BNY Mellon Unit Fined $1.5M for ESG Misstatement as SEC Deals with “Greenwashing”
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BNY Mellon Unit Fined $1.5M for ESG Misstatement as SEC Deals with “Greenwashing”

Mutual-enforcement seems to be the only way to maintain a stakeholder system that doesn't answer to shareholders.
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The Securities and Exchange Commission announced on Monday that BNY Mellon Investment Adviser paid $1.5 million in settlement over the misrepresentation of some of its ESG mutual funds.

BNY Mellon Settles With the SEC

As an indirect subsidiary of The Bank of New York Mellon Corporation, the multi-asset management company was penalized for “misstatements and omissions about Environmental, Social, and Governance (ESG)”.

Following the SEC’s quality review from July 2018, the agency concluded that BNY Mellon made ESG claims too broadly. It turned out that many investments held by various funds did not have the proper ESG quality review score as claimed. Without admitting or denying the charge, BNY Mellon opted for the typical SEC censure order and pay the $1.5 million penalty.

It is worth noting that the SEC’s hefty fines often pave the road for de-facto regulations. Case in point, when the SEC fined BlockFi $100 million, it set a new standard that prohibits other FinTech companies to offer crypto-based interest rates without registering them as securities.

Is ESG Controversial?

Environmental, social, and corporate governance (ESG) is a fascinating phenomenon. It started off as a UN initiative, first appearing in 2004’s “Who Cares Wins” report, to frame companies beyond mere economic entities. Instead, corporations should be the drivers for social and environmental change.

Of course, there is an inherent implication here. Should companies leave profit maximization behind, non-ESG companies would have a distinct advantage. Moreover, if it happens that a company wants to cater to public demand, this may go against the ESG framework.

As a result, ESG creates a powerful governance block that is not the government. For this reason, billionaire Peter Thiel, the co-founder of PayPal and Palantir, likened ESG to a “hate factory” at this year’s Bitcoin Miami conference.

“It’s a factory for naming enemies… When you think ESG, you should be thinking Chinese Communist Party.”

Peter Thiel at April’s 2022 Miami Bitcoin conference

This is a reference to the Chinese social credit score, a complete top-down state control system. In the West, what became an unofficial UN initiative slowly spread across the corporate world, spearheaded by BlackRock, the world’s largest asset manager with $10 trillion AuM. At the end of 2021, the CEO of BlackRock, Larry Fink, took credit for pushing ESG across the board.

“BlackRock is a leader in this, and we are seeing the flows, and I continue to see this big shift in investor portfolios.”

Larry Fink, CEO of BlackRock to Bloomberg

The flows in question are indeed impressive. According to Morningstar data, ESG funds went from $1 trillion in 2019 to $2.7 trillion by Q1 2022, with 65 funds reformed as ESG in the US alone. Eventually, from UN to corporate push, the ESG framework ended up in the halls of government.

Specifically, the SEC launched the Climate and ESG Task Force in March 2021. Most recently, the world’s richest man, Elon Musk, put ESG in the public spotlight after Tesla was removed from the S&P 500 ESG Index.

Joining Thiel’s dislike of ESG, Musk further tweeted that ESG is a metric by which a business is judged against “how compliant your business is with the leftist agenda.” Such a development of events is entirely predictable, stemming from ESG’s inherent implications:

  • Governance without government/elections.
  • Financial bullying so that non-ESG companies don’t gain an advantage.
  • Lack of clarity; what is a social good at any given moment, who determines it, and by which criteria?

The SEC’s sanction of BNY Mellon indicates that some clarity on that criteria is on the horizon.

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SEC to End “Greenwashing”?

Alternative wording for ESG is stakeholders capitalism, in which corporations look out for interests beyond direct shareholders. How those interests are put forward and directed is unclear. However, one could assume that a network of economic networks, the World Economic Forum, is an integral part of it.

At the annual Davos Agenda summit this week, WEF’s chairman Klaus Schwab indicated that a powerful interest block, built on ESG grounds, is building the world’s future.

In practice, this translates to ESG integration to attract the money flow, otherwise known as greenwashing. Presently, the ESG criteria are such that even an oil company like Exxon could get ahead of Tesla, the very company trying to remove carbon emissions from roads.

According to Margaret Dorn, the head of S&P Dow Jones and ESG Indices, Tesla has issues outside of its carbon footprint. Some of these are racial discrimination claims, autopilot safety, and poor working conditions.

“While Tesla may be playing its part in taking fuel-powered cars off the road, it has fallen behind its peers when examined through a wider ESG lens,”

Margaret Dorn’s blog post

How wide can that lens get and will the SEC tighten it to a consistent scope? This may be easier said than done, according to Penn Law professor Jill Fisch.

“These are not standardised products . . . A rule that attempts to standardise what constitutes an ESG fund is going to be a big step backward for people who want to invest in this space,”

Jill Fisch to Financial Times

Presently, the SEC acts on its “naming rule” system developed in 2001, by which a fund has to have at least 80% of investments aligned with the fund’s description/name. By the same token, ESG funds should follow suit, according to the SEC’s April document.

However, with so many interests involved to avoid rule-based clarity, it will be interesting to see how Gary Gensler, the former Goldman Sachs banker, handles the ESG situation.

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