With investor demand driving a proliferation of ESG product, the SEC is prioritizing measures to protect consumers and drive companies to standardize disclosures about environmental, social, and governance factors. The latest is an SEC proposal prompting fund providers to increase transparency about their use of ESG data.
The proposal is in some ways complex, but the intent is simple: set guardrails around ESG. Why?
ESG is a research element that is in use worldwide and will continue to be further integrated into investment analysis.
Sustainable investing is a universe unto itself, with a range of approaches that managers and investors can implement. It encompasses public market investing, shareholder advocacy, impact investing, socially responsible investing. ESG plays a critical role in underlying research. Yet ESG means different things to different people, and definitions must be simplified and standardized.
Investor demand for sustainable investing led to unbridled growth without regulation. As history has shown, if left untended that path often leads to dysfunctional market vehicles and higher risk for investors.
Regulation is a natural outgrowth of the success of ESG. There will certainly be an adjustment period, and the initial proposal is an important step in addressing greenwashing among fund providers.
Jon Hale, Global Head of Sustainable Investing Research at Morningstar, provided an excellent breakdown of the SEC’s proposal (read more: SEC Proposes New Rules for Sustainable Funds Aimed at Standardizing ESG Disclosures).
“Because there are no ground rules for how funds should disclose exactly how they use ESG criteria in their investment process, it is difficult for investors and advisors to understand what a given fund is doing and how it compares to other similarly named funds,” writes Hale. “This can leave investors confused and result in a mismatch between investor expectations and investment outcomes.
“These proposals aim to provide greater transparency, accountability, and comparability to sustainable investing.”
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