Goldman Sachs Investigated by SEC for ESG
Late last week brought news of another SEC investigation over investment fund approaches to implementing ESG policies and strategies – this time targeting Goldman Sachs. ESGToday reported that Goldman responded to their request for comment as follows:
“The US Securities and Exchange Commission (SEC) has been conducting an investigation as to a historical time period for the Goldman Sachs ESG Emerging Markets Equity Fund, Goldman Sachs International Equity ESG Fund and a US Equity ESG separately-managed account offering. The assets under supervision for these strategies total approximately $725 million as of April 30, 2022. Goldman Sachs is cooperating with the SEC on this matter.”
Bloomberg recently wrote that ESG labeling of investment products has become pretty complicated:
HSBC Holdings and JPMorgan Chase have priced ESG cross-currency swaps, Goldman Sachs is experimenting with so-called green equities, and Deutsche Bank has created several green repurchase agreements. Barclays has offered green structured products to retail investors, Axa priced an ESG collateralized loan obligation, and Standard Chartered crafted an ESG capital-relief trade. There are green mortgage-backed securities and ESG labels on asset-backed commercial paper, synthetic CDOs, credit default swaps, and money market funds. Some bonds are even being labeled “blue” to show they support water-related causes such as ocean preservation or sustainable fishing.
ISS recently wrote:
In addition to enforcement, regulators are scrutinizing ESG fund and product disclosure, proposing to enhance existing regulation of fund managers and financial products. The regimes, such as those seen in the EU, UK, Canada and more recently throughout the APAC region, typically address similar issues but take different approaches.
And this – again from Bloomberg – quoting Sonali Siriwardena, partner and global head of ESG at law firm Simmons & Simmons in London:
“despite pushing through a ‘tsunami’ of ESG rules, it’s now apparent that ‘regulators aren’t necessarily looking at a grace period’ to allow the industry to adapt.”
Our take: If there was any doubt previously that the SEC’s Climate and ESG Task Force in the Division of Enforcement is moving rapidly in its mission, it should now be dispelled – even though the fund name rule is but a proposal. The real questions are who is next and how much will the fine be? I suspect we will see fewer ESG labels on investment products in the near future, and more enforcement to come.
Financial Firms Excluded from State Business in West Virginia
Following similar actions by the state of Texas, a new West Virginia law (SB 262) created a “Restricted Financial Institution List” for financial insinuations determined to be “boycotting energy companies.” The West Virginia law defines that term as
… without a reasonable business purpose, refusal to deal with a company, termination of business activities with a company, or another action that is intended to penalize, inflict economic harm on, or limit commercial relations with a company because the company
(A) Engages in the exploration, production, utilization, transportation, sale, or manufacturing of fossil fuel-based energy;
(B) Engages in the exploration, production, utilization, transportation, sale, or manufacturing of fossil fuel-based energy and does not commit or pledge to meet environmental standards beyond applicable federal and state law; or
(C) Does business with a company that engages in the exploration, production, utilization, transportation, sale, or manufacturing of fossil fuel-based energy.
The law states that the determination can be made from an evaluation of a financial institution’s certification that it is not engaged in a boycott of energy companies; media reports, publicly available statements from any officer or employee of the financial institution with the authority to issue policy statements on behalf of the financial institution or information self-published by the firms.
Our take: Financial services firms are caught between a rock and a hard place. However, it seems to me that the more a firm can explain how they support fossil fuel companies within a transition economy context, the better off they will be. Plus, at the moment having fossil fuels in a portfolio is a highlight for returns.