ESG / CSR
Industries
Ecology
Greenly solutions
From new legislation in New York and California all the way to a revolutionary climate bill being passed late last year, the United States has been setting new ambitious goals to fight against climate change – with the next measure in line being the new ESG Fund-Labeling Proposal by the Securities and Exchange Commission.
👉 What is the new SEC ESG Fund-Labeling Proposal, and how could it help companies in the United States succeed in reducing emissions, and ultimately, help the country to achieve their new environmental goals?
This SEC ESG Fund-Labeling Proposal is broken down into two different components: with one part of the proposal seeking to ensure that investment and market funds that claim to be garnered towards environmental, social, and governance improvement (also known as ESG) can provide evidence in order to retain the ‘ESG’ component in their investment title.
In addition, investment and funding programs that are approved to continue titling their financial endeavors with ‘ESG’ in the title will be required to allocate more than half of their financial earnings to projects or organizations dedicated to social or environmental reform.
The SEC ESG Fund-Labeling Proposal will require investment companies and advisors that are already expected to adhere to other filing prerequisites established by the Securities Exchange Committee to comply with the new ESG Fund-Labeling Proposal. Some of the forms that these companies may already be obligated to file include the N-1A,, N-CSR, N-2,N8B-2, N-CEN, S-6, or ADV Part 2A.
Many registered investment funds are expected to complete these files for the SEC, as well as several investment advisors – making the new SEC ESG Fund-Labeling Proposal one of the Securities and Exchange Commission's greatest efforts to improve transparency and emission reporting to date.
The new SEC ESG Fund-Labeling Proposals covers several different ideas and objectives. For instance, the first proposal would rectify how funds are organized as an attempt to ensure that these funds pertain to ESG values.
This mission statement is divided into three different sections.
Companies that choose ESG funds must share the primary intent behind the fund, as well as provide data sources to demonstrate the progress of the fund. If the fund is not up to the standards of the proposed SEC ESG Fund-Labeling rule, ‘ESG’ will either be removed from the name of the fund, or will be subject to periodic review.
These are the funds that will be questioned by the SEC ESG Fund-Labeling proposal where ESG factors will be labeled as a “main” reason for the fund itself. However, if these funds do not seek to reduce greenhouse gas emissions or encourage scope 1, scope 2, or scope 3 emissions to be measured and reduced – these funds will have to be renamed in accordance with the SEC ESG Fund-Labeling proposal.
These funds, also referred to as impact investing, must be established solely for the intent of achieving positive ESG benefits. Companies who choose to partake in impact-focused funds must disclose how their investments are benefiting society and the environment with both qualitative and quantitative data.
Some of the ways that the SEC ESG Fund-Labeling Proposal plan to help to correct this would be by requiring funds with ‘ESG’ in the name to contribute a minimum of 80% of the proceeds to an ESG worthy cause. In other words, the Securities and Exchange Committee will enforce the previous “Names Rule” from 1940 to ensure that these funds will truly contribute to environmental and social predicaments.
Another requirement of the SEC ESG Fund-Labeling Proposal is that it will ask companies to publicly delineate and share both of these proposals in annual reports and to potential investors.
While these new requirements would be created in attempts to encourage companies to reduce their emissions, some company directors have expressed their disconfidence in the new SEC ESG Fund-Labeling Proposal being effective at reducing emissions and helping the U.S. to achieve their new climate goals.
The new SEC ESG Fund-Labeling Proposals are not only meant to adjust the names of funding and investment programs that may be subject to activities closely related to greenwashing, but it will be executed as an attempt to shine a light on the value in publicly disclosing emissions, and ultimately – encouraging those companies to reduce their emissions.
In theory, the SEC ESG Fund-Labeling Proposal is meant to reveal the discrepancies between a company's scope 1, scope 2, or scope 3 emissions – more specifically, which category is guilty of creating the most emissions, which are often the final category, as scope 3 emissions are notoriously difficult to calculate.
