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SEC’s actions on greenwashing align the US with the EU

By Nick Reeve

The US financial regulator’s fining of BNY Mellon for allegedly misrepresenting ESG information brings Washington closer to Brussels on sustainable finance work.

Asset managers are facing greater scrutiny over potential greenwashing as regulators seek to enhance rules around ESG investing.

The US Securities and Exchange Commission has issued a $1.5mn fine to a BNY Mellon subsidiary for allegedly misrepresenting information about ESG assessments it purported to carry out for some of its funds.

Between July 2018 and September 2021, BNY Mellon’s Investment Adviser unit, 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”, according to the SEC’s announcement.

The company has accepted the fine but not admitted or denied any wrongdoing.

It is the first time the SEC has fined an asset management company over ESG-related disclosures, but is unlikely to be the last as it is preparing to unveil new rules governing the marketing of ESG funds.

Scrubbing out greenwashing

The SEC is expected to take a hard line against potential greenwashing – the misrepresentation of funds or products as ESG friendly or sustainable – in its new rulebook. 

“Every fund will take a different approach to [the ESG] process, but it’s guaranteed there will be subjectivity and maybe even smoke and mirrors,” said Diana Rose, ESG research director at Insig AI. “What can bring integrity back to ESG funds is oversight and transparency on the process [and] consistency and due diligence in the method.”

Speaking to FundFire, an FT Group publication, Jason Brown, partner at law firm Ropes & Gray, said ESG was a “high priority” for the SEC, and it had been “more intense with ESG than with respect to other issues”.

At Ceres Accelerator for Sustainable Capital Markets, managing director Steven Rothstein said the SEC action against BNYMIA was a clear example of how seriously the regulator was taking greenwashing. “Fundamentally, there shouldn’t be false advertising in anything, whether it be on climate disclosure or anything else,” he said. “We think [the new rules] will help to address that in some very important ways.

“At COP26, investors representing $52tn of assets under management made net zero commitments. Some are at different stages in their journey; it’s not that there is one standard for everybody, but it’s important that customers and investors understand where an investment firm is in its process,” he added.

SEC commissioner and former acting chair of the regulator Allison Herren Lee said in a speech last year that the SEC wanted to substantially improve the availability and quality of ESG data in order to boost investor confidence. “It’s not just investors who will benefit from the information. All policymaking should flow from reliable data as well,” she said at an online event in October.

“Not only will enhanced climate disclosure inform markets, it can more broadly inform the wider spectrum of climate policymaking – policymaking that deserves incisive, informed and, importantly, swift attention.”

US aligns with EU

As well as the greenwashing rules, the SEC is also consulting on climate disclosure rules for listed companies. The draft rulebook for this was announced in March, and comments are open until June 17.

The proposal is designed to provide market participants with “consistent, comparable, and decision-useful information”, SEC chair Gary Gensler said in March. Disclosures include Scope 1 and 2 emissions, as well as Scope 3 emissions “if material” or if a company has previously pledged to disclose them.

These proposals and the expected greenwashing rules bring the US much closer to the EU’s direction of travel on sustainable finance and climate change. The EU taxonomy has set out definitions for green activities, while the Sustainable Finance Disclosure Regulation introduced requirements for investment funds marketed as ‘green’.

“This is a big step forward, and we congratulate the leadership and the staff of the SEC for grappling with this,” said Rothstein at Ceres. “Investors from individuals to institutions want to know about climate issues. It is part of the essence of a competitive capital market that you first know that there’s capital available to help your company to grow, and that investors have good information.”

 

A service from the Financial Times