Gary Gensler, chairman of the Securities and Exchange Commission, at the SEC headquarters in Washington, on July 22, 2021.Melissa Lyttle/Bloomberg via Getty ImagesThe Securities and Exchange Commission on Wednesday proposed two rule changes that would prevent misleading or deceptive claims by U.S. funds on their environmental, social and corporate governance (ESG) qualifications and increase disclosure requirements for those funds.The proposals, which are subject to public feedback, come amid mounting concerns that some funds seeking to profit from the rise in ESG investing practices have misled shareholders over what’s in their holdings, a practice known as greenwashing.The measures would provide guidance on how ESG funds must market their names and investment practices. One proposal would update the so-called Names Rule to encompass characteristics related to ESG.The current Names Rule says that if a fund’s name suggests it’s focused on a particular class of investment, such as government bonds, then at least 80% of its assets must be in that class. The change would extend the rules to “any fund name with terms suggesting that the fund focuses in investments that have (or whose issuers have) particular characteristics.” Therefore, funds with “ESG” in their name would have to clearly define the term and then ensure that 80% of the assets in the fund adhered to that definition.”A lot has happened in our capital markets in the past two decades. As the fund industry has developed, gaps in the current Names Rule may undermine investor protection,” SEC Chair Gary Gensler said in a statement.”In particular, some funds have claimed that the rule does not apply to them — even though their name suggests that investments are selected based on specific criteria or characteristics,” Gensler said. “Today’s proposal would modernize the Names Rule for today’s markets.”Global ESG funds received a record $649 billion in investments in 2021 through Nov. 30, up from $542 billion in 2020 and $285 billion in 2019, according to data from financial services firm Refinitiv Lipper. ESG funds now comprise about 10% of worldwide fund assets.The proposals to tackle greenwashing come after the SEC in March debuted broad rules that would require publicly traded companies to disclose how climate change risks affect their business, as well as provide more information on the impact their operations have on the environment and carbon emissions.”ESG encompasses a wide variety of investments and strategies. I think investors should be able to drill down to see what’s under the hood of these strategies,” Gensler said. “This gets to the heart of the SEC’s mission to protect investors, allowing them to allocate their capital efficiently and meet their needs.”Andrew Behar, president of the climate activist organization As You Sow, said the new Names Rule will improve — but not stop — misleading labeling for investors.”The new rule acknowledges the problem but does not fully address it. Investors still need clarity on exactly what ‘sustainable’ and other terms like ‘fossil-free,’ ‘low-carbon,’ and ‘ESG’ mean,” Behar said. “It is critical that a fund’s prospectus reflects its philosophy and intent in alignment with its name and holdings.”Rachel Curley, democracy advocate at the nonprofit Public Citizen, said in a statement that the SEC’s new rules on fund portfolios would begin to transform the landscape around “green” investments.”In the current marketplace, retail investors don’t have a clear picture of what it means to invest in a fund whose marketing says it’s ‘sustainable,’ ‘green,’ or ‘ESG,'” Curley said. “The lack of transparency for investors makes it hard to untangle exactly how environmentally-friendly some of these products are.”The proposals will enter a 60-day public comment period after publication in the Federal Register, during which time companies, investors and other market participants can comment on and suggest changes to the rules.— CNBC’s Thomas Franck contributed to this report.