SEC fines Goldman Sachs for ESG non-compliance

Sustainable investing has grown exponentially. As more investors choose to identify green investment opportunities, the need for a set of common standards in the sustainable investment market also grows.

A recent global survey found that 86 percent of global asset owners are now implementing sustainable investment into their strategies, up by 76 percent in 2021.

As sustainable investing, also known as Environmental, Social and Governance (ESG) investing grows, regulators are beginning to tighten their controls through stricter regulations and enforcement actions.

For example, the UK’s Financial Conduct Authority (FCA) recently outlined its plans to tackle greenwashing and the EU’s European Banking Authority (EBA) has published a Call for Evidence on greenwashing to understand the risks and fuel potential practices.

In more recent developments, on 22 November 2022, the Securities Exchange Commissioner (SEC) fined Goldman Sachs Asset Management, L.P (GSAM) $4 million for failing to follow its own ESG guidelines. This indicates that regulators are cracking down on tackling ESG non-compliance through enforcement and calls for higher standards of ESG conduct.

Goldman Sachs’ ESG regulatory violations

In the spirit of the FIFA World Cup Qatar 2022, the SEC has given a “yellow card” to Goldman Sachs. The SEC charged Goldman Sachs for non-compliance with ESG guidelines when overseeing two mutual funds and one separately managed account strategy.

The Co-Chief of the Enforcement Division’s Asset Management Unit, Andrew Dean stated that “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.”

Key takeaways

• From April 2017 to February 2020, the SEC found that there were several failings in policies related to ESG research that GSAM’s investment teams used to select and monitor securities.

• From April 2017 until June 2018, GSAM also failed to have any written policies and procedures for ESG research for one product.

• GSAM also violated its own policies that were implemented, failing to follow them before February 2020.

• GSAM’s procedures required its employees to fill out a questionnaire for every company it planned to include in each product’s investment portfolio before the selection. However, these surveys were mostly completed after the securities were already chosen. They relied on previous ESG research – which was conducted with a different approach to what was required in the present policies.

The Deputy Director of the SEC’s Division of Enforcement and head of its Climate and ESG Task Force, Sanjay Wadhwa said “in response to investor demand, advisers like Goldman Sachs Asset Management are increasingly branding and marketing their funds and strategies as ‘ESG’… 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 differ from their practices.”

CUBE comment

As we have seen from the SEC’s recent enforcement and the FCA and EBA’s recent developments in regulating ESG investing. It is evident that ESG is at the top of the regulatory agenda and that regulators are seeking the development of global standards for ESG investing.

ESG investment products have become the fastest-growing segment of the asset management industry. With more investors and consumers being involved in ESG funds, more oversight is required from regulators to ensure that there are no bad actors taking advantage and that investors are well-informed before making financial decisions.

On 22 November 2022, the FCA also announced a code of conduct for ESG data and rating providers – a voluntary code whilst we wait for further action from the Treasury. It aims to achieve sufficient governance practices, to bring greater transparency to this market, to be internationally consistent with developments in other jurisdictions and accomplish general good practices to tackle greenwashing.

Goldman Sachs’ case where it failed to comply with its own ESG policies is a lesson for compliance teams. Regulators will not allow firms to hide beneath the cracks of the ESG regulatory surface – if implementing your own policies, do not just give the impression that your firm is following these, ensure that procedures are executed from top to bottom.

As ESG investing becomes more expansive, regulators will tighten their controls and will not hold back when it comes to holding firms accountable for their wrongdoings.

To avoid feeling like Bambi on ice, compliance teams should proactively anticipate ESG regulatory frameworks and close any regulatory gaps.

Drowning in ESG regulation? Manual processes are not scalable anymore. For efficient and thorough compliance processes, choose to automate regulatory change.

CUBE’s solution allows firms to make better-informed compliance decisions using a complete regulatory inventory. It would ensure that the firm is following its ESG guidelines in place and eliminate potential compliance blind spots. And when regulators come knocking, there will be reliable audit trails to prove your compliance.

Keep ahead of emerging ESG regulations and guidance by speaking to CUBE.