Guidance and Regulation – North America

8 minute read

The United States has counters greenwashing in financial products by enforcing existing disclosure rules rather than introducing new legislation.1

Securities and Exchange Commission (SEC) climate and ESG task force

In March 2021 the SEC established a climate and ESG task force within its enforcement division to proactively identify ESG-related misconduct in the context of investor disclosures. Its primary focus is on greenwashing to be highlighted by identifying gaps and misstatements in disclosure materials.2 In April 2021 the task force published its first risk alert. Since then, there have been a number of high profile cases involving fines and warnings being issued, proving that the SEC means business.

Read: SEC – The Division of Examinations’ Review of ESG Investing

Key points:

  • When reviewing firms claiming to engage in ESG investing, the SEC will typically focus on:
    • Portfolio management
    • Performance advertising and marketing
    • Compliance programmes
  • The review identifies areas where both good and poor ESG practices were observed, particularly around disclosure and the controls in place to ensure consistency between management practice and disclosure – providing firms with the basis of best practice guidelines
  • Whilst the SEC has not made any indication of intention to introduce further legislation in this area, past precedent suggests that these risk alerts and any associated enforcement action will serve as a guide on best practice

Proposed SEC ESG disclosure rules

The SEC have proposed rules, due to be finalized in late 2022 that “promote consistent, comparable, and reliable information for investors concerning funds’ and advisers’ incorporation of environmental, social, and governance (ESG) factors”. The disclosure requirements will apply to funds and advisers that market themselves as having an ESG focus.

Under the proposed rules, ESG strategies will be categorised requiring certain more specific disclosures in fund prospectuses, annual reports, and adviser brochures based on the ESG strategies they pursue.

  • Environmental focused funds would be required to disclose the greenhouse gas emissions associated with their portfolio investments.
  • Funds seeking to achieve a specific ESG impact would be required to describe the specific impact(s) they seek to achieve and report on their progress on achieving those impacts.
  • Funds that use proxy voting or other forms of engagement to implement their ESG strategy would need to disclose information regarding their voting on particular ESG-related matters and information concerning their ESG engagements.

Further, ESG-related terms used in a fund name will be scrutinized, with the new disclosure rules requiring a minimum of 80% holdings within ESG funds to be in accordance with the fund name. Managers will have 30 days to come back into compliance if ESG-related holdings fall below 80%.

The purpose of these disclosures is to improve transparency around ESG-related funds, create some consistency and standardization of reporting across the industry, and require funds and advisers to disclose not only their definition of ESG in portfolios, but how specifically they will implement ESG into investment portfolios. While not incorporated into U.S. law, these rulings provide a precedent for potential future ESG-related legislation.

New disclosure requirements are enforceable under current securities laws – the Investment Company Act of 1940 and the Investment Advisers Act of 1940.

Biden Administration

Under Joe Biden’s Administration, the US appears to be in the process of realigning away from the limitation on ESG investing imposed under the Trump Administration. Early in the Biden Administration several Executive Orders were signed to overturn Trump’s environment, energy and clean economy actions.  

In March 2021 the Labor Department reneged on the Trump era restrictions that limited investments focused on environmental, social or governance (ESG) factors in retirement plan accounts and limited plan fiduciaries from voting in favour of climate-related shareholder proposals. In November 2022, they released a final rule under the Employee Retirement Income Security Act (ERISA) to “empower plan fiduciaries to safeguard the savings of America’s workers by clarifying that fiduciaries may consider climate change and other environmental, social, and governance (ESG) factors when they make investment decisions and when they exercise shareholder rights, including voting on shareholder resolutions and board nominations.”4 What is interesting about these amendments is that they treat ESG as consequential enough for fiduciaries to factor in when selecting investment line-ups, which contrasts with the Trump administration’s barriers to incorporating ESG into retirement plans. This new ruling treats ESG as relevant and material.

Biden’s American Jobs Plan is also taking sustainability measures into account, with an infrastructure plan meant to include a sustainable transportation system, clean water and energy initiatives, redevelopment of idle property and investment in building up equitability in disadvantaged communities, among other ESG-focused initiatives. If passed, the Plan would be one of the largest American investments in sustainability developments with the potential to support investment managers who are already integrating ESG into their business.

Signaling a shift in the US’s approach to climate initiatives, the Biden administration has pledged to achieve net-zero emissions by 2050 with a goal to reduce greenhouse gas emissions by half or more by 2030. In an unprecedented move by a sitting president, the US is experiencing an emphasis on governance where ESG is concerned. Likewise, the Net Zero Asset Managers Initiative has committed to supporting investments aligned with this goal.

Recommended Read: FINAR – ESG Investing – Clearing the Air on Social Impact Financial Products


1,2 Miller, H., 2021. The SEC takes a different approach to the EU in tackling ESG greenwashing. [online] Passle. Available at: <https://blog.macfarlanes.com/post/102gshu/the-sec-takes-a-different-approach-to-the-eu-in-tackling-esg-greenwashing> [Accessed 17 September 2021].

4 ThinkAdvisor. 2021. Biden Orders DOL to End or Revise Rules Limiting ESG Investments | ThinkAdvisor. [online] Available at: <https://www.thinkadvisor.com/2021/05/21/president-biden-orders-dol-to-end-or-revise-rules-limiting-esg-investments/> [Accessed 17 September 2021].

In: