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Is your portfolio really ESG? Goldman Sachs fined $4m over false claims

By David Burrows

10:29, 23 November 2022

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In this article:
GS
Goldman Sachs
385.99 USD
2.39 +0.620%
BAC
Bank Of America
37.80 USD
0.73 +1.970%
3988
Bank Of China
2.780 USD
0 0.000%
BNP
BNP Paribas
53.66 USD
0.09 +0.170%
DBK
Deutsche Bank
10.140 USD
-0.1 -0.980%

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Goldman Sachs office in New York. Photo: Getty
Goldman Sachs office in New York. Photo: Getty

Imagine you invest in an ESG fund. You do so because its performance looks good and because, more importantly, it is labelled ‘ESG’ - based on assets chosen for their positive environmental, social and governance qualities.

You want your investments to make money but not at the expense of the environment, workers’ rights or fair tax payments.  

But then you discover that the credentials of your ESG fund do not stand up to close scrutiny. This is an all-too common occurrence and Goldman Sachs (GS) is just the latest asset manager to be hauled over the coals for false ESG claims.

Goldman Sachs has agreed to pay a $4m penalty to the Securities and Exchange Commission over charges that its asset management division misled customers about environmental, social and governance (ESG) investments.

The settlement with the SEC highlights an increasing clampdown on financial services groups when it comes to ESG-labelled investment products.

Goldman Sachs share price chart

Earlier this year BNY Mellon agreed to pay $1.5m for allegedly mis-stating and omitting information about ESG factors for its mutual funds.Whether fines of $4m or $1.5m to companies the size of BNY and Goldman represent a 'clampdown' is open to question but it does show that fund managers are being monitored.   

What is certain is that ESG funds have moved from niche status to mainstream in recent years with the number of ESG products on the market growing enormously. Estimates point to $2.7tn going into ‘ESG’ funds in 2021. These also include exchange traded funds (ETF) such as the SPDR S&P 500 ESG ETF (EFIV).

The popularity of the sector has understandably encouraged product providers to establish a foothold in the market. However, the loose definition of what constitutes an ESG company or investment means that as with ‘ethical’ or SRI funds before them, the label could be at best misleading and at worst false.

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Screening stocks

ESG fund managers often use their own screening process to select companies to invest in.  Some may automatically exclude specific sectors – for instance oil and gas, coal mining, alcohol production, cigarette manufacture, weapon production and cosmetics. 

However, in some cases, ESG funds do not have ‘blanket’ exclusions but instead will look to ‘engage’ with companies.

This is why some ESG funds include oil and gas stocks. They argue that as shareholders they can voice concerns about unsustainable practices. They may be able to encourage companies to adapt their business models for a low-carbon world by, for example, reducing emissions and diversifying into renewables.

An ‘ESG fund’ that includes any fossil fuel companies may well be an immediate ‘red’ light for some ESG investors.

However, as the Ukraine war has rolled on and oil and gas prices have soared, it appears ESG fund managers have been tempted to increase rather than decrease exposure to the sector.  

According to a recent report from Bank of America (BOA) around 6% of European ESG funds have included Shell (RDSa) , in their portfolio – as opposed to 0% at the end of 2020. According to BoA. European ESG funds have also seen increased exposure to other energy stocks, including Repsol (REP), Aker BP and Neste.

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For some investors looking at the wider picture, they may be swayed by the fact that those offering ESG funds also invest massively in the oil and gas industry in other funds within their range. While one fund might tick all the ESG boxes, another 10 funds might not tick any.

The likes of JP Morgan (JPM), BNP Paribas (BNP) and Deutsche Bank (DBK) and Bank of China (3988) are just some of the names who have been criticised for supporting ESG but undermining their stance by  investing billions in dirty fossil fuels.

Of course, ESG investing is not just about the oil and gas sector. There are other areas where ESG definitions have been rethought of late in response to geopolitical factors. Investing in arms or defence companies being an obvious example.

Russia’s war with Ukraine has reignited a debate about whether arms and defence stocks should be included as ESG-qualifying investments.

Reversing ESG criteria

Earlier this year, Swedish asset management group SEB reversed its blanket ban on weapons manufacturers to permit six of its funds to invest in the sector.

SEB’s reasoning was that it was in response to the serious security situation and growing geopolitical tensions culminating in Russia’s invasion of Ukraine.

The reckoning here seems to be that the definition of ESG is somewhat fluid and that circumstances alone can move arms manufacturers from a ‘blacklist’ to an ‘inclusion’ list.

The fact that defence sector stocks were, and continue to be, in a position to boost profits from the ongoing conflict – might also have come into the investment equation.

Clearly one of the issues with ESG is definitions applied. It is hoped new EU sustainability reporting rules for multinationals might improve transparency.

From 2024, large companies will need to disclose information about their impact on the environment, human rights and social standards.

How far the EU’s reporting rules will combat greenwashing and make ESG credentials easier to identify is yet to be seen.

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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