SEC Abands Proposed Regulations for Transparent Greenwashing Financing Declarations
The Securities and Exchange Commission (SEC) has withdrawn a series of proposed rules, including one requiring disclosures by investment managers marketing ESG-focused funds. This development, announced in March, has left the rule in legal limbo, causing uncertainty for ESG-focused funds that had anticipated clearer regulatory disclosure requirements.
The withdrawn rule, initially proposed in 2022, aimed to provide consistent information to investors and avoid the risk of greenwashing. The proposal required ESG-focused funds to disclose greenhouse gas (GHG) emissions metrics, including carbon footprint and carbon intensity of the fund's portfolio. It also included disclosure requirements for ESG-focused funds and integration funds to address potential exaggerated claims about ESG strategies.
However, the SEC's decision not to issue final rules for the proposed ESG disclosure requirements does not necessarily indicate a permanent abandonment of future regulatory action in these areas. If the SEC decides to pursue future regulatory action, it will issue a new proposed rule.
The SEC's statement announced that it does not intend to issue final rules with respect to the proposed ESG disclosure requirements at this time. This decision marks the latest in a series of moves shifting the SEC away from climate and ESG-focus since the resignation of former Chair Gary Gensler.
The rule, which was designed to address the lack of clear rules communicating the ESG attributes of an increasing number of funds marketing themselves using terms such as "green" or "sustainable," remains stayed and is not being actively enforced while litigation continues. This regulatory uncertainty may delay or complicate ESG disclosure standardization for investment advisers and companies, impacting transparency and compliance strategies for ESG-focused funds in the near term.
The SEC's withdrawal of defense of the rule followed a change in administration, with the Commissioners now holding a majority view that the rules lack statutory authority. Should the court uphold the rule, the SEC indicated that any reconsideration (e.g., replacing, modifying, or rescinding the rule) would be subject to Commission deliberations but without prejudging the outcome.
In summary, the SEC’s initial ESG-related disclosure rule from 2024 is stalled due to legal challenges, the SEC’s withdrawal of defense, and internal Commissioner disagreement about authority. ESG-focused funds face regulatory uncertainty until the court rules and the SEC decides on a future path.
- The withdrawn rule, initially proposed in 2022, aimed to integrate environmental-science, specifically addressing climate-change, into the financial realm by requiring ESG-focused funds to disclose their greenhouse gas emissions metrics.
- Despite the SEC's decision not to issue final rules for the proposed ESG disclosure requirements, the potential for future regulatory action regarding finance and business strategies that align with environmental-science remains open.
