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SEC Plans Crackdown on 'Greenwashing' ESG Funds

ESG assets will be at least $53 trillion by 2025.
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The Securities and Exchange Commission, the regulatory agency for the stock market, has plans to propose new requirements requiring more disclosure on ESG funds to avoid less greenwashing.

ESG funds are investment mutual funds or exchange-traded funds (ETFs) that include companies that claim to achieve goals for lowering climate change, decreased carbon emissions, more corporate governance and social justice. 

The amount of capital to ESG funds has increased. 

Issuance in these assets rose to $1.6 trillion in 2021, resulting in a total market exceeding $4 trillion. Bloomberg has estimated ESG assets to be at least $53 trillion by 2025. 

The commissioners for the SEC will vote on two proposal that give investors more details about ESG funds and ETFs.

If the two proposals pass the SEC, the public will have two months to comment on the topic before the agency rules.

One of the two proposals would increase the SEC's rules about the names of the funds. The other proposal would add more disclosure requirements for funds with an ESG angle.

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Another issue with ESG funds is that the expense ratios or the fees charged for managing them is usually higher than broad market or sector-based index funds. 

A higher fee impacts the overall return an investor receives.

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The designation also lacks any standard for what a fund manager can market as a ESG fund that includes stocks and bonds. 

Fund managers often have different criteria for what they consider to be a company that is complying with ESG standards.

Right now those are ranging from lowering carbon emissions of a company that is polluting less to adding diversity to a company's workforce or board.

The lack of clarity has led to claims that asset managers and banks who sell the funds are greenwashing.

The SEC fined Bank of New York Mellon's ( (BK) - Get The Bank of New York Mellon Corporation Report) investment management division $1.5 million this week for making misleading claims about the factors used to choose its ESG stocks.