Goldman Sachs Asset Management hit with $4m SEC penalty over ESG violations

The bank has been accused of “policies and procedures failures” involved with multiple funds marketed as ESG investments, as the industry struggles to manage rising ESG research and compliance costs.  

The US financial regulator has charged Goldman Sachs Asset Management (GSAM) for multiple failures related to two mutual funds (the Goldman Sachs International Equity ESG Fund and the Goldman Sachs Emerging Markets Equity Fund) and another separately managed account (SMA) strategy (the US Equity ESG Strategy), marketed as ESG investments. 

GSAM agreed to a $4 million penalty without admitting or denying the SEC’s findings. 

With respect to the US Equity ESG Strategy, the SEC stressed that GSAM did not adopt written policies and procedures governing how it evaluated ESG factors as part of its investment process until “some time” after the strategy was introduced – whilst across all three products, once the firm did finally adopt written policies in June 2018, it failed to follow them consistently until February 2020.   

The regulator opened a civil investigation into GSAM’s ESG fund practices in June of this year, following proposals from the regulator for new and more rigorous ESG disclosure rules for fund managers.  

“In response to investor demand, advisers like GSAM are increasingly branding and marketing their funds and strategies as ‘ESG’,” said the SEC in a statement yesterday. “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.”  

In a statement, GSAM said: “
Goldman Sachs Asset Management is committed to its pursuit of best practices across its portfolios for sustainable, long-term value creation that helps its clients meet their investing needs.”

The move comes amid a wider crackdown on ‘greenwashing’ – on both sides of the pond. In May, the SEC fined BNY Mellon Investment Advisor $1.5 million for “misstatements and omissions” in its ESG policy. The UK’s FCA has also met with asset managers regarding ESG principles, launching a multi-firm review of fund ESG credentials that could result in fines or bans, with initial outcomes expected in the first quarter of next year.  

The recent fines and ongoing regulatory activity might centre around labelling and disclosure, but it highlights a pertinent ongoing issue with regards to ESG for asset managers – expense, both in terms of regulatory compliance and, especially, data. 

On a panel at the Best Execution and Trading Summit Europe yesterday, one speaker warned that “the longer-term impact of Mifid II may well be in the ESG market.” He pointed out that the architects of Mifid II did not realise the full growth potential (in terms of both size and expense) of the ESG market when they created the framework, meaning that firms have had to commit to paying for their research through their P&L, which includes ESG research – and those costs are mounting massively, because they are unable to pass these onto asset owners.  

“Carbon neutrality by 2050 is entirely dependent on asset manager profits,” he warned. “But we rebalance quarterly – and apparently, to achieve this, we need to be able to predict quarterly rebalances 30 years in advance. As long as there’s no volatility between now and then, that should be fine! But realistically, unless we solve this funding problem, which is entirely rooted in Mifid II, there is going to be a major problem meeting these targets – unless European asset managers decide to become not-for-profits.”