“‘If it’s easy to tell if milk is fat-free by just looking at the nutrition label, it might be time to make it easier to tell if green or sustainable funds are really what they say they are.’”
That’s Securities and Exchange Commission Chair Gary Gensler taking to Twitter on Tuesday to make a case for better labeling, essentially tougher regulation, on the fast-growing market segment that bills itself as a way to do good and earn a profit.
The mutual and exchange-traded fund category known as Environmental, Social and Governance, or ESG, is often under fire for perceived infractions stretching from lingering exposure to oil and gas drillers
to alignment with broader indexes that might include big holding companies with prisons in their portfolios, though virtually hidden from investors. If an ESG fund is also promising “growth,” it may include a tech-focused
or otherwise diversified inventory of stocks.
Gensler, whose SEC is considering rule making on climate-change risk for listed companies and other requirements of the ESG investing space
used a posted video to make clear he’s skeptical the hundreds of investment funds touting ESG credentials come as advertised.
“When I think about these questions, I’m reminded of walking down the aisle of a grocery store and seeing a product like fat-free milk,” Gensler said. “In that case, you can see objective figures, like grams of fat, which are detailed on a nutrition label. Investors should be able to drill down and see the ingredients underlying these funds.”
Read the recent MarketWatch interview with Chairman Gensler, in which he said he wants to restore investor confidence in stocks.
For starters, there’s no industry consensus on what environmental, social and governance investing includes, Gensler says in the Tuesday video. He mused whether or not firms are adhering to a 1940 law that requires fund names to match what they invest in.
And Gensler noted that unlike many high-yield bond funds, ESG offerings don’t publish debt ratings that back up their labels. Firms including MSCI and Morningstar’s Sustainalytics do rate ESG funds based on what the research firms have set as criteria.
U.S. growth is driving global ESG assets to reach $41 trillion by the end of this year, Bloomberg Intelligence estimates. ESG-linked assets account for one in three dollars managed globally, industry group Global Sustainable Investment Association estimates.
Meanwhile, CEOs at the powerful Business Roundtable, investor groups and mostly Democratic lawmakers told the SEC in comments they’d support mandatory rules forcing publicly traded companies to disclose detailed greenhouse gas emissions and other figures that reveal the climate-change impacts and risks to investors.
One of the biggest asks from companies is for the SEC to separate climate reporting from earnings and other disclosures. And some commenters are worried about applying the same rules to smaller companies as large ones.