SEC’s Proposed ESG Disclosure Rule: Why It Fails to Remedy the Underlying Challenges Facing ESG Investing Practices
ABSTRACT
ESG issues and ESG funds have rapidly propelled themselves into the spotlight by amassing trillions of dollars, representing one in every three dollars currently invested. What was intended to be a new way to invest “morally” and “responsibly” has resulted in companies greenwashing, making bold and questionable ESG claims, and playing fast and loose with the current lack of ESG standards to gain the upper hand in receiving investments. Realizing the opportunity to capitalize on those who desire to support ESG initiatives, asset management firms began to charge higher fees for ESG funds while providing no clarity or insight into what their ESG investing practices consist of. This significant expansion in ESG investing has revealed the frail and problematic reality in which investors are left with no enforceable remedies when companies mislead investors about their business criteria and ESG investment practices.
This absence of enforceable action against those who advantageously, however legally, deceive investors led to the Securities and Exchange Commission’s proposed amendments to the Rules to Regulate ESG Disclosures for Investment Advisers and Investment Companies. In an effort to minimize investment advisers and investment companies taking advantage of the current lack of ESG investing regulations, this Proposed Rule aims to standardize ESG disclosure requirements by requiring additional specific disclosures on ESG strategies in fund prospectuses, annual reports, adviser brochures, and introducing a standard table for ESG fund disclosure information that allows investors to compare ESG funds.
While the Proposed Rule has the right aim of increasing and clarifying information available to investors by providing investors interested in ESG investing with key information that is material to their investment decisions, this Proposed Rule is a failed effort that will not achieve its idealistic dreams. The Proposed Rule faces an array of challenges including the inherently inconsistent, unreliable, and incomparable regime of ESG data currently out in the world, the lack of standardization and uniformity in ESG ranking practices, the obscure and vague definitions for critical terms in the Proposed Rule, and legal challenges underlying the ability of the Proposed Rule to survive in a court of law. Furthermore, the proposed disclosure requirements are so broad and imprecise that they not only fail to promote the transparency the rule aims to achieve, but the Proposed Rule exacerbates the very issues it seeks to remedy. There is an irrefutable need to provide a mechanism of accountability and enforceability in ESG investing practices, however, this Proposed Rule is not the solution.