Regulators Fight Greenwashing

The US Securities and Exchange Commission (SEC) is getting serious about greenwashing. The market regulator has amended the Investment Company Act of 1940 to ensure that at least 80% of ESG (environmental, social and governance) funds are aligned with the fund companies’ stated goals.

Climate funds managers were too inclined to pack their assets with profitable investments that were not green. A 2022 study by sustainability data platform ESG book showed that some funds were invested in Shell, Exxon, Mobile and BHP group. In fact, 15 so-called ESG funds had carbon dioxide emissions twice as high as the average fund.

Under Chairman Gary Gensler, the SEC has flexed its muscles. The agency recently fined $19 million DWS Investment Management Americas, a Deutsche Bank subsidiary, for failing to adhere to its processes. It also penalized Brazilian mining company VALE for inaccurate statements about a dam’s sustainability.

The new rule, effective at the end of 2023, states that funds with $1 billion or more have two years to comply with the 80% obligation. Funds with less than $1 billion will have to adjust within 30 months.

The European Securities and Markets Authority regulators are also fighting greenwashing but at a slower pace. In May 2023, it published a progress report announcing a definition of greenwashing. Nevertheless, the final report will have to wait until May 2024. And the proposed European Green Claims directive to combat environmental disinformation is still in limbo. There is no date set for entry into force. The European Council must adopt the directive, then its parliament, and, finally, each state member.

The process for each member state to implement the directive may take up to four years, according to international law firm Perkins Coie.

In the meantime, interest in ESG funds continues to boom. The amount of global assets focused on ESG was barely $5 billion in 2006, reports Statista. In 2020, it was $202 billion and two years later, the category had almost doubled, reaching $ 403 billion.