Goldman Sachs Asset Management ESG policy and procedure failures

Background:

• On November 22, 2022, the Securities and Exchange Commission (“SEC”) brought a first-of-its-kind settled action against GSAM for policy and procedure failures involving two mutual funds and one separately managed account strategy marketed as Environmental, Social, and Governance (“ESG”) investments.
• GSAM agreed to pay a $4 million penalty.
• The conduct described in the order is applicable to private funds and addresses some common foot faults we have observed in ESG program implementation.

Key Facts and Allegations:

• ESG branded investment products – This matter concerned branded ESG investment products including one SMA, US Equity ESG Strategy (“ESG SMA Strategy”), and two mutual funds, Goldman Sachs International Equity ESG Fund (“International ESG Fund”) and Goldman Sachs ESG Emerging Markets Equity Fund (“EM ESG Fund”).
  • Analysis – GSAM’s branding of the investment products as “ESG” was likely a key exacerbating factor in the case because it was an indication of the importance of ESG to GSAM’s investors and helped to establish materiality.
• ESG marketing – In marketing its products, GSAM touted detailed processes for selecting ESG compliant investments. First, several of its mutual fund prospectuses contained a description of a two-step process for applying ESG considerations to investment selection and monitoring. Second, GSAM produced pitch books referring to a questionnaire and a “materiality matrix,” which it described as a proprietary ESG tool.
  • Analysis – GSAM made very specific representations to investors about its tools and investment processes, which representations made its ESG compliance easily testable by SEC staff. The order alleges that these tools were not consistently employed.
• Allegations: policy failures – GSAM was slow to develop policies and procedures to support its ESG investment strategy, and even after those procedures were developed, they were not consistently followed. Specifically: (1) GSAM did not consistently complete questionnaires for its new ESG investments or its existing positions; (2) Despite specific disclosures about its ESG evaluation process, GSAM in many cases applied other ESG metrics, some which had different scoring systems; (3) GSAM did not adequately train its investment staff on the use of the questionnaire and materiality matrix, which created confusion (for example, some staff believed that the questionnaire was optional); and (4) GSAM did not maintain its questionnaires in a central location, as required by its policies.
  • Analysis – Consistency and documentation formed the basis for this case. Importantly, the SEC never alleged that GSAM did not apply ESG considerations to its funds or that the funds were deceptively marketed. Rather, the case highlights the SEC’s ability and willingness to bring actions related to the rigor of policy implementation.