The U.S. Securities and Exchange Commission (SEC) has announced the adoption of new rules that will require funds with names suggesting a focus on ESG (Environmental, Social, and Governance) or sustainability-related factors to invest at least 80% of their assets in accordance with those factors.
This action involves an amendment to the Commission’s “Names Rule,” which was initially adopted in 2001 to prevent fund names from misrepresenting their inherent investments and risks. The existing rule required investment companies with names suggesting a particular type of investment focus to adopt a policy to invest at least 80% of their assets in those investments.
The adopted amendments expand the 80% rule to apply to funds with names suggesting a focus on investments with specific characteristics. While this rule doesn’t exclusively target ESG funds (funds labeled as “growth” or “value,” for example, would also be included), it places a significant emphasis on ESG funds. The SEC noted the rapid rise in investor interest in funds offering ESG strategies and the proliferation of such funds. It also acknowledged the increasing potential for greenwashing due to the wide array of ESG-related terms and evolving investor expectations.
The final rule particularly highlighted ESG-related terms like “sustainable” or “green,” stating that they raise “particular investor protection concerns.” It pointed out that funds considering ESG factors in their investment strategies represent a thematic area with unique considerations and involve terminology that can be especially influential in fund names to attract investors.
By FCCT Editorial Team
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