ESG: Adherence to internal policy and procedures

INTRODUCTION:

The Securities and Exchange Commission (“SECOND”) recently accused Goldman Sachs Asset Management, LP (“GS”) for failures of policies and procedures involving two mutual funds and a separately managed account strategy marketed as Environmental, Social and Governance (ESG) investments. GS agreed to pay a $4 million fine to settle¹ expenses.

FACTS:

According to the SEC, GS experienced several failures in its policies and procedures involving the ESG research that its investment teams used to screen and monitor securities from April 2017 to February 2020.

This included the lack of written policies and procedures for ESG research as well as the inability to follow them consistently, once the policies and procedures are established.

Interestingly, the SEC became aware that while GS’s own policies and procedures required its staff to complete a questionnaire for each company it planned to include in each product’s investment portfolio prior to screening, the fact was that staff completed many of the questionnaires (i) after titles had already been selected for inclusion; and (ii) relied on previous ESG research, which was often conducted in a manner different from what was required in its policies and procedures.

In addition, GS shared information about its policies and procedures, which it did not follow consistently, with third parties, including intermediaries and the funds’ board.

THE REGULATOR’S OPINION:

Noting that in response to investor demand, advisers like GS are increasingly branding and marketing their funds and strategies as “ESG,” the SEC went on to state that “When they do, they must establish reasonable policies and procedures governing how ESG factors will be assessed as part of the investment process, and then follow those policies and procedures, to avoid providing investors with information about those products that differ from their practices.”²

DISCUSSION:

The order against GS reinforces that ESG is the flavor of the season and is increasingly being used to brand and market funds and investment strategies. Investment decisions are therefore motivated by the existence of a brand image and strategies based on ESG.

To this end, all policies and procedures so developed on investment processes, including ESG research, must be followed. This is to ensure that investors receive the advisory services they expect to receive from an ESG investment.

While ESG may well be the flavor of the season globally, its reporting and adherence to policies and procedures in India needs significant attention and improvement. ESG regulations in India are defined by several different legislations. Additionally, ESG reporting is still largely done more as a “check-off” item rather than being tracked in its true nature and spirit. In India, the Securities and Exchange Board of India (“SEBI”) also carried out random inspections of alternative investment funds registered with it, in order to monitor Among others whether these funds adhere to the policies and procedures they have set out in the fund documents. While SEBI is unlikely to take action against fund managers without an expressed grievance from investors, given that SEBI is modeled after the SEC, it is all the more imperative now that Indian fund managers take their policies and procedures, including ESG clauses, seriously. .

With ESG-based branding and strategies guiding investment decisions, perhaps it is time for us in India to learn from evolving global best practices and see how, among other , (i) consolidate ESG reporting; (ii) apply standards to ensure its completeness and accuracy; (iii) develop a regulator-based control system in which policies and procedures are developed and strictly adhered to.

FOOTNOTES

¹ https://www.sec.gov/litigation/admin/2022/ia-6189.pdf

² Sanjay Wadhwa, deputy director of the SEC’s Division of Enforcement and head of its climate and ESG task force