On 23 May 2022, the US Securities and Exchange Commission (SEC) fined BNY Mellon Investment Adviser (BNYMIA) $1.5 million for ESG failings.
BNYMIA was fined for misstatements and omissions about ESG considerations in making investment decisions for certain mutual funds that it managed. From July 2018 to September 2021, BNYMIA represented or implied in various statements that all investments in the funds had undergone an ESG quality review, even though that was not always the case. See the Order here.
Comment
Morningstar states that global sustainable fund assets totalled $2.7 trillion in Q1 2022, up from $1 trillion in 2019. The SEC, like other financial regulators, is keeping a close eye on the sector given the scope for misconduct.
In recognition of this, in March 2021, the SEC's Enforcement Division formed a Climate and ESG Task Force which is proactively identifying ESG-related misconduct. One of its tasks is to analyse disclosures and compliance issues relating to investment advisers' and funds' ESG strategies. The SEC has proposed rules to establish how financial firms can apply ESG or other green labels to investment funds which will give the Task Force further teeth.
Like the SEC, the Financial Conduct Authority (FCA) has been setting clear markers. Nikhil Rathi, the FCA's CEO, stated in his speech at COP26 on 3 November 2021 that the FCA is "targeting potential harms to market integrity and consumers as companies and firms adapt to the unfolding ESG landscape." In its 2021 Business Plan, the FCA recognises the "need to ensure that ESG claims and credentials stand up to scrutiny, that consumers' interests are protected, and that competition remains effective in the interests of consumers."
In July 2021, the FCA issued a 'Dear Chair' letter to authorised fund manager chairs. This highlighted the FCA's concern about the risk of misleading ESG-related claims by products and providers. In November 2021, the FCA published a Discussion Paper, entitled 'Sustainable Disclosure Requirements (SDR) and investment labels'. This invited views on sustainable disclosure requirements for asset managers and certain FCA-regulated asset owners as well as on the sustainable investment labelling system.
The scene has been set. It is not difficult to imagine regulatory action in Europe and in the US being a precursor to enforcement action by the FCA.