SEC orders BNY Mellon to pay $1.5 million for overpromising on ESG

The Securities and Exchange Commission announced Monday that it ordered BNY Mellon Investment Adviser Inc. to pay $1.5 million to settle charges that the firm misrepresented mutual funds as using environmentally friendly investment strategies.

From July 2018 to September 2021, BNY Mellon asserted that all investments included in its Overlay Funds had undergone environmental, social and governance quality reviews to ensure they implemented ESG principles, according to the SEC order. The firm committed to identify ESG risk and opportunities in the securities that it selected for the funds and to ensure that the companies issuing those securities managed ESG challenges well.

BNY Mellon Investment Adviser established a responsible investment team to review equity securities and corporate bonds. For certain mutual funds, which were called “sustainable funds,” the team did an ESG assessment for all investments. But the team did not examine investments for the Overlay Funds.

“Registered investment advisers 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,” Sanjay Wadhwa, deputy director of the SEC’s Division of Enforcement and head of the agency’s Climate and ESG Task Force, said in a statement. “Here, we allege that BNY Mellon Investment Adviser 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.”

BNY Mellon Investment Adviser, a subsidiary of the Bank of New York Mellon Corp., did not admit or deny the SEC’s findings. The agency said the firm cooperated with its investigation.

“BNY Mellon Investment Adviser (BNYMIA) is pleased to resolve this matter concerning certain statements it made about the ESG review process for six U.S. mutual funds,” BNY Mellon spokesperson Courtney Woolston said in a statement. “While none of these funds were part of the BNYMIA ‘Sustainable’ fund range, 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. We are proud of our heritage and track record in responsible investment and are committed to continuing to be a trusted partner for our clients’ responsible investing needs.” 

The enforcement case demonstrates the SEC’s increased scrutiny of ESG investing.

“Investors are increasingly focused on ESG considerations when making investment decisions,” Adam S. Aderton, co-chief of the SEC enforcement division’s asset management unit and a member of the ESG task force, said in a statement. “As this action illustrates, the Commission will hold investment advisers accountable when they do not accurately describe their incorporation of ESG factors into their investment selection process.”

SEC reviews of purported ESG investment strategies are likely to become routine. Investment advisers should review their policies and procedures for using the ESG label, said Bryan McGannon, director of policy and programs at U.S. SIF, The Forum for Sustainable and Responsible Investment.

“If they haven’t already begun doing that, [the SEC’s enforcement action] is an eye-opener that they should start as soon as possible,” McGannon said.