One of the US investment industry’s top regulators has called for asset managers to provide clearer explanations of how environmental, social and governance metrics could affect the performance of ESG-labelled funds.

Sustainable investment funds are gathering record-breaking inflows and attracting mounting scrutiny from US regulators, who are concerned that not enough information is being provided to retail investors to allow them to properly compare available choices.

Elad Roisman, one of the four most senior officials at the Securities and Exchange Commission, said asset managers that wanted to use the labels “ESG”, “green” and “sustainable” to name or advertise funds should be required to explain how these terms would influence the strategy and objectives of an investment product.

“Retail investors who want ‘green’ or ‘sustainable’ products deserve more clarity and information about the choices they have,” said Mr Roisman at the Society for Corporate Governance’s national conference.

Improvements in disclosure standards by asset managers would help investors to better understand whether an ESG fund was prioritising environmental or social goals above financial returns.

“Do retail investors know if they are leaving money on the table?” asked Mr Roisman.

He questioned if asset managers were using ESG as a “virtue signalling tactic” to present themselves favourably to investors that wanted to achieve the double benefit of doing well financially while also doing good for society.

Mr Roisman expressed concerns about so-called greenwashing after highlighting the misleading claims about positive environmental benefits made by an unnamed green bond fund.

“The asset manager was taking credit for all the environmental accomplishments of every project it had invested in, rather than the fund’s share alone,” said Mr Roisman.

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Jay Clayton, SEC chairman, last month warned about the risks of investors being misled by ESG ratings which combined environmental, social and governance metrics into a single score.

The comments from two of the SEC’s top officials highlight the growing tensions between US regulators and asset managers who are pressing for improvements in ESG disclosure and reporting standards.

A report published last week by the US Government Accountability Office highlighted the difficulties faced by asset managers and public pension plans in comparing ESG data released by public companies.

The investor advisory committee that sits inside the SEC has also recently recommended that the regulator should adopt new rules to ensure greater harmonisation of ESG disclosures by public companies.

But Mr Roisman expressed his “serious reservations” about the calls for the US government to require public companies to disclose a wide range of ESG information in reports to regulators and investors.

Noting that public companies are already required to disclose “material information” to their investors, Mr Roisman said that the SEC should stick to its principles-based approach to regulation and not abuse its power by pursuing an environmental and social vision for the world.

Via Financial Times