Goldman Sachs Asset Management has been fined $4 million for failing to comply with its own Environmental, Social and Governance (ESG) policies and procedures that it had marketed to intermediaries and fund trustees.
The failings spanned two mutual funds and one separately managed account strategy that were marketed as ESG investments, Wall Street watchdog the Securities and Exchange Commission (SEC) said on November 22.
Like other global regulators the SEC is cracking down on greenwashing and inconsistent ESG reporting; even as asset managers and other financial markets struggle with poor data quality and inconsistent frameworks.
Goldman Sachs ESG fine: Staff relied on "previous ESG research"
The asset manager required staff to complete a questionnaire for every company it planned to include in the ESG investment portfolio prior to their selection. However, “personnel completed many of the ESG questionnaires after securities were already selected for inclusion and relied on previous ESG research, which was often conducted in a different manner than what was required in its policies and procedures” said the SEC.
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“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, head of the SEC’s Climate and ESG Task Force. “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…”
The SEC found GSAM violated Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7.
GSAM agreed to a cease-and-desist order, a censure, and a $4 million penalty.
The Goldman Sachs ESG fine by the SEC comes as earlier this year it also hit BNY Mellon Investment Adviser with a smaller $1.5 million fine for having "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."
The SEC said that "numerous investments held by certain funds did not have an ESG quality review score as of the time of investment" -- BNY Mellon may consider itself lucky to have avoided a more substantial fine.
Both investigations were led by the SEC's Division of Enforcement’s Climate and ESG Task Force, which was formed in March 2021. It analyzes disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies. The ESG fines are small enough to be insignificant at this scale but a warning shot for asset managers.
Whilst these fines may stem from asset manager personnel playing fast and loose, the ESG reporting space remains a challenging one for many. As Lorraine Waters, Chief Data Officer (CDO) at Solidatus has earlier noted in The Stack: "The root issue is that there’s no universal metric or formula which can be applied to ESG.
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"Organisations are still facing a wide-ranging set of different standards to match up against, not to mention variances in depth of detail required, depending on who is applying their own set of scoring and ratings criteria. There’s also then no clear roadmap on how to improve an ESG score. The devil is in the detail on this issue...
Existing ESG data spans three primary categories:
- Company disclosures: Data direct from companies (mandated or voluntary); quantitative and qualitative. Few stick to the same format or guidelines and few make it machine readable, however.
- Alternative company data: Unstructured company data (or alternative data) includes data not released through formal company channels; e.g. media reports, NGO reports, geospatial data and more.
- Third-party data: Third-party data that can include data from either of the above two categories that has been collected, packaged and/or analysed and sold to a data and research provider.
UK regulators are also stepping up
In the UK alone, for example, the biggest UK-registered companies and financial institutions are obliged to report a range of climate-related disclosures under rules that became mandatory in April 2022.
Early analysis of these disclosures by the Financial Conduct Authority (FCA) this summer revealed that it had “found some instances where… the disclosures themselves appeared to be very limited in content.
It added: “We are considering these in more detail and may take action…”
The FCA added: “Looking ahead to disclosures for the 2022 reporting period, one example of where these may be particularly useful is in respect of the net zero commitments that companies are making.
“Where you are making net zero commitments, we encourage you to consider the TCFD’s guidance on Metrics, Targets and Transition Plans, and to ensure that your disclosures are not misleading.”
“We remind you of the direction of travel in corporate reporting on climate change and other sustainability matters, as set out in the Government’s Roadmap on Sustainable Investing. We intend, subject to our usual public consultation processes and cost benefit analysis, to adapt our regime to reference forthcoming International Sustainability Standards Board (ISSB) standards – so, we strongly encourage you to continue to deepen your familiarity with the TCFD’s recommendations and further improve your internal processes to ensure that you are ready to disclose effectively against the ISSB’s standards once finalised and adopted…”
