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In early 2018, Goldman Sachs revamped one of its decades-old mutual funds.
Invested in the stocks of large European and Japanese companies in many industries, suddenly became a stock of Goldman Sachs International. ESG fundit’s new investment mandate: Select foreign companies with the best reputation for environmental, social and governance policies.
Transformation of ESG funds is a constant trend on Wall Street. BlackRock, JP Morgan, Morgan Stanley, HSBC, WisdomTree, Putnam and MassMutual all do it. About 90 mutual funds and ETFs have made similar reforms in the past five years, according to mutual fund rating agency Morningstar. And the Wall Street firm has launched hundreds of brand new his ESG-only funds in an attempt to meet investor demand for such investments.
There are now 588 sustainable funds and ETFs in the US, up from 203 in 2017, according to Morningstar. Those assets have grown from he’s $70 billion to he’s $296 billion.
But what might have seemed like a harmless marketing effort is now frowned upon. constitute an ESG investment product or strategy;
SEC tightens crackdown
It’s Wall Street’s version of an ad crackdown, and it’s also the focus of a special ESG Enforcement Task Force set up last year by the Securities and Exchange Commission. The Task Force essentially looks for examples of banks and asset managers engaging in “greenwashing” using misleading claims to make their investment funds and strategies appear ESG compliant. I’m here.
Goldman is one of the fund managers being investigated by the task force. In a statement posted An online survey conducted by the firm’s asset manager in June confirmed that the Goldman Sachs International Equity ESG Fund and another fund, the Goldman Sachs ESG Emerging Markets Equity Fund, were the subjects of the investigation. A person briefed on the matter said Goldman has eight of his ESG funds in the US.
The task force got off to a slow start. But securities lawyers expect the pace to pick up in the coming months.
While some Republicans accuse the SEC of promoting “woke capitalism,” some sustainable investment advocates say Wall Street’s support for ESG is more than a signal of virtue. Investigations have been made as we are beginning to question whether there is. Many of these asset managers have been accused of not making significant sustainability efforts, only shifting their asset allocation from specific industries such as oil and gas to technology stocks. .
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To some extent, this is what happened within Goldman’s international equity ESG funds. In 2017, before the fund was rebranded to ESG products, technology stocks accounted for around 3% of its allocation. By the end of 2018, their share of the fund had more than doubled to more than 8%, according to Morningstar. Stocks such as Japan Tobacco and Royal Dutch Shell fell.
a goldman prospectus The revamped fund says it will avoid companies that “make significant returns” from alcohol, gambling, tobacco, pornography, guns, for-profit prisons, oil, gas and coal.
But not all ESG funds shun the oil and gas sector.many ESG funds such as DWS ESG Core Equity Fundhas a sizeable allotment in ExxonMobil stock. relatively high score Promoting diversity in worker wages and recruitment.
The PIMCO Total Return ESG Fund was rebranded in 2017 by the giant fixed income mutual fund company, but it has a similar treasury mix and shares the same management team as its famous PIMCO Total Return fund. Both funds are heavily invested in bonds issued by Fannie Mae, a federally backed mortgage company, according to Morningstar data. ESG funds have a high investment ratio in corporate bonds.
Many fund managers base their investment decisions on a company’s ESG rating. This rating is often produced by major financial research firms.
Earlier this year, the S&P 500 ESG Index, a list of companies meeting certain environmental, social and governance criteria, removed Tesla due to the way the electric car maker handled accusations of racism at its California factory. Did.
But even these ratings don’t necessarily reflect how good a company is for the world at large. It is often a measure of a company compared to its competitors.
“Do you think there’s confusion on that front? Yes,” said Ken Packer, a former apparel company executive who is now a senior lecturer at Tufts University’s Fletcher School.
Packer said that even if the fund manager didn’t mean to do any harm, their money could be unintentionally preventing real change from happening.
“I worry that the growth of ESG investing is delaying necessary dialogue and action on the well-being of the planet,” he said.
Even academic researchers with strong ties to Wall Street are skeptical.
