Goldman Sachs Asset Management agreed to pay $4 million to settle Securities and Exchange Commission charges that it failed to adopt proper policies concerning two mutual funds and one separately managed account strategy marketed as environmental, social and governance investments.
GSAM did not admit to or deny the SEC's findings, but agreed to a cease-and-desist order, a censure and the $4 million penalty, the SEC announced Tuesday.
From April 2017 until February 2020, GSAM's fundamental equity group did not implement policies and procedures reasonably designed to prevent violations of the federal securities laws concerning the investment process, according to an SEC order.
The funds in question are U.S. Equity ESG Strategy, Goldman Sachs International Equity ESG Fund and Goldman Sachs ESG Emerging Markets Equity Fund, the order noted.
Of note, from April 2017 until June 2018, the company failed to have any written policies and procedures for ESG research for its U.S. Equity ESG Strategy, and once policies and procedures were established, it failed to follow them consistently prior to February 2020, the SEC said.
The order finds that GSAM's policies and procedures required its personnel to complete a questionnaire for every company it planned to include in each product's investment portfolio prior to the 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, the SEC said. GSAM shared information about its policies and procedures, which it failed to follow consistently, with third parties, including intermediaries and the funds' board of trustees, the SEC added.
"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 division of enforcement and head of its climate and ESG Task Force, in a news 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."
In a statement, GSAM said it was "pleased to have resolved this matter." Further, "As the order notes, the Goldman Sachs Asset Management fundamental equity group had conducted ESG research on the issuers held in each of those portfolios. And, as of February 2020, the Goldman Sachs Asset Management fundamental equity group had completed the ESG questionnaires provided by its policies and procedures for the issuers held in those portfolios. These historical matters did not materially impact the investments' satisfaction of the ESG criteria contained in those policies and procedures."
The SEC in May issued two proposals to address greenwashing — when a fund or company overstates its ESG offerings. One proposal would require investment advisers and fund managers to disclose additional information on ESG strategies in fund prospectuses, annual reports and adviser brochures. The other proposal would expand the "Names Rule" under the Investment Company Act of 1940, which requires funds with certain names — such as funds that suggest a particular type of investment, industry or geographic area — to adopt a policy to invest 80% of their assets in the investments suggested by that name. The latter proposal would subject fund names with terms such as "growth" or "value" and those indicating that the fund's investment decisions incorporate one or more ESG factors to the Names Rule.
