SEC Considers Asking Funds for Criteria Used to Tout Sustainability

WASHINGTON—Asset managers that say they allocate capital to environmentally or socially responsible companies might eventually have to back up those claims.

Wall Street’s main regulator is considering whether to require fund managers to disclose the criteria and data they use to apply labels such as green, low-carbon or sustainable. Securities and Exchange Commission Chairman Gary Gensler said Wednesday he has asked his staff to make recommendations for new disclosure requirements for such funds and expects to seek public comment on the matter later this year or in early 2022.

“We are looking at funds that say they are something: They are green, they’re sustainable and the like. What stands beneath that right now?” Mr. Gensler said in a video conference with members of the European Parliament. “And we think that it would be appropriate…to say, ‘You’ve got to disclose an awful lot more.’ ”

So-called sustainable investing has exploded in recent years, with trillions of dollars flowing into funds that say they screen assets based on environmental, social and governance factors, or ESG. With rising investor demand has come an opportunity for fund managers to charge higher fees at the same time profit margins across the broader asset-management industry are declining.

Industry insiders have criticized the absence of clear standards for ESG investing. Tariq Fancy, former chief investment officer for sustainable investing at BlackRock , wrote in June that fund managers lack clear standards for ESG investing and sometimes mislead the public through their marketing messages.