SEC Proposals for ESG Ignore 80 Years of Financial Science
The regulator has some valid concerns about “greenwashing,” but its solutions are straight out of the New Deal, top-down playbook from the 1930s.
The Security and Exchange Commission is taking the wrong approach to ESG investing.
Photographer: Spencer Platt/Getty Images
The US Securities and Exchange Commission is concerned that retail investors who want their investment managers to factor environmental, social and governance considerations into investment decisions are being duped by “greenwashing” — token actions with no material effects —and marketing materials that overstate what the managers are actually doing. This is a valid concern, but the SEC’s solutions are straight out of the New Deal, top-down playbook from the 1930s.
The first change proposed by the SEC is to apply the “80% rule” to funds with names that suggest a focus on ESG focus, meaning 80% of the asset value of the fund must be in assets described by the name. But for the last 70 years, Modern Portfolio Theory has held sway in finance. You don’t evaluate investment securities one at a time; you look at the statistical properties of the portfolio as a whole.