The U.S. Securities and Exchange Commission (SEC) announced the adoption of new rules that will require   funds with names that suggest an investment focus on ESG or sustainability-related factors to invest at least 80% of the value of assets in accordance with those factors.

The SEC action consists of an amendment of the Commission’s “Names Rule,” first adopted in 2001, as a measure to prevent fund names from misrepresenting their inherent investments and risks, which included a requirement for investment companies with names that suggest a focus on a certain type of investment to adopt a policy to invest at least 80% of the value of their assets in those investments.

The adopted amendments expand the 80% rule to apply to funds with names that suggest a focus on investments with particular characteristics. While not applying only to ESG funds – funds labelled as “growth” or “value” would also be included, for example – the ruling focused heavily on ESG funds, noting the rapid increase in investor interest in funds that offer ESG strategies and the proliferation of such funds, as well as the growing potential for greenwashing due to the wide range of ESG-related terms and evolving investor expectations.

The final rule noted that use ESG-related terms such as “sustainable” or “green” present “particular investor protection concerns,” as “funds that consider ESG factors in their investment strategies comprise a thematic area that entails unique considerations, and that involves the use of terminology that may be especially powerful in fund names to attract investors.”

SEC Chair Gary Gensler said:

“Today’s final rules will help ensure that a fund’s portfolio aligns with a fund’s name. Such truth in advertising promotes fund integrity on behalf of fund investors.”

The final rule did not include action in an initial proposal that would have defined the use of ESG terms in the names of “ESG integration funds” as “materially deceptive and misleading.” ESG integrations funds consider ESG factors alongside other non-ESG factors in investment decisions, although the ESG factors are not more significant than the other factors. In a statement announcing the new rule, Gensler said that this aspect of the proposal is still under consideration.