Dear Ms. Countryman:

My name is Jennifer Schulp, and I am the director of financial regulation studies at the Cato Institute’s Center for Monetary and Financial Alternatives. I appreciate the opportunity to comment on the Securities and Exchange Commission’s proposed amendments to rules and forms under the Investment Advisers Act of 1940 and the Investment Company Act of 1940 “to require registered investment advisers, certain advisers that are exempt from registration, registered investment companies, and business development companies, to provide additional information regarding their environmental, social, and governance (‘ESG’) investment practices.” The Cato Institute is a public policy research organization dedicated to the principles of individual liberty, limited government, free markets, and peace, and the Center for Monetary and Financial Alternatives focuses on identifying, studying, and promoting alternatives to centralized, bureaucratic, and discretionary financial regulatory systems. The opinions I express here are my own.

The Commission states that these proposed amendments “are designed to create a consistent, comparable, and decision-useful regulatory framework for ESG advisory services and investment companies to inform and protect investors while facilitating further innovation in this evolving area of the asset management industry.” While additional disclosure from investment companies and investment advisers that are pursing ESG strategies may provide useful information to investors, I share the concerns stated by Commissioner Hester Peirce in her statement regarding this proposal. I write specifically to highlight how this expansive and prescriptive proposed disclosure framework will impose unnecessary costs on investors, potentially limit investment choice, and not result in consistent, comparable, and decision-useful disclosures.

First, the proposed disclosure framework offers little to enhance the Commission’s exercise of its existing authority under existing rules but imposes costs on investors whose funds and advisers would expend resources to comply with the framework. A central concern of the Commission in proposing these amendments is combatting “greenwashing.” While greenwashing has no “universally accepted definition,” it is generally understood to be when an investment is presented as more environmentally friendly or socially responsible than it actually is. Pinpointing when an investment is greenwashed is difficult—if not impossible—due to the many different understandings of what it means for an investment to be considered green or sustainable. Indeed, in many respects, whether an investment is environmentally friendly or socially responsible is in the eye of the beholder. Indeed, the Commission rightly recognizes this by acknowledging that the proposed amendments do not “define ‘ESG’ or similar terms.”

This inherent subjectivity and lack of consensus calls into question whether combatting greenwashing is a realistic goal. Regardless of the specifics of greenwashing, the Commission has long been tasked with ensuring that investors receive the investments that they are promised, and the Commission already has rules to prevent investors from being misled, including anti-fraud rules and rules about how investment funds and their advisers communicate with their investors. The Commission has recently used these tools to address similar issues in the ESG investment context.