Tesla could get an ESG boost from the SEC's greenwashing crackdown but funds will still have plenty of wiggle room
- The SEC is trying to rein in so-called greenwashing that mislead investors about a fund's holdings.
- The regulator recently offered new proposals that would tighten rules on how funds are named and boost disclosure requirements.
The proposals were part of an existing effort to stop the ESG label from being used too liberally. But they came a week after Tesla stock was kicked out of the S&P 500 ESG Index despite its focus on making electric vehicles, solar panels, and battery packs — while oil and giant Exxon Mobil was included.
The SEC's newest proposals target funds' naming practices and boost disclosure requirements. One proposal would expand the SEC's Names Rule to include ESG, meaning that a fund billing itself as focused on environmental, social or governance must invest at least 80% of its assets that way.
Another proposal would require ESG impact funds to disclose how they measure progress on their goals and make other ESG funds provide information about the greenhouse-gas emissions produced by the companies they hold. That may sound good for Tesla's ESG prospects, and not so good for Exxon's.
But while the SEC wants to tighten rules toward clarity, it is simultaneously asking the companies and funds to define ESG for themselves, said Maggie Peloso, a partner at Vinson & Elkins focusing on climate change risk management and environmental litigation.
"The commission has taken much more of a free-market approach," she told Insider.
In the case of Tesla and the S&P 500's ESG index, the EV maker was booted because it was low on S&P Dow Jones Indices' own ESG score, namely over its lack of a low-carbon strategy disclosures and questionable codes of business conduct.
The new proposals from the SEC may allow a green-energy company like Tesla to remain outside of the ESG index whereas emitters like Exxon can stay inside. That's because each company, or industry, is weighted against one another in the same field. Tesla may shine on environmental standards compared to an oil company like Exxon, but its issues with social and governance complaints still weigh Tesla down.
"The proposal is still giving private sector actors a lot of ability to define what the 'it' is in a way that's likely to manifest through interactions between fund managers and their investors," Peloso said.
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