SEC's Climate and ESG Task Force Settles Action Against GSAM

Rounding out the second year of the US Securities and Exchange Commission’s Climate and Environmental, Social and Governance (ESG) Task Force, the SEC recently settled charges with Goldman Sachs Asset Management, LP (GSAM) relating to GSAM’s marketing for ESG investing. In addition to the imposition of injunctive relief and a censure, GSAM agreed to pay $4 million as a penalty. Despite the small amount of the penalty, the GSAM settlement, following on the heels of the SEC’s settlement with BNY Mellon, represents the second investment firm-related action taken by the Climate and ESG Task Force, which was formed in March 2021 to analyze disclosure and compliance issues relating to investment advisers’ and funds’ ESG strategies, among other things.

The SEC brought charges alleging that GSAM violated Section 206(4) of the Investment Advisers Act of 1940 and Rule 206(4)-7 promulgated thereunder. Section 206(e) and Rule 206(4)-7 require a registered investment adviser to adopt and implement written compliance policies and procedures that are reasonably designed to prevent violations of the Advisers Act and the rules thereunder.

The SEC alleged that GSAM had a number of issues regarding the policies and procedures around the ESG research used by its investment teams to select and monitor securities for two mutual funds and a third product marketed as ESG investments between April 2017 until February 2020. Specifically, the SEC alleged between April 2017 until June 2018, GSAM did not have any written policies and procedures for ESG research in one product. After policies and procedures were established in June 2018, GSAM shared information about the policies and procedures with third parties, including intermediaries and the funds’ board of trustees. However, GSAM did not follow its policies and procedures consistently. For example, the SEC alleged that GSAM’s policies and procedures required its personnel to complete a proprietary questionnaire for every company it planned to include in each product’s investment portfolio prior to the selection. Representations were made to investors about GSAM’s use of this questionnaire. Despite this requirement, GSAM 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’s action against GSAM portends the SEC’s long-awaited scrutiny on investment firms’ use of ESG as a branding and marketing tool. Investors have signaled increasing interest in investments bearing an ESG component, and the SEC has sent a clear message that reasonable policies and procedures must be established and followed governing how the ESG factors will be evaluated in investment decisions.

As 2022 draws to a close, ESG remains at the forefront of the SEC’s attention, with numerous open investigations in the ESG space and rules on climate disclosure requirements likely to be finalized in early 2023. The attention of both the SEC and investors will create new challenges and opportunities for investment firms offering ESG products and other companies with disclosure requirements in this space.

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