The Securities and Exchange Commission is facing blowback from the financial industry as it tries to follow through on an ambitious agenda of liberal goals.
Under SEC Chairman Gary Gensler, the Wall Street watchdog has proposed a series of rule changes with the aim of increasing ESG, which stands for environmental, social, and governance principles. In addition to pushing for more ESG, the SEC proposals are hoping to prevent “greenwashing” by major companies.
Greenwashing is when firms obfuscate the truth about what is in 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 index funds).
But the effort to cut down on greenwashing and improve ESG disclosure is meeting resistance due to perceptions 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 broaden SEC rules governing names that suggest funds are ESG-oriented. The proposals aim to prevent money managers from “greenwashing” investors who prioritize ESG.
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The Investment Company Institute, an association of regulated funds, pushed back on the proposed rule in a lengthy comment letter to the SEC. It contends that the rule would create “substantial and unnecessary complexity, burden, and cost without commensurate benefits.”
ICI President and CEO Eric Pan said the SEC’s current fund names rule already works as intended and that investors understand there is much more underpinning just a name, including extensive documents provided by funds that explain their strategies and investment objectives.
“The SEC’s names rule proposal is a blunt instrument that would place enormous costs on funds to comply with this new, complex regime,” Pan said in a statement. “These costs will ultimately be paid by investors. The proposal also places the Commission in the position of second-guessing how investment professionals choose investments and execute strategies.”
The SEC also proposed a rule regarding disclosures that it contends would help “promote consistent, comparable, and reliable information for investors” about how their funds and advisers incorporate ESG factors.
The proposal requires advisers to provide more specific disclosures in fund prospectuses, annual reports, and adviser brochures based on how they pursue ESG strategies. For instance, funds that prioritize or focus on the environment would be required to disclose information about greenhouse gas emissions within their investment vehicles.
BlackRock, one of the biggest and most influential money managers in the world, recently filed a letter with the SEC pushing back on aspects of the proposal. The firm said that while it supports the goal of the SEC to clamp down on greenwashing and provide 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 requirements will inevitably lead to the disclosure of proprietary information about these strategies, reducing the competitive advantage of those unique insights.”
The pushback is notable because BlackRock has been at the forefront in pushing forward the ESG movement. BlackRock CEO Larry Fink has become a sort of bogeyman among some on the Right.
Earlier this year, Sen. Ted Cruz (R-TX) placed some of the blame for the country’s higher gas prices on Fink’s “woke” push for more corporate involvement in combating climate change.
“There’s a Larry Fink surcharge every time you fill up your tank. You can thank Larry for the massive and inappropriate [environmental, social, and governance] pressure,” Cruz said on CNBC. “What Larry Fink is doing has been unprecedented in the rise of ESG.”
Like ICI and BlackRock, the Managed Funds Association, an industry group that represents major hedge funds, has also come out in opposition to the SEC’s ambitious agenda. It claims the ESG disclosure framework is overly broad and could create investor confusion and render the term ESG “overused and hollow.”
“The alternative asset management industry fundamentally disagrees with the SEC’s one-size-fits-all, check the box, approach to ESG that fails to recognize the industry’s diversity of strategies,” said MFA President and CEO Bryan Corbett.
“The proposed framework will cause confusion in the marketplace and saddle investors, such as pensions, foundations, and endowments, with distinguishing ESG factors that are being considered as part of an ESG strategy from ESG factors that may 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. That sets up a battle between Gensler’s SEC and the financial industry over the proposals.
An economic dispute likely to be argued involves estimated compliance costs. For the fund names rule, the SEC predicts compliance costs would be between $50,000 and $500,000 per fund. Pan contends that the SEC’s economic analysis is understated.
“This is a huge range, and total costs could easily be at the upper end or even exceed it—a dreadful consequence for fund shareholders,” he said.
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These aren’t the only ESG-focused proposals the SEC is weighing. The SEC previously voted to propose a rule compelling companies to disclose climate-related risks. The proposal says companies must report direct and indirect greenhouse gas emissions, with an outside party then auditing those reports.
While self-reporting of climate data is already commonplace with many companies, the SEC proposal, if approved, would push it a step further by mandating the practice and could be seen as a form of indirect pressure on fossil fuel companies.
