Regulatory agencies fight against greenwashing
SEC tightens rules on ESG standards due to growing concerns over high-profile greenwashing cases
Recently, the U.S. Securities and Exchange Commission (SEC) announced a proposal to amend specific rules that, if approved, will be applied to funds that use environmental, social and governance (ESG) criterias in their investment practices and to market their name and products.
The proposal’s intentThe intent is mainly to improve transparency and standardise reportings on the subject as a way to avoid misleading claims by these funds. The proposal is now under public consultation for a 60 day period while awaiting feedback from the industry before it can be implemented, but the expectation is that it will be approved.
Other regulatory pieces of legislation are being proposed across the board. In Europe, the SFDR (Sustainability Finance Disclosure Regulation), a similar proposal, is already in effect. And specifically in France, The Decrét Tertiaire, a legal text outlining essential measures for reducing energy consumption in tertiary sector buildings, is also being implemented.
This tightening of regulation comes amid growing SEC concern that funds may be profiting from ESG wording in order to appear to be compliant with the criteria rather than actually meeting them, a practice known in the industry as greenwashing and something that has grown as rapidly as the industry itself, precisely because of the regulatory gap.
The DWS caseA recent case involving greenwashing allegations comes from German asset manager DWS, owned by Deutsche Bank. The case first blew up when a former employee accused the company of lying when they claimed that more than half of the $900 billion they managed was invested according to ESG criteria.
“Names Rule”One of the changes that is being proposed concerns the names of funds. The “Names Rule” says that if the name of the fund suggests a certain type of investment, then at least 80% of its resources must be applied according to what has been indicated. The SEC, however, believes the current wording leaves room for interpretation and the amendment intends to eliminate any ambivalence to protect investors.
In case the fund's portfolio falls below the 80% required under the Names Rule, a correction must be provided within 30 days. Managers will also have to indicate which of their assets are counted towards achieving the 80%.
To illustrate the transparency they are aiming to achieve with the amendment, Gary Gensler, SEC director, compared the investment market to the food industry. “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,” Gensler said in a tweet.
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Jill Brosig, a Managing Director & Chief Impact Officer at , an investment management firm exclusively focused on alternative real assets, believes these regulations will bring much needed transparency to the issue. “Certainly these types of regulations are coming out because companies need to be held accountable for the ESG activities they profess to be conducting. Unfortunately greenwashing is rampant, and companies make various ESG claims, but are unable to demonstrate they’ve delivered on these claims,” Brosig remarked.
According to Brosig, to avoid deception, investors need to know who they are investing with and make sure they have the right reasons behind their actions. “Investors are smart, and they are asking the right questions to ensure those at the helm of ESG programs are competent, innovative, passionate about their role, and have set up measurable and achievable policies to achieve ESG goals,” she stated.
On the standardization, Brosig agrees that “standards need to be in place so that people understand the expectations. If you are at a particular level of an ESG or an impact investment, then you have to be abiding by certain restrictions, certain commitments or certain performance standards. On top of that, transparency is paramount and performance must be reported.”
Brosig believes standards are only the starting point on how to implement ESG initiatives but it should never limit the industry in thinking hitting the bar is enough. “You want to have standards because it establishes a common set of expectations for the industry to follow. In order to continue to advance what we're doing around ESG, we need to be the ones to hold ourselves accountable, we need to continue to raise the bar on what we're doing, and on what’s expected of us, to create a positive impact in all we do.”Emily Hamilton, Head of ESG at , agrees with Brosig on how regulations and standards are a great first step, but the industry has the obligation to continuously raise the bar. “Most of the time, sustainability in real estate has been judged by certification, but you can't hide behind just a certification anymore,” Hamilton concludes.
“A really positive thing that we're seeing within real estate is the sense that transparency is being pushed on performance,” says Hamilton as she explains that there’s a huge performance gap between how a building is built and how a building is used, how they are operated, in practice. According to Hamilton, “the key to transparency is to actually get investors to look beneath the scores and start asking the right questions: how to reduce that performance gap?”
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Written by Roberta Gomes