We have previously written about the Securities and Exchange Commission (“SEC”) considering additional regulations on statements and disclosures made by public companies and investment funds relating to their credentials on Environmental, Social, & Governance (“ESG”) issues. In March, this topic was one of several we highlighted in a video podcast as a key climate change and resiliency issue to watch in 2022. Within weeks of the recording of that podcast, the SEC unveiled an expansive rules-based proposal that would require public companies to provide more information about their emissions and other metrics designed to show how the companies’ operations affect, and are affected by, the global climate.
Additional developments in May demonstrate that the discussion about regulation of ESG disclosures has only just begun. On May 23, the SEC charged BNY Mellon Investment Adviser for “misstatements and omissions about Environmental, Social, and Governance (ESG) considerations.” BNY Mellon agreed to pay a $1.5 million penalty to settle the charges, which is believed to be the first fine stemming from the work of the SEC’s ESG and Climate Task Force since its formation in March 2021.
In the same week it settled BNY Mellon’s charges, the SEC also proposed two new rule changes which would increase disclosure requirements and regulate misleading or deceptive claims by U.S. funds relating to their ESG credentials (commonly referred to as “greenwashing”). The first change pertains to the so-called "Fund Names Rule,” which requires funds with names that suggest they are focused on a particular class of investment to have at least 80% of their assets in that class. The proposed change would expand the number of investment funds that would be covered by the rule and thus that would have to invest at least 80% of their assets in investments tracking the class or classes suggested by their names. The other proposed change would mandate that registered investment companies and some advisers using ESG strategies provide additional information relating to ESG in their public statements and reports.
Greenwashing has become a problem of increasing social prominence over the last few years as companies and funds seek to capitalize on the emerging trend of ESG investment and, in some instances, overstate the extent to which their holdings are truly “green.” SEC Chair Gary Gensler indicated the recently proposed rule changes aimed at combatting greenwashing followed significant investor pressure for the actions the rules aim to take. As the SEC finds itself in a period of transition from considering action, to taking action, to enforcing the consequences of that action, it is critical that public companies and general counsel stay apprised of the latest developments. While the rule changes discussed herein remain proposals subject to public comment and further evaluation before they might ultimately be enacted, clearly, a new age of ESG regulation is coming.