Investment Giant Pays the Price for Misrepresented ESG Funds
Investment advisors have seen a surge in demand for investment products that integrate environmental, social, and governance (ESG) factors. With this surge has come about an increase in misrepresented ESG funds. The most recent and costly example can be seen in BNY Mellon. BNY Mellon was fined $1.5 million by the Securities and Exchange Commission (SEC) for misleading claims about their ESG mutual funds. While the Investment Adviser neither confirmed nor denied these allegations, they agreed to pay the fine. BNY Mellon admitted that they needed to be more transparent when communicating with investors regarding ESG-related investments. This has only fueled the need for more precise and established boundaries around what constitutes as a true ESG investment.
The SEC’s Division of Examinations Risk Alert from 2021 cautions investors regarding the promises that ESG funds make. The Risk Alert warned that many ESG funds which claimed to follow global ESG standards in required disclosure and client-facing documents did not follow the standards they pledged to. This stemmed from a lack of screening and reliance on ratings from sub-advisers. Many advisors do not have sufficient policies surrounding the implementation and monitoring of clients’ positive and negative ESG screens. This leads to portfolios with prohibited securities and a lack of ‘green’ investments.
The Risk Alert also cautioned that many compliance departments have a poor understanding of ESG fund analysis and limited say in their marketing campaigns. Without this understanding, compliance teams cannot accurately test ESG funds and assess any gaps between portfolio holdings and public disclosure documents. This can lead to false advertisements of ESG funds.
As the SEC is cracking down on falsely represented ESG funds, what can YOU do to avoid millions in fines? The importance seems to center around how advisors monitor and enforce policies surrounding ESG funds rather than reporting them. More specifically, advisors should have clearly defined policies around ESG investing. This means written procedures and due diligence documentation, especially if multiple ESG funds exist. Compliance teams should also be incorporated into firms’ ESG policies and marketing campaigns to better understand and test ESG funds. This will ensure that there are no costly false misrepresentations.
If you want more information on staying in compliance relating to ESG investing, please contact IMP’s professionals.
“The Division of Examinations’ Review of ESG Investing - SEC,” April 9, 2021.
https://www.sec.gov/files/esg-risk-alert.pdf.