SEC fines Goldmann Sachs for not following own ESG guidelines
The Securities and Exchange Commission (SEC) announced in a press release on November 22, 2022 that it has issued an order against Goldmann Sachs Asset Management (Goldmann Sachs) for failing to follow and implement its own ESG policies and procedures.
Goldmann Sachs consented to theentry of the SEC’s order finding that the firm violated the U.S. Investment Advisers Act. Without admitting or denying the SEC’s findings, Goldmann Sachs agreed to a cease-and-desist order, a censure and a $4 million penalty to settle the charges.
At its core, the lawsuit concerns allegations that from April 2017 until February 2020, Goldmann Sachs failed to consistently comply with its own ESG policies and procedures in the investment process, which were previously disclosed to trading intermediaries involved in the distribution, such as investment advisors and brokers. Specifically, Goldmann Sachs failed to complete its newly developed ESG questionnaires in the investment process until after securities had already been selected for inclusion in portfolios. In addition, Goldmann Sachs failed to maintain the ESG questionnaires in a central location during the relevant period, contrary to its own policies and procedures.
The process vividly demonstrates that the complexity of the wide range of ESG disclosure requirements must not prevent a focus onthe essentials. ESG is first and foremost a compliance task that requires embedding robust and forward-looking corporate governance and effective risk management in the corporate organization. The allegation of non-compliance with the company’s own ESG policies and procedures in the present case exposes particular deficiencies in this area. In this context, the $4 million fine is likely to be comparatively less significant than the impending and already incurred reputational damage. The case is also reminiscent of the case of DWS/Deutsche Bank in Germany, which is facing similar accusations (see our blog article on Greenwashing ).
Greenwashing and the associated liability risks for companies and controlling bodies can only be prevented in the medium term by establishing clear governance structures and compliance requirements that incorporate the relevant ESG and sustainability aspects. Business managers need to align the content and structure of their compliance or integrated governance, risk and compliance (GRC) systems and the functions responsible within them to ESG/sustainability issues and risks. Besides a clear definition of responsibilities, the inclusion of ESG and sustainability issues requires more than ever continuous communication and coordination among all gatekeeper functions.
The Corporate Sustainability Reporting Directive (CSRD – see our blog article), which was adopted by the European Parliament on November 10, 2022, has brought the issue into even sharper focus for companies based in the EU. The CSRD requires not only detailed information on environmental and social aspects, but also on governance factors such as the role of the company’s administrative, management and supervisory bodies, also with regard to sustainability issues, and their composition, or the company’s internal control and risk management systems, also with regard to the reporting process. By means of delegated acts prepared by the European Financial Reporting Agency Group (EFRAG), binding uniform EU standards for sustainability reporting will be introduced in order to achieve comparable reporting across Europe. EFRAG published a first draft of standards on business conduct on November 15, 2022. To ensure that companies provide reliable information, they will be subject to independent auditing and certification in the future. It is expected that the CSRD will enter into force in 2023 at the latest. For large public interest entities (with more than 500 employees) already subject to the Non-Financial Reporting Directive, the rules will apply from January 1, 2024, with reports due in 2025.
If you have any questions regarding ESG/sustainability regulation, the review, design and further development of your compliance, sustainability or GRC systems, or (German/international) prosecution for possible greenwashing, we are always available for a discussion.
We have many years of experience in developing and implementing effective and sustainable compliance/GRC structures and systems, including as (voluntary or regulatory-imposed) compliance monitors. Equally recognized is our expertise in advising on national and international environmental and other regulatory issues. We would be happy to discuss our experience with you – including what the SEC, DOJ and German law enforcement and government agencies expect from companies.
Link to SEC announcement: