Shutdown Threatens to Undercut SEC’s Momentum on ESG Oversight

SEC Chair Gary Gensler is gaining momentum on his ESG agenda with new investment fund names rules targeting greenwashing, just as a looming government shutdown threatens to pause work on climate disclosure mandates and other rulemaking.

The Securities and Exchange Commission on Sept. 20 adopted regulations intended to better safeguard investors from funds with misleading environmental, social and governance names and other deceptive labels. ESG funds, for example, now must invest 80% of their assets in ways their names suggest, in keeping with requirements for many other investment products.

These are the first ESG-related rules finalized this fall. The agency is looking to build on that momentum by issuing final rules requiring greenhouse gas emissions disclosures in October, according to its latest rulemaking agenda. But it’s unlikely to finish that requirement or advance other significant ESG rulemaking before a potential government shutdown Oct. 1.

Gensler said this week that he’s concerned about the SEC’s ability to oversee financial markets during a shutdown. The chair added that he doubted a closure would ultimately thwart his rulemaking agenda.

“We don’t do it against a clock,” Gensler told reporters in response to questions from Bloomberg Law Sept. 20. “When the staff gets through all the comments, we serve up recommendations to the commission.”

Pace Picks Up

The fund names rules stem from plans the SEC released in May 2022, along with a related proposal for funds to report their portfolio companies’ emissions and make other ESG disclosures. The pair of proposals came two months after the agency put out its draft corporate climate disclosure plans in March 2022.

Gensler told lawmakers earlier this month the SEC often takes one to two years to adopt rules after it proposes them. The two pending proposals on corporate climate disclosures and ESG-related disclosures for funds are more than a year old.

The SEC is aiming to finalize its ESG reporting rules for funds as early as October, the same month the agency is targeting for its corporate climate disclosure regulations, according to the agency’s latest rulemaking agenda.

The commission also is targeting October to release a major ESG proposal that would require companies to report more information about their workforce.

Gensler has declined to say when the SEC will issue rules, though he faces pressure from Democrats and some investor advocates to move quickly. Separately, California lawmakers in their recent session approved legislation requiring corporate emissions disclosures.

The SEC is receiving substantial pushback from the funds industry on the ESG disclosure proposal.

The Investment Company Institute, which represents funds, urged the SEC to toss any emissions reporting directives if the agency hasn’t finalized requirements for companies to report their carbon footprint. Gensler on Sept. 20 declined to say whether the company disclosure rules or the ESG disclosure rules for funds would come first.

The SEC is increasingly unlikely to require funds to report their emissions before it would direct companies to disclose their carbon footprint, said Kelley Howes, a co-chair of the Morrison & Foerster LLP investment management group.

“How could you justify that from a policy perspective?” Howes said.

‘Less Controversial’

The fund names rules the SEC adopted Sept. 20 attracted less concern than the agency’s ESG disclosure plans for funds.

The fund names rules came more than 20 years after the SEC first regulated investment product labels. The new rules cover names that have various thematic investment focuses like “growth” and “value,” in addition to ESG. Funds will have to disclose more about their labels in their prospectuses, along with following the 80% investment policy requirement.

SEC officials have held about 70 meetings so far with representatives of BlackRock Inc., the Investment Company Institute and other members of the public on the proposed ESG reporting rules for funds, according to agency records. The fund names rules brought only about 40 meetings.

The SEC’s comment files contained only about 140 letters from the public on the fund names rules, while the ESG disclosure rules for funds have received about 240 to date, agency records show.

The fund names rules ultimately were adopted on a bipartisan 4-1 vote. Republican SEC Commissioner Hester Peirce, who usually votes against Gensler on rulemaking, joined the chair and Democratic Commissioners Caroline Crenshaw and Jaime Lizárraga to support the rules.

“It was always a less controversial rule,” said George Raine, a partner in the Ropes & Gray LLP asset management group. “The SEC staff, when we’ve talked to them, had a lot less patience for objections to this rule than they did to objections to how the ESG rule might roll through.”

Skeletal Staff

Congress has about a week left to negotiate a deal to keep the SEC and other agencies working after Sept. 30.

The last government shutdown from December 2018 to January 2019 hobbled the SEC. Only 122, or 3%, of the agency’s 4,418 employees at the time, worked full time during the shutdown, according to a Bloomberg Law analysis. Another 750, or 17%, assisted part time.

The SEC’s Enforcement Division had the most staff working. The agency’s Division of Corporation Finance, which drafts disclosure rules for companies, had only one full-time employee—its director.

Gensler said the SEC will get by the best it can with a skeletal staff if there’s another shutdown starting Oct. 1.

“I’ll be coming in,” Gensler said. “There’s a few of us that will come in.”

—With assistance from Matthew Bultman.