The U.S. Securities and Exchange Commission (SEC) has published new rules to prevent misleading or deceptive use of environmental, social, and governance (ESG) terms in mutual fund names.
According to an announcement by the regulator, the amendments are designed to increase investor protection by requiring that funds with a name that suggested a focus on a “particular type of investment,” such as ESG, must invest “at least 80%” of its assets in the suggested type of investment.
The SEC also stated that any purported ESG fund that uses the remaining 20% of its portfolio to invest in assets that are “materially inconsistent” with the investment focus or risk profile reflected by the fund’s name, the fund’s name would be deemed materially deceptive or misleading.
ESG investment advocacy group As You Sow welcomed the rule update, noting that it should prevent situations where a fund technically conforms to the 80% rule but contradicts the fund name with the remaining portion of the holding.
However, the group felt the change did not go far enough, noting that the final rule did not cover situations where a fund “considered ESG factors but such ESG factors were not the principal purpose of the fund’s investment strategy,” while still using ESG terms such as “sustainable”, “green” or “impact” in their names.