The U.S. Securities and Exchange Commission on May 25 proposed new disclosure mandates for investment advisers and firms that market funds focused on environmental, social and governance priorities.

The proposal comes as the SEC seeks to hold companies accountable for their ESG and sustainability promises amid growing investor demand for more clarity. The agency is also taking comments on a much-debated rule that will require publicly traded companies to report their greenhouse gas emissions annually.

The new ESG proposal tackles a broader effort by companies to show their commitments to issues that go beyond strict financial performance, including social and environmental justice. SEC Chairman Gary Gensler likened the need for ESG standards to the expectations consumers have when they buy milk in a grocery store.

"What does 'fat-free' mean? Well, in that case, you can see objective figures, like grams of fat, which are detailed on the nutrition label," Gensler wrote in a statement published along with the proposed rule. "Funds often disclose objective metrics as well. When doing so, investors get a window into the criteria used by the asset managers for the fund and the data that underlies the claim."

But when it comes to ESG investing, "there's currently a huge range of what asset managers might disclose or mean by their claims," Gensler said.

Under the May 25 rule, firms that offer ESG funds would be required to disclose more details on their investment strategies, and to report such information in "structured data language." Some funds would also need to disclose what ESG impacts they seek to achieve and what key metrics they use to assess progress.

Those that claim to consider environmental factors in their investment strategies would be required to disclose the carbon footprint of their portfolios.

"While we have just begun reviewing these proposed rules, the actions taken by the SEC would address concerns about greenwashing, and result in greater investor confidence that sustainable funds are what they say they are," said Steven Rothstein, managing director of the Ceres Accelerator for Sustainable Capital Markets at the investor network Ceres.

"More consistent disclosures are sorely needed to help investors take advantage of this dynamic and growing market," Rothstein said in a statement.

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