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Sustainability Matters

In a Move to Stifle ESG Misrepresentation, the SEC Fines BNY Mellon $1.5 Million

The settlement affects six funds and coincides with 'investor demand for ESG strategies.'

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Bank of New York Mellon's (BK) investment advisory division agreed to pay $1.5 million to the Securities and Exchange Commission to settle charges of making misstatements about its sustainable practices in six mutual funds. 

In a statement, the SEC said that BNY Mellon Investment Advisor was charged with making "misstatements and omissions about environmental, social, and governance considerations in making investment decisions for certain mutual funds that it managed" between July 2018 and September 2021. According to the order, BNY said all the investments in its funds during the period "had undergone an ESG quality review, even though that was not always the case." However, "numerous investments held by certain funds did not have an ESG quality review score as of the time of investment," the SEC said. 

BNY neither admitted nor denied the claims.

The settlement comes at a time when investors are increasingly concerned about greenwashing. Advisors and funds "are increasingly offering and evaluating investments that employ ESG strategies or incorporate certain ESG criteria, in part to meet investor demand for such strategies and investments," said Sanjay Wadhwa, deputy director of the SEC's division of enforcement, in the statement.

Indeed, this week, the SEC will propose new rules about ESG disclosures.

A BNY spokesperson said the matter related to the ESG review process for six U.S. mutual funds, none of which was in the "sustainable fund range." The BNY Mellon unit oversees more than $380 billion in assets under management.

"Seems like a pretty straightforward case of a fund manager not following its process," says Jon Hale, director of sustainability research for the Americas at Morningstar. "Many fund managers have added ESG criteria in recent years, but new processes can take time to implement and practice in the way they are intended."

In an April "risk alert," the SEC said it would focus on three areas in future examinations: portfolio management, performance advertising and marketing, and compliance programs. Deficiencies included inconsistencies between portfolio management practice and disclosures about ESG approaches. "The risk alert provides the most specific guidance to date from the SEC and its staff as to their expectations for advisors in the ESG area," wrote authors led by Robin Bergen from law firm Cleary Gottlieb Steen & Hamilton.

In an April speech at the CFA Society of Washington D.C.'s ESG conference, the SEC's Adam Aderton, co-chief of the enforcement division's asset-management unit, said that the risks of misrepresenting how ESG factors are used in portfolio selection are "an issue that's top of mind at the commission right now."

Leslie Norton does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.