The asset management arm of Goldman Sachs agreed to pay $4 million to settle charges it failed to follow its own policies and procedures regarding a trio of investment products marketed for their environmental, social, and governance (ESG) considerations.
Goldman Sachs Asset Management (GSAM) reached an agreement with the Securities and Exchange Commission (SEC) announced Tuesday that continues the agency’s crackdown on whether investment advisers are backing up their ESG claims. Earlier this year, the SEC fined a BNY Mellon subsidiary $1.5 million for failing to meet its ESG representations regarding certain of its mutual funds.
The SEC in the spring proposed a rule that would require registered investment advisers, investment companies, and business development companies to submit enhanced disclosures about funds that claim ESG strategies drive their investment choices. The proposal has been met with pushback from the industry.
The details: The alleged failures at GSAM involved two of the firm’s mutual funds and a separately managed account strategy. In each case, written policies and procedures the firm had in place for ESG research were not followed, in violation of the Investment Advisers Act.
For example, GSAM’s policies required employees to complete a questionnaire and materiality matrix when planning to add new securities to the products’ ESG investment pool. The tools would be considered in determining position size, and their results would be stored in a centralized database, the SEC stated in its order.
The agency found employees often completed questionnaires after securities were already selected, with personnel instead relying on previous ESG research that was “not uniformly applied across issuers.” It added GSAM employees failed to store the questionnaires in a central location, as required, which impeded its investigation.
The alleged failures occurred from April 2017 until February 2020. For the separately managed account strategy, ESG investment policies and procedures weren’t in place until June 2018 and went unimplemented through the relevant period, according to the SEC.
The agency said staff from GSAM’s fundamental equity group had an “inconsistent” understanding of obligations regarding the questionnaires, with some workers believing the tool to be “optional.” The firm was further faulted for sharing its policies and procedures with third parties despite its failures to adopt them consistently internally.
“In response to investor demand, advisers like Goldman Sachs Asset Management are increasingly branding and marketing their funds and strategies as ‘ESG,’” said Sanjay Wadhwa, deputy director of the SEC’s Enforcement Division and head of the agency’s Climate and ESG Task Force, in a press release. “When they do, they must establish reasonable policies and procedures governing how the ESG factors will be evaluated as part of the investment process and then follow those policies and procedures to avoid providing investors with information about these products that differs from their practices.”
Goldman Sachs response: “Goldman Sachs Asset Management is pleased to have resolved this matter, which addressed historical policies and procedures related to three of the Goldman Sachs Asset Management Fundamental Equity group’s investment portfolios,” the firm said in a media release.
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