Goldman Sachs to Pay $4 Million SEC Fine Related to Environmental, Social and Governance (ESG) Investments
In recent years there has been an emerging trend for investors to put their investment dollars into companies that are aligned with their own world view. These investors seek out companies that get high marks from third-party independent companies and research groups for things like environmental responsibility, social responsibility and governance and leadership that drive positive change and respond to shareholder concerns. Environmental, Social and Governance (ESG) investing addresses how a company serves its stakeholders which include workers, communities, customers, shareholders and the environment.1
Some financial services professionals believe that ESG investing can be key to ferreting out well-run companies and that ESG investors are finding, through a growing body of research, that ESG investments actually helps mitigate risk.2
While ESG investment products have become the fastest-growing segment of the asset management industry, with estimated assets at $2.7 trillion in 2021, critics argue that certain companies and investors used ESG to make unrealistic or misleading claims about their sustainability and governance credentials.3
The U.S. Securities and Exchange Commission (SEC) fined BNY Mellon more than $1.5 million earlier in 2022 for allegedly misstating and omitting information about ESG considerations for its mutual funds. This was the first case the SEC settled with an investment adviser concerning ESG investments. On November 22, the SEC announced another ESG case settlement.
In this settlement, Goldman Sachs Asset Management, L.P. (GSAM) agreed to pay a penalty of $4 million for “policies and procedures failures involving two mutual funds and one separately managed account strategy marketed as ESG investments.”4
The SEC alleged that GSAM did not adopt written policies and procedures governing how the GSAM Fundamental Equity Group evaluated ESG factors as part of the investment process until “some time after the strategy was introduced” and that once adopted, from April 2017 through February 2020, GSAM did not consistently follow their written policies and procedures relating to the ESG investment process.5
In both the BNY Mellon case and the GSAM case the companies did not admit or deny the SEC’s findings. GSAM agreed to a cease-and-desist order, a censure and the penalty. Goldman issued a statement indicating that by February 2020 its analysts had completed the ESG questionnaires required by its policies and procedures for all the stocks in those portfolios named in the SEC case.
The SEC’s action sends a message to financial professionals and firms that they must adhere to the Investment Advisers Act of 1940, and Rule 206(4)-7 in particular, and not make unsupported claims when it comes to socially-conscious investment products.
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1,2 Environmental, Social and Governance: What is ESG Investing? by E. Napoletano & Benjamin Curry, 2/24/2022
Link: https://www.forbes.com/advisor/investing/esg-investing/
3 Goldman Sachs to pay $4mn Penalty over ESG Fund Claims, by Joshua Franklin and Patrick Temple-West, 11/22/2022
Link: https://www.ft.com/content/0e2b6e41-4113-437f-824b-80d7acd29579
4 SEC Charges Goldman Sachs Asset Management for Failing to Follow its Policies and Procedures Involving ESG Investments, 11/22/2022
Link: https://www.sec.gov/news/press-release/2022-209
5 SEC Order, 11/22/2022
Link: https://www.sec.gov/litigation/admin/2022/ia-6189.pdf