BNY Mellon Affiliate Settles SEC Charges Over ESG Statements With $1.5 Million Penalty

BNY Mellon Investment Adviser has agreed to pay a $1.5 million penalty following charges brought by the Securities and Exchange Commission alleging that the company’s statements about its environmental, social and governance funds included misstatements and omissions.

Under the settlement agreement, announced Monday, BNY Mellon Investment Adviser consented to the SEC’s order finding it violated the Investment Advisers Act and the Investment Company Act, but it did not admit or deny the SEC’s findings. The company promptly took action to correct the issues and cooperated with the investigation, according to the SEC, and agreed to a cease-and-desist order and a censure, along with the fine.

“Registered investment advisers and funders 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,” Sanjay Wadhwa, deputy director of the SEC’s division of enforcement and head of its climate and ESG task force, said in a statement. “Here, our order finds that BNY Mellon did not always perform the ESG quality review that it disclosed using as part of its investment selection process for certain mutual funds it advised.”

The order focused on BNY Mellon Investment Adviser’s responses to ESG questions on requests for proposals on its Overlay Funds. These funds are separate from the unit’s Sustainable Funds, which incorporate ESG principles as part of their main investment strategy. The Overlay Funds include six individual funds (BNY Mellon Global Equity Income Fund, BNY Mellon International Equity Fund, BNY Mellon Variable Investment Fund–International Equity Portfolio, BNY Mellon Global Real Return Fund, BNY Global Emerging Markets Fund and BNY Mellon Global Dynamic Bond Income Fund) with a combined net assets of more than $5 billion, according to the SEC.

Increased Scrutiny

The settlement is the latest evidence that the SEC is following through on its commitment to curb the practice of “greenwashing,” in which financial services institutions make unsupported claims about their approach to vetting investments based on ESG factors. Last month, the organization charged a Brazilian mining company with making false and misleading claims about the safety and environmental impact of its dams.

SEC’s Climate and ESG Task Force launched in March 2021 to analyze disclosure and compliance issues around advisers’ and funds’ ESG strategies. The agency named ESG investing as one of its priorities for this year, citing the risk that false or misleading disclosures could result in misinformed investors.

The SEC is not the only governmental watchdog taking a closer look at ESG claims. Last month, the Federal Trade Commission reached an agreement with Kohl’s and Walmart over claims that the retailers’ marketing inaccurately described the environmental impact of the production of “bamboo” items. In that case, Kohl’s and Walmart agreed to pay $2.5 million and $3 million, respectively.

While studies show that ESG investing has garnered capital from both institutional and individual investors, defined contribution plans have been slower to incorporate such options into their plan menus.

The 2021 PLANSPONSOR Defined Contribution Survey found that just 15% of plans included ESG funds on their investment menu. That share may grow amid strong participant demand. Schroder’s 2022 U.S. Retirement Survey found that nearly three-quarters of plan participants said they would or might increase their overall contribution rate if their plan offered ESG options.