- BNY Mellon agreed to pay a $1.5 million penalty after the Securities and Exchange Commission (SEC) found the bank’s investment adviser division misstated how it applied environmental, social and governance (ESG) criteria when making investment decisions for some of its mutual funds, the regulator said Monday.
- The first-of-its-kind fine comes as the regulator plans to enact “consistent, comparable and decision-useful” standards for disclosure on climate risk after a public comment period ends June 17. The SEC on Wednesday is set to propose new rules concerning the descriptive language a mutual fund can use to call itself green.
- “We take our regulatory and compliance responsibilities seriously and have updated our materials as part of our commitment to ensuring our communications to investors are precise and complete,” a BNY Mellon Investment Adviser (BNYMIA) spokesperson said in a statement.
Between July 2018 and September 2021, BNYMIA indicated in prospectuses for six U.S. mutual funds that an affiliated sub-adviser pursued ESG quality reviews when researching all investments, the SEC said Monday.
However, the regulator asserted, the funds “made investments that had not always received ESG quality reviews.” The funds, which held $5.3 billion in net assets as of March 31, “incorporate ESG considerations into investment decisions, but do not have a specific mandate to follow ESG principles for any investment,” the SEC said.
In particular, 67 of 185 investments made by a mutual fund advised by BNYMIA between January 2019 and March 2021 lacked an ESG quality review score at the time of investment, the SEC found. Those investments accounted for roughly one-quarter of the fund’s net assets at the end of that time frame.
BNYMIA “failed to adopt and implement policies and procedures … to prevent the inclusion of untrue statements of fact” in prospectuses and other documents, the regulator said Monday, adding that compliance employees were unaware of missing quality reviews until March 2020.
“Investors are increasingly focused on ESG considerations when making investment decisions,” Adam Aderton, co-chief of the SEC enforcement division’s asset management unit, said in a statement. “The commission will hold investment advisers accountable when they do not accurately describe their incorporation of ESG factors into their investment selection process.”
The SEC, citing its mandate to protect investors, has pledged to crack down on companies involved in finance and other sectors that overstate their commitment to sustainability.
Nearly three out of five executives (58%) responding to a global survey sponsored by Google Cloud said their companies engaged in greenwashing — exaggerating efforts to limit harm done to the environment.
Thirty-five percent of U.S. executives, and 29% worldwide, agreed with the phrase, “my company treats sustainability like a PR stunt,” according to the survey by Harris Poll of 1,491 CFOs and other executives in the C-suite or vice president level across 14 markets.
BNYMIA is apparently not the only financial institution scrutinized by the SEC for sustainability claims. The agency said in an April 2021 “risk alert” that some investment advisers, investment companies and private funds may have misguided investors about their approach to investing based on ESG principles.
Some investment firms lacked sufficient policies and procedures for ESG investing, provided “weak or unclear” documentation for ESG-related decisions and pursued compliance efforts that did not appear to safeguard against flawed disclosures or marketing information, the agency said, describing a review by the examinations division.
Under a proposal announced in March, the SEC would require companies to describe on Form 10-K their governance and strategy toward climate risk and their plan to achieve any targets they’ve set for curbing such risk. The agency would also mandate that public companies disclose their greenhouse gas emissions.
“Companies and investors alike would benefit from the clear rules of the road,” SEC Chair Gary Gensler said in announcing the proposal.