New SEC Amended Rule Attempts to Limit Greenwashing

The purpose of investing in an “ESG” fund – one which considers environmental, social, and governance issues – is to, at the least, reduce the climate risk or harmful impact of one’s investments and, at the most, promote certain policies that align with an investor’s values. But can an ESG investor really know his or her investments are actually making a difference? Particularly when there has been a boom in funds that have tried to exploit investor interest in ESG?

The SEC wants to help with that, by tamping down on marketing by investment funds which mislead investors about their ESG accounts, otherwise knowing as “greenwashing.” This past September, the SEC amended the Investment Company Act’s “Names Rule.” The amendment tightens the Names Rule by requiring funds which have names that suggest a particular focus or investment strategy dedicate at least 80% of their portfolio to such assets. This amendment not only applies to funds with names that suggest an ESG emphasis, but also to funds with conceptual names such as “growth” or “value.” Any word used in a fund’s name “must be consistent with those terms’ plain English meaning or established industry use,” according to the SEC. Additionally, the amendment created a new requirement that funds must review their assets every quarter to ensure they are consistent with their name. If a portfolio’s assets have dipped under the 80% requirement, it has 90 days, in most instances, to get back into compliance. This rule change comes on the heels of a spate of enforcement actions targeting misleading marketing. For example, SEC recently filed an enforcement action against DWS Investment Management Americas, an investment arm of Deutsche Bank (“DWS”). As a result, DWS agreed to pay $19 million to settle allegations including that its marketing overstated how it used ESG factors in its funds. The SEC also fined Goldman Sachs and BNY Mellon over ESG claims in 2022.


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