Goldman Fined $4M as SEC Tightens ESG Oversight

Goldman Sachs Group Inc., which manages $25 billion in exchange-traded funds, was fined $4 million by U.S. regulators for failing to comply with policies and procedures in ESG, an area of increasing interest to ETF investors.  

The Securities and Exchange Commission cited Goldman’s asset management division for lapses in ESG research used to “select and monitor securities” from April 2017 to February 2020, according to a statement announcing the penalty Tuesday. The fines target two of the firm’s mutual funds and a separately managed account strategy marketed as Environmental, Social, and Governance investments. According to the firm, the funds in reference are the Goldman Sachs ESG Emerging Markets Equity Fund, Goldman Sachs International Equity ESG Fund and a US Equity ESG separately-managed account strategy.  

The charges come at a time when growth in ESG investing is surging in the exchange-traded fund industry. Over 47 ESG-labeled ETFs have been launched in the first 10 months of 2022, ETF.com data shows, falling just short of the 49 ESG ETFs started in the same period last year. 

The SEC’s sharpened focus on ESG comes as chair Gary Gensler has proposed new rules regulating fund names to be more accurate, and more disclosures from funds claiming to invest in companies that adhere to environmental, social and governance factors. ETF issuers have since posted a mixed bag of comments on the propositions, with some claiming that the new rules could spell trouble for investors and companies alike.  

“Advisers like Goldman Sachs Asset Management are increasingly branding and marketing their funds and strategies as ‘ESG,’” Sanjay Wadhwa, Deputy Director of the SEC’s Division of Enforcement and head of its Climate and ESG Task Force, said in the statement. 

“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,” he added. 

A 2022 report published by PwC found growth in the sector is expected to outpace the asset and wealth management market as a whole, with ESG assets under management in the U.S. likely to double to $10.5 trillion by 2026. 

According to the SEC, Goldman didn’t have policies for ESG research in one of their products from April 2017 to June 2018, and then failed to consistently follow them prior to February 2020. It further noted that Goldman, which manages 32 ETFs according to ETF.com data, failed to properly complete ESG questionaries, or did so after the selection of securities for portfolio inclusion.   

The regulatory agency’s charges on Goldman Sachs are just the latest installment in the SEC’s crackdown on asset managers in relation to ESG standards. Earlier this year, the agency also charged BNY Mellon —the first time the SEC charged an investment advisor with ESG charges— after alleging that “numerous investments held by certain funds did not have an ESG quality review score as of the time of investment.” The firm’s asset management arm agreed to pay $1.5 million in a settlement.  

Neither Goldman Sachs nor BNY Mellon admitted or denied the allegations.  

New-York based Goldman has since stated that the asset management arm has conducted ESG research on the issuers held in each of those portfolios and completed the ESG questionnaires as of February 2020.  

“These historical matters did not materially impact the investments’ satisfaction of the ESG criteria contained in those policies and procedures,” the statement said.  

Contact Shubham Saharan at [email protected]