SEC Issues New Rule Aimed at Protecting Against 'Greenwashing'

On September 20, 2023, the US Securities and Exchange Commission (SEC) adopted amendments to the Investment Company Act “Names Rule” in its latest effort to address “greenwashing.”¹ The amendments strengthen older versions of the rule to require that 80 percent of a fund’s portfolio match the assets advertised by its name.²

But notably, the SEC did not cite the new amendments when it fined DWS Investment Management Americas, a subsidiary of Deutsche Bank, $19 million for overstating the role Environmental, Social, and Governance (ESG) factors played in its research and investment recommendations and for failing to adhere to its own ESG investment process³. Even without specific climate-related disclosure regulations, these efforts highlight the SEC’s existing ability and current trend to increase ESG-related actions.

Recent Developments

On September 20, 2023, the SEC adopted amendments to the Investment Company Act “Names Rule.”⁴ This act required that 80 percent of a fund’s portfolio match the assets advertised by its name⁵. The new amendments will now enhance the rule’s protections by requiring more funds to adopt the percentage investment policy, including funds with names suggesting that they incorporate one or more ESG factors⁶.  The amendments will impose enhanced prospectus disclosure requirements, ensuring that terminology in fund names aligns with their plain English meaning or established industry use⁷. In effect, the rule simply specifies that the fund match its marketing.

The SEC has recently taken a stronger stance following the boom in funds that seek to take advantage of growing investor interest in ESG. They are concerned that some fund names do not accurately reflect the nature of the strategies or investments—colloquially referred to as “greenwashing.” More specifically, this term refers to the use of misleading or false information provided to investors about a company’s environmental impact, often done to emphasize a focus on sustainability, while obscuring environmentally damaging practices⁸. Of particular interest to the SEC is a firm’s potentially misleading or false disclosures related to ESG research and investment, pending a potential development of specific climate-related disclosure regulations in the near term.

Some commissioners have argued that the SEC does not need specific rules to require funds to “do what they say they are doing.” As if to prove this point, on September 25, 2023, the SEC fined DWS Investment Management Americas, a subsidiary of Deutsche Bank, $19 million, alleging that DWS overstated the role ESG played in its research and investment recommendations. The SEC did not allege violations of the “Naming Rule,” but rather charged that DWS failed to adhere to its own ESG investment processes. This action was sparked by a whistleblower who warned that DWS’ ESG funds heavily invested in fossil fuels, despite their “green claims.” Deutsche Bank contends that the SEC did not identify any misstatements in the company’s financial disclosures or prospectuses. They emphasize that the SEC’s findings primarily pertain to weaknesses in processes and procedures, which the firm has already taken steps to address.  Nonetheless, this is not likely to be the last ESG-related fine imposed by the SEC.

What Does This Mean For Your Organization?

This article is authored by Laila Lapins