Harvard Business School Professor George Serafeim has urged companies and investors to double down on ESG principles. some fund managers Wall Street companies that sell ESG products, such as State Street, a major bank, and Neuberger Berman, a heavyweight investment bank.
In his book Purpose and Profit: How Business Can Lift Up the World, Serafeim says it offers “how companies can design and execute strategies that have a more positive impact.”
But he said there is much to criticize about ESG funds.
“Many ESG funds actually do very little.
“In fact, in my opinion, ESG funds should not exist in the end,” he said. “ESG analysis should be part of good corporate and investment management.”
“All ESG funds are not the same”
The focus of regulators on Wall Street greenwashing allegations is unsurprising given that SEC Chairman Gary Gensler has made regulation of ESG investments a top priority.he has pressed Due to rules requiring Wall Street investment firms to provide investors with more information about how they are implementing their ESG strategies. another SEC suggestion A fund that describes itself as ‘socially responsible’, ‘sustainable’ or ‘green’ must invest 80% of its assets in a manner consistent with its strategy.
In an investor bulletin, the SEC WARNING INVESTORS“You should know that not all ESG funds are the same. It is always important to understand what you are investing in.”
In a statement, BlackRock, the single largest manager of ESG mutual funds and ETFs in the United States, said in a statement that it would generally take steps to combat “greenwashing” and “increase in corporate reporting on sustainability issues.” said to support. BlackRock spokesman Matt Cobsen said:,”Greenwashing is a risk for investors and undermines credibility in the investment management industry. “
but by letter Comments on the SEC’s Proposals Under the Investment Advisors Rule, BlackRock has raised concerns that the proposal could lead to “disclosure of proprietary information” surrounding money managers’ ESG investment processes.
Alissa Stankiewicz, Associate Director of Sustainability Research at Morningstar, said the criteria for composing ESG funds are still evolving. But she said the SEC is right to expect consistency in the standards it claims investment advisers use.
Dennis Kelleher, CEO of Better Markets, a nonprofit that helped President Biden with fiscal policy migration teamHe said the SEC’s rule, if enacted, should help bring about an agreed definition of an investment area that “lacks legal content and clarity.”
The task force is beginning to do so, to some extent, with enforcement action.
The SEC and Task Force Reached a Settlement with Bank of New York/Mellon in May After Regulators Discovered Bank of New York/Mellon didn’t keep the promise Conducting appropriate “ESG quality reviews” on the portion of the mutual funds we advise. The bank neither confirmed nor denied the allegations, but agreed to pay a $1.5 million fine and changed some procedures.
Last year, the SEC launched an investigation into allegations of “greenwashing.” ESG funds sold by DWSthe investment management arm of Deutsche Bank.
Earlier this year, lawyers working with the task force made a number of requests to several banks for information on their securities lending business and ESG strategies, two people briefed on the matter said. .
Securities lending is an activity closely associated with short selling. Investors often bet on falling stock prices. Some market analysts and academics question whether lending stocks to short sellers is fundamentally inconsistent with promoting his ESG investment strategy.
But there are concerns that the task force is moving too quickly.
“Enforcement may be ahead of ESG rulemaking,” said Mark Erowitz, head of the investment management regulatory practice group at Schulte, Roth & Zabel, a law firm that represents many large hedge funds and investment advisors. has potential,” he said. “If there is actual fraud, the SEC can shut it down. But difficult policy debates about ESG investing should not be preempted by coercion.”
Daniel Hawke, securities enforcement attorney at Arnold & Porter and former head of the SEC’s Market Abuse Division, said that given the importance of ESG to the Biden administration, regulators “do something. “There’s a lot of pressure to be seen as being unfair,” he said.
The SEC enforcement attorneys overseeing the new task force reject criticism that it goes too far.
“Possible misstatement investigations in the ESG area are exactly the same as possible other types of misstatement investigations that we are considering,” said the Deputy Director for Enforcement, who leads the Climate and ESG Task Force. Sanjay Wadwa said. “We have taken action in this area before. To me, this is just simple coercion.”
What do you think? Should Wall Street regulators crack down more on ESG funds? Let us know: dealbook@nytimes.com.