SEC Proposes New Rule To Address Greenwashing

ESG investing is in high demand, but there are growing concerns about disclosures.

Reviewed by: Heather Bell
Edited by: Heather Bell

Whether an investor is using ESG strategies to avoid risks or to support incremental change, it should come as no surprise that there is very little standardization—either in the funds offered or the sales approaches used by advisors.  

The Securities and Exchange Commission issued a rule proposal Wednesday that seeks to make it easier to evaluate and compare funds that label themselves “ESG.” Concerned about the fuzziness around the terminology and the potential confusion it presents for investors, the proposal mainly addresses environmental, social and governance issues surrounding open-end funds and closed-end funds, including exchange-traded funds and business development companies. 

“I am pleased to support this proposal because, if adopted, it would establish disclosure requirements for funds and advisers that market themselves as having an ESG focus,” said SEC Chair Gary Gensler in a press release. “ESG encompasses a wide variety of investments and strategies. I think investors should be able to drill down to see what’s under the hood of these strategies. This gets to the heart of the SEC’s mission to protect investors, allowing them to allocate their capital efficiently and meet their needs.” 

The proposal goes into great detail assessing the current state of ESG investing and the demand for it, the problem of greenwashing, as well as the changes that would need to be made to various regulatory forms and the costs and benefits of the suggested changes. It even has a section outlining “Reasonable Alternatives.” 

The 362-page document also poses nearly 200 queries to commenters, with comments accepted within 60 days of publication in the federal register.  

“The proposed rules and form amendments are designed to create a consistent, comparable, and decision-useful regulatory framework for ESG advisory services and investment companies to inform and protect investors while facilitating further innovation in this evolving area of the asset management industry,” according to the proposal. 


The rule proposal specifically notes that it is not trying to define ESG, but calls for “strategy-specific disclosures,” largely involving prospectus documents and annual reports, and refers mainly to what it terms ESG-focused integration and impact funds.  

ESG-focused funds are products that prioritize ESG criteria in their management, while integration funds include ESG criteria, among other factors, without prioritizing it. Impact funds are considered to be funds that look to advance a particular goal.  

“Requiring comparable, consistent, and reliable information from all funds and advisers that use an ESG label would reduce the risk of exaggerated claims of the role of ESG factors in investing, thereby increasing the efficiency and reliability with which investors seeking an ESG strategy can find a fund or adviser that meets their investing preferences, better protecting and serving investors in the market for ESG-related investing as a whole,” the document noted. 

It recommends a framework for disclosures about ESG funds and strategies, suggests collecting census-type information from issuers to create a standardized way to compare products and proposes that ESG disclosures be made using a structured data language—in this case, Inline Extensible Business Reporting Language, known as inline XBRL—to further improve efficiency when it comes to evaluating funds.  

“We believe that these requirements would provide improved transparency and decision-useful information to investors assisting them in making an informed choice based on their preferences for ESG investing,” according to the proposal. 

Key Points 

Integration funds would simply be required to summarize “in a few sentences” the role of ESG factors in their investment processes. The document notes that more extensive ESG-related disclosure requirements are not in the proposal out of concern that that could lead to an overemphasis on ESG’s role such a fund. 

ESG-focused funds would be required to provide an “ESG Strategy Overview Table.” The table would include a description of the fund’s strategy, how it uses ESG factors to select investments and how the fund handles proxy votes or interacts with companies to forward a fund’s ESG goals.  

Using a standard table for each ESG fund would facilitate investors’ ability to compare and analyze the funds within the category. These funds would also be expected to disclose the total greenhouse gas emissions associated with their respective portfolios in their annual reports. 

Impact funds are singled out among ESG funds for additional disclosures around measuring the fund’s progress toward its impact goal and how pursuing that goal will generate returns for the fund, as well as disclosing proxy voting and engagement with companies.  


Contact Heather Bell at [email protected] 

Heather Bell is a former managing editor of She has also held editorial positions at Dow Jones Indexes and Lehman Brothers. Bell is a graduate of Dartmouth college and resides in the Denver area with her two dogs.