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SEC levies penalties for ESG omissions and lies

On Behalf of | Jun 17, 2022 | Commercial Litigation

On May 23, the Securities and Exchange Commission (SEC) charged BNY Mellon Investment Advisor with a $1.5 million penalty. BNY Mellon claimed that specific mutual fund investments had passed the Environmental, Social and Governance (ESG) review when, in reality, they did not always conduct the review. The settlement involves a penalty, censure and a cease and desist from conduct.

Why are ESG reviews critical?

ESGs evaluate the company’s risk associated with Environmental, Social and Governance factors, which standard financial evaluations do not cover. There is also an overall score. Each of the three areas is scored using publicly available information in the media and annual reports. These scores help investors better anticipate future business risks and opportunities. It is also supposed to aid long-term value creation and strategic thinking.

If the company gets a low ESG rating, the stock may be regarded as an unsustainable asset, a riskier investment, resulting in a lower valuation. Low ratings can lead to investors selling stock they own or not buying stock. Responsible investment is also an increasing priority for investors. Some examples of data ESG reviews weigh include:

  • Impact on climate change
  • Consumption of natural resources
  • Regard for worker’s rights

While these metrics can provide investor confidence, there is no consistent measurement metric. Investors are currently best off looking at the details used to create the scores.

A lapse in judgment

BNY Mellon hired a sub-advisor responsible for conducting the review that provided accurate information to investors, mutual fund boards, and other investment advisors. Still, the company allowed the reviewer to pick some funds that did not undergo ESG review.

Another action in April

The SEC filed an ESG-related action in April as well. This one involved the publicly traded Vale mining company of Brazil that made multiple false claims in an ESG about the safety of the Brumadinho dam it built. The company raised $1 billion from investors. Not only were the ESG disclosures fraudulent, but the dam’s subsequent collapse also led to the deaths of 270 people. News of this catastrophe led to a $4 billion drop in Vale’s market value.

More to come

The SEC promises more actions on ESG misrepresentations using its newly launched Climate and ESG-related task force. The SEC also has proposed a rule to create ESG disclosure standards to provide greater transparency to investors.