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On May 25th 2022, the SEC proposed new rules to promote consistent, comparable, and reliable information for responsible investors. This would require funds managers and financial advisors to provide more specific disclosures for their environmental and sustainable product offerings, such as specifications on ESG-related voting matters and reporting on the particular ESG impact they hope to achieve.
Companies will soon have to specify what exactly makes their product sustainable, and as a result, the SEC will be able to more easily identify exaggerated ESG credentials in investment products. Many regulators and responsible investors welcome this change with open arms, given how prominent greenwashing (also known as the phenomenon where companies will exaggerate or overplay the sustainability of their products to investors) is in the financial sector. Financial advisors and investment organizations, however, warn the SEC to give some leeway as strict regulation could reduce the amount of advisors who want to enter the space.
Since the inception of sustainable reporting, there have been issues with standardizing the process because rather than creating one standardized framework for all companies to follow, there are numerous frameworks with different requirements to choose from, such as the TCFD, SASB, and the GRI. This has led to greenwashing becoming increasingly prevalent in company reporting, since they can choose to leave certain parts out that would make them look unsustainable. With the new rules the SEC proposes, sustainability reporting is on the path for further standardization, which means the ease of greenwashing will be dramatically reduced.
As of now, the proposed SEC ruling only applies to investment companies and companies in the financial sector, but this ruling is only the first step in a movement that will lead to the disclosure among all publicly held businesses. As this transition occurs, the SEC will quickly expose and punish the companies that have been greenwashing, and although this process could take a few years, the move toward mandatory sustainable disclosure will be irreversible as the world focuses on a more sustainable future.
Due to the early adoption of these regulations in the financial industry, all responsible investors will be called to attention to provide data that can back their sustainable investment decisions. A nicely written CSR report and an ESG score will no longer be enough for companies to label be considered as sustainable, instead investors along with a sustainable investment thesis will need real data to back up their investment decisions.
At Physis we’ve prepared a solution to help keep financial institutions our of trouble with the SEC. Our impact data is specific to your portfolio and can tell you the amount of emissions, renewable energy use, percentage of women employed and so much more, since the day of your first investment. Physis also offers a suite of other tools to ease the lives of investors such as a security screener, client CRM, dynamic and PDF reporting, easy API integration, and more. Find our how we can help you today!