Earlier this month, we wrote regarding the Securities and Exchange Commission’s (SEC) ESG Task Force filing its first complaint against a publicly-traded company for allegedly presenting fraudulent information to investors regarding the safety of its dams, which touches on both “E” and “S” factors related to ESG. However, prior to May 23, 2022, the ESG Task Force had not yet publicly announced any settlement order in which it detailed climate-related enforcement action as the impetus for the settlement order. On May 23, 2022, the ESG Task Force made its first public statement directly linking a settlement order to climate-related issues. Fines of $1.5 million were agreed upon by BNY Mellon Investment Adviser, Inc. (part of the BNY Mellon parent entity) for allegedly misleading clients by representing that fund investments were vetted for ESG factors when in fact no such vetting had taken place.

The latest action by the SEC underscores the incredible importance of taking a measured approach to all types of advertising, marketing, ESG statements, or other information disclosures that touch on ESG factors, as well as ensuring that promised ESG analysis takes place in appropriate fashion. Firms that fail to do so are likely opening themselves up to significant risk of enforcement action and penalties.

SEC ESG Task Force

In March 2021, the SEC formed the Climate and Environmental, Social, and Governance Task Force (ESG Task Force) within its Division of Enforcement. Hand in hand with the legal world’s attention on greenwashing in 2021, the SEC’s ESG Task Force was created for the sole purpose of investigating ESG-related violations. At the same time, the SEC also announced that it intended to create rules for company disclosures related to ESG factors, including climate disclosures. The goal of the SEC ESG decision is to create standardized, comprehensive disclosure requirements, making it easier for investors to compare between companies.

The SEC’s actions were well-timed, as 2021 saw an enormous increase in investor demand for ESG-related and ESG-driven portfolios. There is considerable market demand for ESG portfolios, and whether this demand is driven by institute influencers or simple environmental and social consciousness among consumers is of little importance to the SEC – it simply wants to ensure that ESG activity is being done properly, transparently, and accurately.

BNY Mellon Investment Advisors ESG Misrepresentation Allegations

The $1.5 million agreed-upon penalty by BNY Mellon Investment Adviser Inc. is incredibly significant to investment firms not only for present-day and future action with respect to ESG representations but also for past practices in which ESG was factored into marketing or portfolios. The essence of the charge against BNY was that between July 2018 and September 2021, BNY either represented or implied that investments in its funds were vetted for ESG factors. However, the SEC ESG Task Force alleged that numerous equity and corporate bond investments “…did not have an ESG quality review score as of the time of the investment.” In addition to the penalty, BNY agreed to stop publishing “ESG vetted” investment options without scoring information, and it agreed to update prior disclosures to accurately reflect the information represented.

In a statement as part of the settlement, an ESG Task Force member stated “As this action illustrates, the [SEC] will hold investment advisers accountable when they do not accurately describe their incorporation of ESG factors into their investment selection process.”

Significance of SEC ESG Task Force Settlement

This week’s ESG Task Force settlement and the statements made by the Task Force representative show that the SEC is committed to pursuing companies that it believes are deliberately misrepresenting ESG-related information to the public and to investors. While BNY was the first firm targeted by the ESG Task Force, it certainly will not be the last. Any statements, disclosures, prospectus materials, or even marketing materials must be scrutinized closely for accuracy, while sound and reasonable marketing statements that touch on ESG factors must be the standard for companies to follow.