This is because scope 3 emissions refer to emissions created outside of the company: such as through business travel, the use or purchasing of raw materials, goods, or services, leased assets, franchises, investments, or the carbon footprint created by an employee’s commute. Given these emissions account for all emissions created outside of scope 1 and scope 2 – they can be challenging to measure. Ironically, this category of emissions that remain difficult to calculate are also often the culprit behind a company’s excessive emissions – making one of the goals of the SEC ESG Fund-Labeling Proposal to raise awareness on scope 3 emissions and encourage companies to reduce them.
However, many remain skeptical as to whether this will truly encourage companies in the United States to reduce emissions – or if it will act as nothing more than a business version of “show and tell”.
Is the new SEC ESG Fund-Labeling Proposal on par with other European regulations currently intact to encourage transparency and emission reductions?
While a potential new SEC ESG Fund-Labeling Proposal may seem revolutionary for those located in the United States, disclosing business matters such as scope 3 emissions and pushing for greater transparency aren’t new across the pond.
The SEC ESG Fund-Labeling Proposal will function in a similar manner to rules such as the Sustainable Finance Disclosure Regulation, also known as the SFDR, in the EU and the Sustainability Disclosure Requirements, also known as the SDR, in the United Kingdom.
Other reporting directives in the European Union include the NFRD and the CSRD. The NFRD serves as a financial reporting directive for companies with over 500 employees, companies in possession of over €20 million in assets or have a net income of more than €40 million euros annually. Companies expected to adhere to the NFRD must draft detailed reports on the company's efforts to reduce emissions and efforts to create a fair work environment. efforts to maintain equality amongst the workplace, their anti-corruption measures, and how well they promote diversity. The CSRD is works in a similar manner to the NFRD, but requires extended reporting on a company’s efforts to implement sustainability and improve environmental and societal circumstances.
However, the SFRD is more concerned with protecting future investors from making poor financial decisions – in the same way the SEC ESG Fund-Labeling Proposal will work to prevent future financial investments in projects that appear to be sustainable without scientific evidence or public disclosures to ensure their contribution to the environment or society.
Reports to be made through the NFRD and CSRD are more concerned on the environmental side of ESG investing, whereas the SFRD and the new SEC ESG Fund-Labeling Proposal are more concerned with the legitimacy of ESG funds and investment endeavors.
In addition to familiarizing oneself with the nature of the investment and financial market, transparency and measuring scope 3 emissions are also pivotal components and goals of the SEC ESG Fund-Labeling Proposal. Therefore, establishing practices to emphasize the importance of transparency within a company’s business operations and seeking to understand the environmental impact of scope 3 emissions are also beneficial for those that will be expected to report to the SEC ESG Fund-Labeling Proposal.
👉 The first date in which investment companies and advisors will be expected to report in accordance with the new SEC ESG Fund-Labeling rules won’t be until late 2024 at the earliest.
However, that doesn’t mean that the SEC isn’t already aware of ESG funds that are subject to greenwashing tactics – the new SEC ESG Fund-Labeling Proposal should serve as a contemporary guide on how investment companies and private advisors should approach sustainable finance.
If those who will be expected to comply with the new SEC ESG Fund-Labeling Proposal adapt this mindset – there will be no need to be caught, “fake green handed”, and even more so – the SEC ESG Fund-Labeling might make a difference in the market of sustainable finance in the United States.
If reading this article about the SEC's ESG Fund-Labeling Proposals has made you interested in reducing your carbon emissions to further fight against climate change – Greenly can help you!
Seeking the right investment for you or your company can be challenging, especially in the midst of greenwashing – and that’s why we at Greenly are here to help you with your transition to sustainable finance.
The SEC's ESG Fund-Labeling Proposals are also expected to put an emphasis on the importance of reducing scope 3 emissions, and Greenly’s got you covered – click here to book a demo and learn more about how we can help you to measure and reduce your various scope emissions.
What are socially responsible investments, and why have they grown in popularity during the global cause for concern regarding climate change? Can socially responsible investments encourage companies to go green?
The Supreme Court has been exceptionally decisive in the United States as of late. Why did the supreme court in the U.S. block the EPA?
A complete guide to sustainable finance and how to manage your finances to be more sustainable.
The iPhone 14 will be released on September 16. But do you know the exact carbon footprint of an iPhone?
