On Monday, BNY Mellon agreed to pay $1.5 million to settle ESG-related charges with the SEC, the first ESG enforcement action to hit the news since the SEC issued a risk alert in April 2021.
The charge against BNY Mellon is simple: the firm claimed it had an ESG diligence process and didn’t always follow it.
BNY Mellon claimed in multiple RFPs that it conducted ESG quality reviews for all securities across its portfolios prior to making an investment (including those that were not labeled as ESG portfolios). The SEC found that a substantial number of securities were purchased in non-ESG labeled products prior to the ESG quality review being conducted. The SEC in their ruling offered one example of a fund in which 67 out of the 185 investments lacked an ESG quality score at the time of investment.
Guidance for advisors when clients ask questions about ESG credibility
Earlier this year, SEC Chair Gary Gensler said that the commission is looking into rules for ESG investment products, including disclosures for fund managers regarding the criteria used and data utilized for “ESG,” “green,” or “sustainable” labeled products. Alongside regulator scrutiny, greenwashing now tops ESG concerns of retail investors as well. This recent fine for BNY Mellon is further proof that the SEC is reviewing a firm's process for screening for ESG.
ESG clients may see this news and question the validity of ESG investment options their advisor put them into. Advisors should know three things:
- Greenwashing and mislabeling do exist in the industry. You should not make ESG decisions based purely on the name of a product or the description of marketing materials.
- If you use ESG data, to evaluate your ESG choices for your clients, as long as you follow your stated process, you will not be in the same SEC review category as BNY Mellon.
- If you use ESG analysis tools, you can prove to your clients that you are providing additive value. Anyone can pick an ESG fund based on the name. If you are generating reports and running screens to align clients' portfolios with their values, then you are helping them overcome greenwashing to actualize their values.
How YourStake Helps
At YourStake, we provide data and tools to investment firms and advisors to help them align investments with individual client preferences. We help advisors show the impact of fund portfolios according to thematic issues, such as climate or gender, or a combination of issues most relevant to each client. The data we provide can be drilled down to specific evidence; if we are presenting air pollution data, you can see down to which factories emitted which chemicals where, and to what volume. We can be used as part of an established process without the need for abstract scoring.
We are proud to help many advisors build out and streamline their own processes around choosing and reporting on ESG and other values-aligned portfolios, and we are proud to be able to do so in ways that hold fund managers and public companies accountable for the claims that they make, to encourage real actions and filter out greenwashing.