Solving the ESG Conundrum

As smart as human beings are known to be, we are also known for going off the rails at times. Now, that’s pretty much a part and parcel of life, but it becomes a problem in situations where potential consequences are just too detrimental. Such a dynamic expectantly calls for some protection, and we’ll get exactly that once we bring dedicated regulatory bodies into the fold. The move was a massive success. It made us more organized than ever before. However, it was all quite short-lived. You see, as soon as technology turned up on the scene, it nullified most of the protections that we had established for ourselves. By doing so, it, of course, got us back to square. Fortunately, though, we were a lot quicker with our response this time around. Talk about what happened, the regulators, instead of treating technology like a foe, were successful in making it an ally. This change in approach notably went a few extra yards on its way to achieve the stated goal. You see, it didn’t just help the regulators in particular battles against tech-driven crime, but it also made them smarter from an overall standpoint. The latter element was actually on full display following one recent SEC announcement.

Securities and Exchange Commission has formally proposed a couple of rules, which are predicated upon eliminating deceptive claims made by various US funds in regards to their environmental, social, and corporate governance credentials. As we have seen a trend of funds trying to abuse the ESG investing practices, the new rules will establish a whole new market framework that will orchestrate every step, therefore minimizing any chance for the funds to go rogue. While the overhaul looks to go down on a grand scale, one significant change will likely happen within Names Rule. At present, Names Rule explicitly states that if a fund’s name suggests it’s focused on a particular class of investment like, let’s say, government bonds, then at least 80% of its assets must be in that same class. Now, the rule itself will remain the same, but the new proposal should get it to cover more funds. In specific terms, the alteration is expected to help SEC in capturing an estimated 75% of all the funds, which is a whopping increase from 62% it is working with right now.

“A lot has happened in our capital markets in the past two decades. As the fund industry has developed, gaps in the current Names Rule may undermine investor protection,” said Gary Gensler, SEC Chair. “In particular, some funds have claimed that the rule does not apply to them — even though their name suggests that investments are selected based on specific criteria or characteristics. Today’s proposal would modernize the Names Rule for today’s markets.”

Beyond the stated change, the commission has also suggested a legislation that will encourage better disclosures of ESG strategies across fund prospectuses, annual reports, and advisor brochures.

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