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Greenwashing practices in the financial sector: BNY Mellon Investment Adviser INC. case

BNY Mellon Investment Adviser INC (“BNY”), an investment management firm, was sanctioned on May 23rd, 2022, by the U.S. Securities and Exchange Commission (“SEC”).

The facts investigated by the SEC relate that BNY, during the period from July 2018 through September 2021, claimed that certain investments they were making met satisfactory standards and ratings associated with environmental, social and governance ("ESG") criteria.  That is, BNY would have stated that certain ESG considerations and ratings were considered when making investments in funds that were not always rated or reviewed for ESG quality.

For that reason, the SEC imposed a fine of USD$1,500,000 against BNY, finding it liable for willfully violating the provisions contained in Sections 206(2) and 206(4) of the Investment Advisers Act of 1994 and associated Rules 206(4)-7 and 206(4)-9, as well as Section 34(b) of the Investment Company Act. Broadly, these violations consist of (i) engaging in any business that misleads a potential client; (ii) stating or omitting material facts necessary to make a statement not misleading; (iii) failing to implement measures to prevent violation of the Investment Advisers Act; and (iv) making false statements in documents filed or issued under the Investment Company Act.

1. Relevance of ESG Criteria

An increasing number of investments are being made with the aim of generating a long-term positive impact on society, the environment and, in general, on business performance and processes. In each of these elements (environment, government and society), different criteria have been proposed to implement actions that generate a positive impact.

For example, in environmental matters, it is common to propose actions aimed at implementing processes that guarantee the efficiency of resources, or to adopt systems that use renewable energies.  In the social side of it, it is possible to ensure that part of the company's activities are carried out with certain populations.  Finally, in the area of governance, the implementation of risk management systems for crimes such as corruption or transnational bribery, or the adoption of internal policies on, for example, non-discrimination, are commonly associated.

ESG criteria are becoming increasingly relevant at the time of making investments, either because of the attractiveness of implementing such standards in economic activities, or because they can have an impact on the risk rating of a given investment.

Please note, Colombia has also recognized the relevance of ESG criteria in the investment field.  It should be recalled that on August 18, 2022, the Financial Superintendency of Colombia (Superintendencia Financiera) published the roadmap "Towards the Greening of the Colombian Financial System", which includes certain categories that must be implemented by credit institutions and insurance companies in ESG matters (see our publication at https://bit.ly/3YWtuAP).

Thus, companies are progressively adopting, as part of their business strategy, criteria that allow them to generate better environmental, social and governance impacts.  This has been supported by an incentive in the markets to rate these companies more highly and make investments in them more attractive.

2. Greenwashing 

The relevance of the adoption of ESG criteria has shown a problem that has resulted in a “bad practice” known as “greenwashing”. That is, advertising or stating that a business or a company has adopted ESG policies or criteria when that is not true, or perhaps said policies or criteria have actually been adopted but vaguely.  And typically, the purpose of greenwashing is to (i) become more attractive to investors or consumers; or (ii) conceal the real impact of its operations.

Some of the greenwashing practices that have been commonly identified are: (i) making false or inaccurate statements about the ESG standards adopted in a process or business; (ii) adopting definitions or terms so generic or succinct that they lead to consumer or investor confusion; or (iii) assuring that certain products or processes comply with ESG criteria or standards that have not been certified or verified.

These practices defraud the expectations and conditions under which a consumer or investor carries out certain transactions.  It also creates unequal conditions with respect to those companies that do adopt appropriate ESG criteria and standards, with the costs that said implementation entails.

Therefore, the SEC´s decision against BNY somehow ratifies that ESG criteria is important to investors and consumers, and entails a strong rejection to greenwashing practices in the financial industry.

It is also a call to all companies to adopt ESG criteria in a responsible manner, to ensure that investors´ and consumers´ interests are properly served and protected when making their investments, especially considering that sometimes the determining factor may be the adoption of ESG criteria.

Authors

Portrait ofDaniel Rodríguez, LL.M.
Daniel Rodríguez, LL.M.
Partner
Bogotá
Portrait ofCamila Posada
Camila Posada
Associate
Bogotá
Portrait ofMaría Alejandra Ramírez
María Alejandra Ramírez
Associate
Bogotá