Written by: David Michaels
WASHINGTON—The Securities and Exchange Commission is investigatingGoldman SachsGS2.06%▲Group Inc.’s asset-management arm over its funds that aim to invest based on environmental, social and governance standards, according to people familiar with the matter.
The SEC’s probe is thelatest known instance of regulators’ scrutinyof ESG investing, which has been a boon for asset managers that struggled in recent years to compete with low-fee index funds.
The SEC’s civil investigation is focused on Goldman’s mutual-funds business, the people said, and the firm manages at least four funds that have clean-energy or ESG in their names. The probe could end without formal enforcement action.
Regulators have sometimes expressed concerns that ESG—which doesn’t have a defined regulatory meaning—can be a superficial way to market financial products to shareholders’ desire to address subjects such as climate change or diversity in the workplace.
The SEC last year warned investors that it found some fund holdings “predominated” by companies with low ESG scores, despite the fund manager’s advertised commitment to picking companies that performed well on ESG screening tests. Data vendors such as S&P Global and London Stock Exchange Group’s Refinitiv score public companies on ESG standards, but the gradescan vary widely between ratings firms.
Goldmanrenamed its Blue Chip Fundas the U.S. Equity ESG Fund in June 2020. The fund’s top three holdings—MicrosoftCorp.,AppleInc., and Alphabet Inc.—-have remained the same since then, according to regulatory filings. The U.S. Equity ESG fund’s other top holdings currently includeBristol-Myers SquibbCo.,Eli Lilly& Co., andJPMorgan Chase& Co., according to its website. It is a relatively small fund, with $17.8 million in assets under management, according to Morningstar data.
Goldman says in regulatory documents that its ESG fund aims to keep 80% of its net assets in stocks issued by companies that meet the fund manager’s criteria. They exclude companies that earn most of their revenue from selling alcohol, tobacco, weapons, coal, oil and gas, and some other products. Goldman says holdings in the U.S. Equity ESG Fund undergo an ESG analysis but reserves the right to invest in some companies without such a screening. It can also invest up to 20% of its net assets in stocks that deviate from its ESG standards.
Goldman also manages ESG-labeled funds focused on international and emerging-markets equities, which are larger than its U.S. fund. It offers several other funds, including exchange-traded funds, that are marketed as “sustainable” or “just” in shareholder documents, according to Morningstar.
Representatives for the SEC and Goldman Sachs declined to comment.
Assets in funds that claim to focus on sustainability or ESG factors reached $2.78 trillion in the first quarter, up from less than $1 trillion two years earlier, according to Morningstar.
The SEC took notice of that growth several years ago andbegan scrutinizing ESG investing products. It did so through its division of compliance examiners, who don’t issue fines but look for deficiencies that they can forward to the agency’s enforcement attorneys.
The regulator and the Justice Department have been investigatingDeutsche BankAG’s asset-management subsidiary, DWS Group, over claims that the company misled investors about its adherence to ESG criteria. German authorities in Mayraided the bank’s Frankfurt officesover allegations of greenwashing in its mutual funds. DWS’s chief executive said after the raid thathe would resign.
Because the SECdoesn’t yet have rulesthat dictate what ESG investing means or requires, any enforcement action would need to focus on a fund’s past disclosure, and whether its investing practices materially deviated from what it advertised to shareholders.
The SEC in May finedBank of New York MellonCorp.’s investment advisory arm $1.5 million after a regulatory investigation found the firm failed to disclose that some investmentsdidn’t undergo a screening for ESG considerations. BNY Mellon Investment Adviser Inc. had told shareholders that its strategy included “identifying and considering the environmental, social and governance risks, opportunities and issues throughout the research process,” according to the SEC.
In the case of one BNY Mellon fund, 67 of 185 investments didn’t have an ESG-quality score at the time the security was purchased,the SEC alleged. BNY Mellon settled the investigation without admitting or denying misconduct.
Charley Grant contributed to this article.
Write toDave Michaels atdave.michaels@wsj.com
Appeared in the June 11, 2022, print edition as 'Goldman Faces SEC Scrutiny Over ESG'.
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Source: SEC Is Investigating Goldman Sachs Over ESG Funds - WSJ
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