September 27, 2018; Capital and Main
Individuals and organizations, including many nonprofits, are taking an increasing interest in “socially responsible investments” (SRI). According to the Forum for Sustainable and Responsible Investment, “as of year-end 2015, more than one out of every five dollars under professional management in the United States—$8.72 trillion or more—were invested according to SRI strategies,” a doubling over the preceding four years.
Earlier this month, Goldman Sachs announced it would launch a new investment fund meant to appeal to the socially responsible investor. The newly launched exchange-trade fund (ETF), JUST Capital, will select its investments to “flow toward a more sustainable and equitable future, while seeking to generate attractive returns for investors…featuring only companies with above-average scores across all major social, environmental, and governance issues.”
Has one of the nation’s largest investment firms turned over a new leaf and changed its corporate culture? Or is this but a clever effort to “greenwash” a firm with a troubled history, as recently highlighted in NPQ, and grab a piece of the profit to be made from the growing desire of investors to be more socially responsible?
Goldman Sachs chose to partner with billionaire investor Paul Tudor Jones, founder of the nonprofit JUST Capital, which purports to rank companies on “the issues Americans care most about—to build a more just marketplace.” According to a Goldman Sachs press release, the combined effort reflects a “shared belief that capitalism should be a positive force for change and that its future will be driven by a new definition of corporate success that is aligned with the values and priorities of the public.”
We have the unique opportunity to help shift resources toward companies driving change on the country’s most intractable social, environmental, and economic problems.
Timothy J. O’Neill, co-head of the Goldman Sachs Investment Management Division, sees the new effort as both responsible and good business. “JUST is an important financial product—it specifically promotes corporate practices and policies that society values. This focus allows investment to flow toward a more sustainable and equitable future, while seeking to generate attractive returns for investors.”
But do the companies selected by the JUST ETF represent a new standard of more socially conscious investing? A recent article in Capital and Main found good reason to be suspicious of JUST Capital’s corporate rankings, which provide the basis for the ETF’s investment strategy, and Just ETF’s initial investments. Chase Woodruff and David Sirota write:
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Some of JUST’s largest investments are in fossil fuel firms that have been sued for suppressing global climate research, Wall Street behemoths fined for defrauding investors, a social media platform accused of helping rig elections and a tech industry giant criticized for paying its workers starvation wages.
A report from the investment advisory firm Castlefield, cited by Capital and Main, raised a bright red flag for those evaluating investments in responsible funds to consider.
Putting the word “ethical” or “sustainable” in the name of a fund does not make it so. It is increasingly important to differentiate between those funds genuinely responding to customer demand for a sustainable approach and those which use terms like ethical, Socially Responsible Investment or stewardship in their name but include companies such as British American Tobacco or Shell in their key holdings.
Lisa Lindsley, Capital Markets Advisor for the shareholder advocacy group SumOfUs, told Capital & Main, “You shouldn’t be able to, with a straight face, invest in the Dakota Access Pipeline with your left hand, and with your right hand tell people that you’re doing responsible investing. The compartmentalization is very hypocritical.”
It’s not just the fund’s direct investments, either. How will the Fund vote its shares when owners are asked to consider resolutions that would push firms to be more responsible? Baruch College professor Jared Peifer told Capital & Main, “There is variance to the degree that SRI funds are ethically motivated versus a more greenwashing approach. Is the fund dialoguing with management? Issuing shareholder proxy votes, voting on others? If so, that seems like a more ethically motivated fund to me, because they are exerting additional effort many other funds do not bother with.”
The new fund has not had time to show whether Goldman Sachs will use a different approach than it has previously; its track record with its other funds shows a mixed set of social responsibility grades:
Of the 10 companies that make up the largest share of Goldman’s JUST fund, eight considered shareholder-proposed reforms that were overwhelmingly opposed by Goldman-managed funds at their most recent annual meetings. The proposals included prohibitions on offshore tax avoidance schemes, increased transparency on lobbying activities and requirements that companies appoint an independent board chair—a governance model that advocates say leads to more responsible corporate behavior.
A year from now, we may be better able to tell if Goldman Sachs sees this new fund differently. Has it adjusted its portfolio to better reflect the standards it has set for itself? Has it voted its economic clout when shareholder proposals seek to make the companies of which they have shares more responsible? If this fund does reflect and meet a higher standard of social responsibility than the rest of Goldman’s investment portfolio, is that enough to redeem it? The responsible investor, individually and on behalf of the organizations for which they invest, needs these questions answered before they take a press release as a guidepost.—Martin Levine