Abstract

Environmental, social, and governance (“ESG”) funds enable earnest investors to align their money with their values. Some believe that ESG funds can promote a more sustainable and just economy by encouraging companies to adopt better practices and by divesting from those that do not. Others expect that funds with limited carbon exposure will outperform as climate change imposes regulatory and financial risks on carbon-intensive industries. Research suggests that younger investors overwhelmingly support the idea behind ESG investing; one-third even report a willingness to forgo 10 percent or more of their retirement savings to protect the environment.

Unfortunately, ESG products also stoke cynicism. While some funds may live up to their name, others may co-opt trendy labels as a marketing ploy to charge higher fees—a tactic now commonly referred to as “greenwashing.” In addition to misleading investors, greenwashing has the power to erode faith in the ESG movement. Legitimate offerings can quickly become contaminated by those seeking to make a quick buck. To address this harm, in May 2022, the Securities and Exchange Commission (“SEC”) set forth two proposals to enhance transparency in registered funds using ESG-like branding: an enhanced disclosure rule and an amendment to the “Names Rule.” The latter proposal, adopted in September 2023, requires ESG funds to invest 80 percent of their assets “in accordance with the investment focus that the fund’s name suggests.” This Note takes the position that the Names Rule amendment furthers the SEC’s mission of investor protection but requires additional guardrails to adapt adequately to the complexities of ESG funds.

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