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Why ESG Investments Are Under Scrutiny

The Wall Street Journal reported on Friday that the U.S. Securities and Exchange Commission has begun an investigation into the investment management segment of Goldman Sachs. The investigation is focused on Goldman’s ESG funds offerings.

Institutions and individuals wanting to invest in funds or stocks that meet environmental, social, and governance criteria are mostly on their own when determining if the financial products are ESG-friendly. Regulators have not adopted a single set of ESG guidelines that investors can use to judge how closely a fund or company adheres to ESG principles, however, they may be defined.

Goldman’s U.S. Equity ESG Fund (GINGX) comprises 45 stocks, with the top 10 accounting for 38.7% of the portfolio. Here is the bank’s description of its ESG focus:

“A proprietary framework is used to identify and invest in a select portfolio of companies that satisfy the Strategy’s ESG criteria. By incorporating ESG criteria and through active engagement where determined appropriate, the team seeks to invest in industry-leading, durable franchises, to manage risk as well as benefit from positive corporate decision making and industry-leading productive change where possible.”

Goldman also notes that up to 20% of the fund’s assets may not be in line with the bank’s ESG criteria or be invested in non-U.S. issuers, or fixed-income securities.

Late last month, the SEC fined Bank of New York Mellon’s investment advisory group $1.5 million for misstating or omitting ESG investment considerations for the mutual funds the bank manages. The fine was a first for the SEC, and there is good reason to believe that more will follow.

According to data from the Investment Company Institute, an investment industry group that lobbies Washington on behalf of its members, there were 740 ESG-themed mutual funds and ETFs with assets valued at $529 billion at the end of 2021, up from 583 funds with assets of $381 billion at the end of 2020. U.S. mutual funds and ETFs had a net asset value of $34.2 trillion at the end of last year, with ETFs accounting for $7.2 trillion of the total.

The SEC is proposing new disclosure and naming requirements that would give investors added transparency into mutual funds, ETFs, and other funds that claim to make investment decisions based on ESG factors.

The increasing scrutiny around asset managers, rating firms, and proxy advisors’ ESG policies has given birth to an organization dedicated to accountability in the rapidly growing ESG field.

The Corporate Citizenship Project, a think tank dedicated to a data-driven approach to corporate governance matters, announced last week that Terry Branstad, former U.S. ambassador to China and former governor of Iowa, has been named national chairman of the organization. His 22 years as Iowa’s governor make him the longest-serving governor of any state in U.S. history.

The Corporate Citizenship Project expects that Ambassador Branstad will bring his unique insight as a pro-business Governor and diplomat in his role by pushing proxy advisors like Institutional Shareholder Services (“ISS”) and other “ESG activists” to do away with significant potential conflicts of interest and increase transparency.

On his appointment, Branstad commented:

“I am proud to act, on behalf of American businesses and investors, to bring much-needed reform to how corporate governance matters are analyzed. Proxy advisors, rating agencies, and ESG consultants have created an environment that has added unnecessary costs and burdens to American businesses, consumers, and investors alike. These ESG activists have made themselves the self-appointed authorities on which companies are good and which ones are bad, and in most cases make their determinations based on standards that are arbitrary, political, or worse the result of significant conflicts of interest. I look forward to bringing a data-driven and transparent approach to this industry.”