a minimum, have failed to explain what actions they are taking. The SEC must finalize strong rules to ensure that investors are not being deceived and that asset managers are backing their climate-related marketing with real action,” said Ben Cushing, Campaign Director for the Sierra Club’s Fossil-Free Finance campaign.

The failure by many asset managers to back up their climate and other ESG claims has attracted the attention of global regulators and oversight bodies, including:

• A November 2022 report by the UN High-Level Expert Group on Net Zero Commitments by Non-State Actors calling for urgent attention to climate-related greenwashing that provided detailed recommendations for asset managers.
• A February 2023 letter from the UK’s Financial Conduct Authority to asset manager CEOs noting its concerns that claims about ESG may be “misleading or inaccurate”. 
• A May 2023 report by the EU’s European Securities and Markets Authority (ESMA) noting rapid growth in ESG-related financial products and markets and growing concern among investors about greenwashing.
• An October 2023 report by ESMA noting an increase in funds with ESG words in their name, but that many fund managers were failing to provide reliable and consistent disclosures.
• July 2023 civil penalty proceedings by the Australian Securities & Investment Commission against major asset manager Vanguard for false and misleading statements in its ESG fund marketing.

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