November 30, 2022
ESG: Adherence to internal policy and procedures

 

Introduction:

The Securities and Exchange Commission (“SEC”) recently charged Goldman Sachs Asset Management, L.P. (“GS”) for policies and procedures failures involving two mutual funds and one separately managed account strategy marketed as Environmental, Social, and Governance (ESG) investments. GS agreed to pay a $4 million penalty to settle1 the charges.

Facts:

According to the SEC, GS had several policies and procedures failures involving the ESG research its investment teams used to select and monitor securities from April 2017 until February 2020.

This included failure to have any written policies and procedures for ESG research as well as a failure to follow them consistently, once policies and procedures were established. 

Interestingly, the SEC took cognisance of the fact that while GS own policies and procedures required its personnel to complete a questionnaire for every company it planned to include in each product’s investment portfolio prior to the selection, the fact was that personnel completed many of the ESG questionnaires (i) after securities were already selected for inclusion; and (ii) relied on previous ESG research, which was often conducted in a different manner than what was required in its policies and procedures.

Further, GS shared information about its policies and procedures, which it failed to follow consistently, with third parties, including intermediaries and the funds’ board of trustees.

The Regulator’s view:

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 the ESG factors will be evaluated as part of the investment process, and then follow those policies and procedures, to avoid providing investors with information about these products that differs from their practices.2

Discussion:

The order against GS reinforces the fact that ESG is the flavour of the season and is being used increasingly to brand and market funds and investment strategies. Investment decisions are, consequently, driven by the existence of ESG-based branding and strategies.  

To that end, any policies and procedures that are so developed over investment processes, including ESG research, must be adhered to. This is to ensure that investors receive the advisory services they would expect to receive from an ESG investment.

Whilst ESG may well be the flavour of the season globally, its reporting and adherence to polices and procedures in India requires significant attention and improvement. ESG regulations in India are set out under several different legislations. Moreover, the ESG reporting is largely still being done more as a ‘check-the-box’ item rather than being followed in its true nature and spirit. In India, the Securities and Exchange Board of India (“SEBI”) has also been conducting random inspections of alternative investment funds registered with it, to supervise inter-alia whether these funds are adhering to policies and procedures set out by them in the fund documents. While SEBI is unlikely to take any action against fund managers without a grievance expressed by investors, considering that SEBI takes cues from the SEC, it is all the more imperative now for Indian fund managers to take their policy and procedures, including ESG covenants, seriously.

With ESG-based branding and strategies driving investment decisions, it may well be the time for us, in India, to learn from evolving global best practices and see how best to, amongst other things (i) consolidate the ESG reporting; (ii) apply standards to ensure its completeness and accuracy; (iii) develop a regulator-based checking system whereby the policies and procedures are developed and strictly adhered to.


–  Sahil Kanuga & Arjun Gupta

You can direct your queries or comments to the authors


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


Disclaimer

The contents of this hotline should not be construed as legal opinion. View detailed disclaimer.

This Hotline provides general information existing at the time of preparation. The Hotline is intended as a news update and Nishith Desai Associates neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this Hotline. It is recommended that professional advice be taken based on the specific facts and circumstances. This Hotline does not substitute the need to refer to the original pronouncements.

This is not a Spam mail. You have received this mail because you have either requested for it or someone must have suggested your name. Since India has no anti-spamming law, we refer to the US directive, which states that a mail cannot be considered Spam if it contains the sender's contact information, which this mail does. In case this mail doesn't concern you, please unsubscribe from mailing list.


November 30, 2022

ESG: Adherence to internal policy and procedures

Introduction:

The Securities and Exchange Commission (“SEC”) recently charged Goldman Sachs Asset Management, L.P. (“GS”) for policies and procedures failures involving two mutual funds and one separately managed account strategy marketed as Environmental, Social, and Governance (ESG) investments. GS agreed to pay a $4 million penalty to settle1 the charges.

Facts:

According to the SEC, GS had several policies and procedures failures involving the ESG research its investment teams used to select and monitor securities from April 2017 until February 2020.

This included failure to have any written policies and procedures for ESG research as well as a failure to follow them consistently, once policies and procedures were established. 

Interestingly, the SEC took cognisance of the fact that while GS own policies and procedures required its personnel to complete a questionnaire for every company it planned to include in each product’s investment portfolio prior to the selection, the fact was that personnel completed many of the ESG questionnaires (i) after securities were already selected for inclusion; and (ii) relied on previous ESG research, which was often conducted in a different manner than what was required in its policies and procedures.

Further, GS shared information about its policies and procedures, which it failed to follow consistently, with third parties, including intermediaries and the funds’ board of trustees.

