Goldman Sachs fined $4m over failure of ESG policies and procedures

SEC takes action to protect investors after identifying a number of failures.

Goldman Sachs Asset Management, L.P. (GSAM) has been charged over policies and procedures failures involving two mutual funds and one separately managed account strategy marketed as Environmental, Social, and Governance (ESG) investments.

The Securities and Exchange Commission (SEC) found several policy and procedural failures relating to ESG research the GSAM investment teams used when selecting and monitoring securities. From April 2017 until June 2018, GSAM failed to have any written policies and procedures for ESG research in one product, and then failed to follow them after they were established, up to February 2020.

“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.

“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.”

$4m penalty

GSAM’s policies and procedures required a completed questionnaire for every company it planned to include in each product’s investment portfolio. However, many ESG questionnaires were filled out after they already had been selected, and relied on previous ESG research, which was often conducted in a different manner than required in the policies and procedures.

The company also shared information about its policies and procedures with third parties, such as intermediaries and the funds’ board of trustees.

“Today’s action reinforces that investment advisers must develop and adhere to their policies and procedures over their investment processes, including ESG research, to ensure investors receive the advisory services they would expect to receive from an ESG investment,” said Andrew Dean, Co-Chief of the Enforcement Division’s Asset Management Unit.

GSAM has consented to the entry of the SEC’s order that found the firm violated Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7. Without admitting or denying the findings, GSAM has agreed to a cease-and-desist order, a censure, and a $4m penalty to settle the charges.