Mar 3, 2022 - Economy

SEC chair pushing for greater transparency around ESG funds

A stamp with a tree sign on it.

Illustration: Annelise Capossela/Axios

SEC chair Gary Gensler has a new target: ESG-focused funds.

Wait, what? No, Gensler doesn't oppose funds whose strategies include a focus on environmental, social and governance issues. But he does want ways to measure and verify that funds are using ESG as more than a buzzword to attract investment.

  • Many institutional investors have ESG allocation targets, so there's lots of incentive to affix the acronym.
  • This cuts across asset classes, including mutual funds, hedge funds, credit funds, private equity funds and venture capital funds.

By the numbers: The SEC estimates that there are at least 800 registered investment companies with more than $3 trillion in AUM, claiming to work toward ESG goals.

What he said: Gensler used a grocery analogy, explaining how he can look at ingredients to verify if something claiming to be “fat free” is actually free of fats. And then noted how, in the investment space, a high-yield bond fund will disclose summaries of underlying credit ratings. ESG funds, however, are all over the place.

  • “What we need are standards, measurement and transparency,” adds Case Foundation CEO Jean Case, who’s been beating this drum for years. “Today there's no criteria for labeling yourself an ESG fund.”
  • Case also tells Axios that there’s also an argument for breaking up the three letters – as a firm could be legitimately strong on climate but disastrous on diversity or governance. (As an aside, how many ESG funds really focus on governance?)

The bottom line: ESG is at the edge of becoming goopy jargon; something slapped onto investment funds for marketing purposes. The question now is if it can be pulled back from that cliff.

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