The Regulator’s view:

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 the ESG factors will be evaluated as part of the investment process, and then follow those policies and procedures, to avoid providing investors with information about these products that differs from their practices.2

Discussion:

The order against GS reinforces the fact that ESG is the flavour of the season and is being used increasingly to brand and market funds and investment strategies. Investment decisions are, consequently, driven by the existence of ESG-based branding and strategies.  

To that end, any policies and procedures that are so developed over investment processes, including ESG research, must be adhered to. This is to ensure that investors receive the advisory services they would expect to receive from an ESG investment.

Whilst ESG may well be the flavour of the season globally, its reporting and adherence to polices and procedures in India requires significant attention and improvement. ESG regulations in India are set out under several different legislations. Moreover, the ESG reporting is largely still being done more as a ‘check-the-box’ item rather than being followed in its true nature and spirit. In India, the Securities and Exchange Board of India (“SEBI”) has also been conducting random inspections of alternative investment funds registered with it, to supervise inter-alia whether these funds are adhering to policies and procedures set out by them in the fund documents. While SEBI is unlikely to take any action against fund managers without a grievance expressed by investors, considering that SEBI takes cues from the SEC, it is all the more imperative now for Indian fund managers to take their policy and procedures, including ESG covenants, seriously.

With ESG-based branding and strategies driving investment decisions, it may well be the time for us, in India, to learn from evolving global best practices and see how best to, amongst other things (i) consolidate the ESG reporting; (ii) apply standards to ensure its completeness and accuracy; (iii) develop a regulator-based checking system whereby the policies and procedures are developed and strictly adhered to.


Sahil Kanuga & Arjun Gupta

You can direct your queries or comments to the authors


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


Chambers and Partners Asia-Pacific: Band 1 for Employment, Lifesciences, Tax and TMT, 2022

AsiaLaw Asia-Pacific Guide 2022: Ranked ‘Outstanding’ for Media & Entertainment, Technology & Communications, Labor & Employment, Regulatory, Private Equity, Tax

Who's Who Legal: Thought Leaders India 2022: Nishith M Desai (Corporate Tax - Advisory, Corporate Tax - Controversy and Private Funds – Formation), Vikram Shroff (Labour & Employment and Pensions & Benefits) and Vyapak Desai (Arbitration)

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IFLR1000: Tier 1 for Private Equity and Tier 2 for Project Development: Telecommunications Networks, 2021

FT Innovative Lawyers Asia Pacific 2019 Awards: NDA ranked 2nd in the Most Innovative Law Firm category (Asia-Pacific Headquartered)

RSG-Financial Times: India’s Most Innovative Law Firm 2019, 2017, 2016, 2015, 2014


Disclaimer

The contents of this hotline should not be construed as legal opinion. View detailed disclaimer.

This Hotline provides general information existing at the time of preparation. The Hotline is intended as a news update and Nishith Desai Associates neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this Hotline. It is recommended that professional advice be taken based on the specific facts and circumstances. This Hotline does not substitute the need to refer to the original pronouncements.

This is not a Spam mail. You have received this mail because you have either requested for it or someone must have suggested your name. Since India has no anti-spamming law, we refer to the US directive, which states that a mail cannot be considered Spam if it contains the sender's contact information, which this mail does. In case this mail doesn't concern you, please unsubscribe from mailing list.

 
 

 

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Chambers and Partners Asia-Pacific: Band 1 for Employment, Lifesciences, Tax and TMT, 2022

AsiaLaw Asia-Pacific Guide 2022: Ranked ‘Outstanding’ for Media & Entertainment, Technology & Communications, Labor & Employment, Regulatory, Private Equity, Tax

Who's Who Legal: Thought Leaders India 2022: Nishith M Desai (Corporate Tax - Advisory, Corporate Tax - Controversy and Private Funds – Formation), Vikram Shroff (Labour & Employment and Pensions & Benefits) and Vyapak Desai (Arbitration)

Benchmark Litigation Asia-Pacific: Tier 1 for Tax, Labour and Employment, International Arbitration, Government and Regulatory, 2021

Legal500 Asia-Pacific: Tier 1 for Tax, Data Protection, Labour and Employment, Private Equity and Investment Funds, 2021

IFLR1000: Tier 1 for Private Equity and Tier 2 for Project Development: Telecommunications Networks, 2021

FT Innovative Lawyers Asia Pacific 2019 Awards: NDA ranked 2nd in the Most Innovative Law Firm category (Asia-Pacific Headquartered)

RSG-Financial Times: India’s Most Innovative Law Firm 2019, 2017, 2016, 2015, 2014