SEC Said to Consider Moderating Proposed ESG Rules

The Securities and Exchange Commission is reportedly considering easing proposed environmental disclosures rules after pushback from businesses, politicians and the world’s largest exchange-traded fund issuer, BlackRock Inc.  

The SEC may pare proposals requiring companies to disclose the effects of their operations on global warming, the Wall Street Journal reported on Friday, citing unnamed people familiar with the situation. A final version of the rules is expected later this year, the WSJ said.  

The softening of the rules may be seen as an effort to reach a compromise in a battle pitting regulators, seeking to increase environmental accountability, against businesses and investors trying to keep costs associated with that accountability down.  

Last May, the SEC issued two proposals that would require more disclosures from funds and companies claiming to invest in companies that adhere to ESG factors. Hundreds of citizens, academics, financial advisors and asset managers shared their opinions during the open comment period that ensued.  

Among the proposed regulation was the 1% rule: Companies would have to report any climate-related costs that accounted for 1% or more of each line item.  

Firms and industry groups noted during the comment period how the SEC’s rulings could create confusion for investors, increase compliance costs and create misleading information about sustainability levels at funds.   

“Mandating specific climate-related disclosures to investment fund investors before issuers disclose such information to investors could result in inconsistent investment manager risk assessments and disclosures to fund investors,” the Managed Funds Association, a D.C.-based industry group that represents the alternative investment industry, said in a comment letter.   

The two largest ETF issuers, BlackRock Inc. and Vanguard Group Inc., were among the asset managers to warn that the proposed disclosure regulation would cause increasing confusion and more inaccurate reporting.  

ESG Crackdown 

Still, the SEC has remained steadfast in its endeavors to crack down on what it considers greenwashing, the practice of overstating ESG fund offerings.  

In November, Goldman Sachs Group Inc., which manages $25 billion in ETFs, was fined $4 million by U.S. regulators for failing to comply with ESG-related policies and procedures. The agency also charged BNY Mellon $1.5 million in May, alleging the company did not “have an ESG quality review score.”  

New York-based BlackRock has increasingly come under scrutiny for its ESG-labeled offerings from politicians on both sides of the aisle.  

Last year, $1 billion was pulled from BlackRock from Republican states including Louisiana, Utah and Arkansas regarding ESG concerns, according to the Financial Times. Meanwhile, New York City Comptroller Brad Lander also condemned BlackRock for the “fundamental contradiction” between the firm’s statements and actions, claiming they weren’t environmentally friendly enough.  

The increased politicization has also taken a toll on ESG funds with sustainable funds in the U.S.—including ETFs and mutual funds—shedding a record $6.2 billion in last year’s fourth quarter.  

For ETFs alone, ESG-labeled funds had outflows of $2.1 billion in the last three months of 2022, compared with $6.1 billion of inflows in the year-ago quarter, according to data from research firm Strategas Securities.   

Contact Shubham Saharan at [email protected]