August 15, 2022
Ms. Vanessa Countryman
Secretary Securities and Exchange Commission
100 F Street, NE Washington, D.C. 20549
Re: Enhanced Disclosures by Certain Investment Advisers and Investment Companies About Environmental, Social, and Governance Investment Practices, File No. S7-17-22 (“ESG Disclosure Proposal”); Investment Company Names, File No. S7-16-22 (“Fund Names Proposal”)
Dear Ms. Countryman,
On behalf of our 500,000 members and supporters across the country, Public Citizen is grateful for the opportunity to comment on the Enhanced Disclosures by Certain Investment Advisers and Investment Companies About Environmental, Social, and Governance Investment Practices, (“ESG Disclosure Proposal”) and the Investment Company Names (“Fund Names Proposal”) proposed rules. As an organization that focuses on retail investor protection, we agree with the Securities and Exchange Commission (Commission) that the name of a fund signifies its nature to investors. We support the Commission’s goals of addressing misleading or materially deceptive names, especially as marketplace use of the terms “environmental, social, and governance,” or “ESG” has evolved in recent years. We appreciate that the Commission has proposed amendments to the Investment Advisers Act and the Investment Company Act that would provide investors with more detailed information about how a fund incorporates ESG factors. It is critical that investors have access to information on which the funds’ ESG claims are based so they can evaluate it themselves. Since these two proposed rules are closely related, we have combined our comments on both into one submission (submitted to both comment files) so as to speak to the interplay between a fund’s name and its required disclosures. Below, we first address the fund names proposal, then the ESG disclosure proposal.
Fund Names Proposal
We support the proposed rule’s purpose of preventing “greenwashing” by assuring that a fund’s investment activity is focused in the manner that its name suggests. While “ESG” most accurately refers to the types of long-term risks a company may be exposed to, the term has also come to mean in common parlance investments that generally do not further perpetuate social ills such as human-generated climate change, gun violence, income inequality, personal data collection, or threats to democracy. For these reasons, the Commission is right to propose updates to the Names Rule to match investors’ common understanding of “ESG” so that fund names do not mislead investors regarding how the funds invest. Below, we respond to particular questions the Commission proposed.
Questions 1–15 (Expansion of the 80% Rule)
The Commission should expand the existing requirements, as proposed, to cover fund names that suggest an investment focus or include issuers that have particular characteristics in their portfolio such as those that focus on sustainable investments or promote ethical business practices. It is also appropriate to keep the scoping requirement as proposed so that it does not distinguish between types of investments and investment strategies. It is not reasonable to assume that retail investors believe that fund names reflect their underlying investments in some areas but not in others. The Names Rule should absolutely apply the 80% requirement to fund names with terms such as “ESG” and “sustainable” as proposed. Investors rely on these terms in fund names.
Questions 52–57 (Disclosures Regarding Terms in Fund Names)
We support the enhanced prospectus disclosures that require a fund to explain how it defines terms used in its name and provide the criteria it uses to select investments. Given the growing market share of “ESG”- related products and the increased investor interest in these types of investments, it is important that fund managers explain, in plain English, how they define the terms in the fund name so that investors may compare that to their understanding of the term. As stated above, investor expectations around terms such as “sustainable” or “socially responsible” are evolving, and it is critical that investors be able to easily understand how a fund defines them. Even when a fund is not in violation of the “materially misleading” standard, an investor could have a different expectation for the term “sustainable” than the fund manager intended, and she needs enhanced disclosure in order to determine if investing in this fund meets her expectations.
Questions 58–62 (Plain English and Established Industry Use of Terms)
The proposed requirement that funds subject to the 80% rule use terms in their names that are “consistent with those terms’ plain English meaning or established industry use” is an important provision of the proposed rule because it prevents funds from defining a term such as “ESG” or “sustainable” in a way that is inconsistent with investors’ expectations. While it is critical that an investor have access to information about how a fund defines a term used in the fund name, as stated above, in instances where investors only use fund names when making investment decisions, those names should not be inconsistent with investors’ reasonable expectations. Additionally, the agency should clarify that, if an established industry use of a term is inaccurate or misleading, then the “established industry use” principle emphatically does not apply.
Questions 63–65 (Integration Funds)
We strongly support the proposed approach of considering the names of Integration Funds materially deceptive or misleading if they use terms that inaccurately suggest the funds’ investment decisions are based on ESG factors. While the argument in favor of taking ESG factors into consideration when investing suggests that all investment advisors should be considering the long-term risks associated with their portfolio companies, the use of an ESG term in a fund name strongly suggests that the ESG factor has special significance in investment decisions. The ability for a fund to call itself ESG and benefit from that marketing while not considering ESG factors above any other material factors should not be allowed.
ESG Disclosure Proposal
We support the aim of the disclosure rule to provide investors with more detailed information about how investment advisors consider ESG factors for their funds. Increasing disclosure by investment managers and advisors is squarely within the Commission’s mandate because transparency is key to efficient capital markets and investor protection. We also support the proposed rule’s goal, in conjunction with the Names Rule, of preventing investment managers and advisors from misleading investors about how and to the extent to which a fund considers ESG factors. Millennials have been a significant demographic undergirding ESG investing with contributions of $51.1 billion to sustainable funds in 2020 compared with less than $5 billion in 2015. The trends of younger investors speak to longevity and that ESG investing is here for the long haul. According to polling retrieved by Yahoo Finance-Harris, about 95% of millennials and 97% of the subsequent Gen Z generation are familiar with ESG investing and indicated that a company’s ESG factors played a role in their investment choices.1 Beyond just Millennial and Gen Z investors, the market for ESG investing is continuing to expand significantly. According to Bloomberg Intelligence, ESG assets are primed to increase to $41 trillion by the end of 2022, and further estimates project ESG assets at $50 trillion by 2025.
Questions 3-11 (Integration Funds)
We encourage the Commission to consider whether the proposed Integration Fund category serves the proposal’s purpose. ESG integration continues to rise around the world, with “the proportion of global ESG users [at] 89%—up from 84% in 2021.”3 Investor demand for more…