Monday, October 23, 2023

Sierra Club presses SEC to follow through on ESG disclosure rules for investment companies and advisers

By John Filar Atwood

The Sierra Club has written to the SEC to express its concern that the Commission did not follow through on its proposal to include in the recently adopted fund names rule a prohibition against ESG marketing by ESG integration funds, instead saying that the idea “remains under consideration.” The ESG disclosure proposals and fund names proposals were issued on the same day in June 2022, the Club noted, so it urged the SEC to finish its work on the ESG disclosure rules as it has done with fund names.

The Sierra Club presented its concerns in a second comment letter on the proposed rules that supplements recommendations it laid out in an August 2022 comment letter. The group emphasized that adoption of a strong ESG disclosure rule for registered investment companies and investment advisers (“asset managers”) is critically important to protect investors from misleading ESG-related marketing.

Asset managers recognize that ESG marketing can be used to attract clients, the Sierra Club stated, but the marketing claims are frequently made without providing reliable and consistent disclosures that investors need to evaluate them. The ESG disclosure proposals should be finalized with clear prohibitions against any ESG marketing by asset managers that is unaccompanied by detailed, standardized disclosures justifying those claims, the group said.

Focus on ESG integration funds. The Sierra Club stated that the SEC needs to help investors distinguish between three broad categories of ESG-related funds:
  • those claiming to consider ESG factors without treating them as the main consideration when making investment and engagement decisions (“ESG integration” funds);
  • those where ESG is the main consideration in investing and engagement (“ESG-focused” funds); and
  • those that do not focus exclusively on financial returns in addressing ESG factors (“impact” funds).
The group is particularly concerned that the Commission ensure that any marketing of specialized ESG expertise or strategy be limited to ESG-focused and impact funds. It acknowledged that it may be appropriate to allow managers of ESG integration funds to reference consideration of ESG factors in the context of a material risks discussion, but it believes the SEC must 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.

Greenwashing risk. The Sierra Group urged the SEC, when finalizing the ESG disclosure proposal, to focus on remedying a significant greenwashing risk—funds that market themselves as oriented toward climate and sustainability risks but still invest heavily in fossil fuel producers and other carbon-intensive businesses. The group cited a September 2023 Morningstar report which found that many funds that market themselves as offering “climate solutions” and “clean energy/tech portfolios” invest substantially in carbon-intensive businesses.

The group noted that asset managers often justify their investments in fossil fuel companies and other carbon-intensive businesses by claiming that they are engaging with portfolio companies on emissions reduction strategies. However, meaningful and consistent disclosures on those engagements are lacking, the group said.

Political pressure. The Sierra Group urged the SEC to move quickly on requiring disclosures about asset managers’ engagement approaches because many large asset managers, possibly in response to political pressure, have started to pull their support for ESG-related resolutions. In the group’s opinion, investors that believe they have a right to climate risk disclosures and other information on sustainability have the right to be kept informed when their asset managers oppose those disclosures.

The Sierra Group reminded the Commission that it provided in its August 2022 comment letter recommendations to ensure that engagement disclosures provide sufficient information to prevent greenwashing and enable investors to discern which funds are actually addressing climate and other sustainability risks as claimed. The group asked the SEC to consider those ideas as it moves to finalize the rules.