ESG by Retrofitting

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    Another week, another greenwashing scandal. This time around, it’s Goldman Sachs Asset Management’s (GSAM) turn to eat humble pie instead of the more traditional pumpkin or pecan flavours of the season. A few months ago, the eager officers from the Climate and ESG Task Force of the US Securities and Exchange Commission (SEC) launched an investigation into the firm’s policies and practices. Seek, and ye shall find.

    What they did find was that the asset manager had been employing a rather peculiar way of integrating ESG in its investment process, at least until February 2020 and at least for some specific products[1].

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    “GSAM did not adopt written policies and procedures governing how [the ESG-labelled strategy in question] evaluated ESG factors as part of the investment process until some time after the strategy was introduced,” states the SEC. I assure you, their report makes for a surprisingly entertaining read despite its intimidating title, “Order Instituting Administrative and Cease-And-Desist Proceedings, Pursuant to Sections 203(E) And 203(K) Of the Investment Advisers Act Of 1940, Making Findings, And Imposing Remedial Sanctions and A Cease-And-Desist Order”.

    The report tells the tale of an imaginative pitch book, freely distributed among potential clients and quoted in several RFPs, describing state-of-the-art ESG questionnaires and a materiality matrix as “proprietary ESG investment tools used to inform stock selection and portfolio construction”. The visionary pitch book was making the rounds already in February 2018. Unfortunately, it took a little longer for the team managing the portrayed ESG strategies to catch up with the description. It was not until two years later, in January 2020, that they started following the routine. When they finally did, they conveniently opted for populating the fabled questionnaires, ex post facto, for most of the companies they had already invested in. GSAM could probably patent their innovative approach as ‘ESG by Retrofitting’.

    I wonder who the clever mastermind behind the scheme was. Was it some ambitious sales rep spurred by relentless client demand who narrated the ESG fairytale that investors wanted to hear? Or an overeager communicator who fibbed liberally about a process that did not exist? Or was it perhaps the portfolio managers themselves, embellishing their decision-making process with fantasy ESG scores generated from imaginary questionnaires? And how did the purely aspirational ESG integration pass undetected through the multiple defence lines of sustainability managers, risk, compliance, internal audit, etc.? No one thought it was a big deal, I would imagine.

    Scary the corporate culture that allows such an elaborate scam to go on for years, isn’t it? Not that Goldman has admitted to being guilty, of course. No, the firm has “just” agreed to pay the penalty and to comply with a cease-and-desist order and a censure. Speaking of the penalty, by the way, I must agree with the outraged netizens out there, calling the USD 4 million fine “a joke”. Comments like “20 minutes of profits lost” and “Ha-ha, that is 0.03% of their comp pool. I am sure it will hurt” abide online. Seriously SEC, we are talking about an asset manager with USD 1,5 trillion under management!

    Still, it’s a start, I guess. And, in the spirit of Thanksgivings, let’s be grateful to the diligent SEC investigators for digging up some of the dirt behind the well-polished facade of the global firm. And kudos to the anonymous whistleblower who had the guts to tip off the SEC about it!

    [1] The products in question, in case you were wondering, are the Goldman Sachs International Equity ESG fund, the Goldman Sachs ESG Emerging Markets Equity fund, and the US Equity ESG SMA strategy.

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