ESG Funds Plan May Create ‘Garbage In, Garbage Out’ Problem: SEC Roundup

Welcome to SEC Roundup, a bimonthly video series by Paul Hastings partners and former Securities and Exchange Commission senior trial counsels Nick Morgan and Tom Zaccaro exploring current SEC topics with thought leaders and industry experts.

In this episode, Morgan and Zaccaro speak with Eric Pan, president and CEO of the Investment Company Institute in Washington, and Paul Hastings partner Ira Kustin about the SEC’s recently proposed ESG rule — Enhanced Disclosures by Certain Investment Advisers and Investment Companies about Environmental, Social, and Governance Investment Practices — which would impose new restrictions to ensure ESG funds accurately describe their investments.

The plan, the SEC states, seeks to “create a framework for disclosures about a fund or advisor’s ESG-related strategies.”

Pan argues that the SEC plan “definitely has the possible unintended consequence of creating a ‘garbage in, garbage out’ problem where because available information, which the SEC would like funds to disclose, is not available for funds to collect, will funds actually be able to provide useful information to the public as intended by the SEC rule writers.”

Also, Pan added, will the SEC’s call for categorizing funds in different investment strategies “end up tying the hands of fund managers?”

See the video above for the discussion with Pan and Kustin.

(Correction: An earlier version of this article mistakenly included a photo of Daniel Gallagher, a former SEC commissioner who is now Robinhood’s chief legal officer.)