ESG law is emergent and fast evolving such that today, the best sources are blogs and Twitter, not bound statutes and printed law reviews.

Last week U.S. Securities and Exchange Commission Chair Gary Gensler Tweeted about the future of ESG regulation.

You do not need to be a futurist to know that SEC regulation of ESG is coming although precisely when has been unclear, however, it is now apparent that the SEC will release a proposal at its March 21 Open Meeting. The last formal remarks on ESG by Gensler were on July 28, 2021 before the European Parliament and focused almost exclusively on greenhouse gas emissions to the detriment of other ESG factors. So, much can be gleaned from his Tweet last week, just days before the Open Meeting announcement about the “Enhancement and Standardization of Climate-Related Disclosures for Investors.”

Gensler Tweeted, with an embedded video from the SEC’s YouTube channel,

“If it’s easy to tell if milk is fat-free by just looking at the nutrition label, it might be time to make it easier to tell if “green” or “sustainable” funds are really what they say they are.”

SEC Chair Gary Gensler

Significantly, he did not suggest new statutes or legislative action by Congress, but rather a regulatory act by the SEC. It is worthy of note the SEC has broad authority and it is difficult to conceive that the independent agency could exceed the powers granted to it (.. which is very different than the current Supreme Court challenge in West Virginia v. EPA that the executive agency exceeded its authority granted in 1970, when it was created, by now regulating greenhouse gases a pollutants).

Gensler’s Tweet describes that the new SEC effort might “build upon” the existing naming rules and conventions authorized by the Investment Company Act of 1940. Those rules prescribe that an investor should be able to tell what an investment firm does by the name of the fund.

And it should not be lost on anyone that the ESG space is far larger than only investment funds so this action all but certainly portends more and additional regulation by the Federal government, by states and by sovereigns around the globe. This may be a good step toward striking a balance by modifying and updating existing regulations versus enacting entirely new statutory systems.

Continuing with the analogy to fat free milk, Gensler described that an investor in a fund making ESG claims should be like a supermarket shopper reading a food box label for the “ingredients underlying these funds.” In the earlier talk to the European Parliament committee he spoke approvingly about the U.K. Net Zero Strategy, which may well be the basis of a new SEC requirement for funds to “disclose the criteria and underlying data they use in” in ESG investing. Which is consistent with his Tweet now describing that the public should be able to determine, “is a fund really what they say they are?”.

Gensler reported that there are currently more than 800 investment funds making ESG claims over trillions of dollars of assets. Those funds, including those making “green” or “sustainable” claims will be the first targets of the soon to be announced ESG regulations. And such may be well received by the business community that is already subject to regulation, from the Federal Trade Commission to the Department of Agriculture, defining terms of green, sustainable and the like. 

We expect Gensler will answer his own question, “so what do investment funds have in common with fat free milk?” .. on March 21. And you can read about it here or get a jump on where the SEC may be going by reading the U.K. Net Zero Strategy.