Paul Hodgson: Is Goldman’s acquisition of Folio Financial the end of the indie ESG house, or the start of something new?

Back in the 90s, attendees of the 30-year old SRI in the Rockies conference in the US – renamed The SRI Conference a few years back – might have fallen out of their seats and rolled around in the aisles laughing at the idea that Goldman Sachs would one day own the event. 

Or, they might have predicted it as a logical extension of the sustainable finance movement.

The event had the reputation of being at the ‘progressive’ end of the sustainability spectrum.

Either way, it will be owned by Goldman very soon.

In a letter late last week to clients announcing the forthcoming Goldman Sachs buy-out of Folio Financial (FOLIOfn), the digital brokerage firm, Steve Wallman, Folio’s founder and CEO – a former SEC Commissioner, – said that the acquisition “fulfills Folio’s long-term goal of partnering with a preeminent financial services firm to increase the reach and impact of [its] investment technology and services” indicating that such a deal was always part of the plan.

Of course, it is only a few years since Folio bought First Affirmative, the ESG brokerage firm running approximately $1.1bn in ESG-screened assets, and working with over 400 financial advisors across the US; many of whom have attended The SRI Conference since it launched in 1990.

First Affirmative has a clear ESG-based shareholder voting and engagement strategy.

"This is sort of like Tyson Foods buying an organic chicken producer. But way, way bigger." – Heidi Welsh, Si2

At the time of the Folio deal back in 2016, RI spoke to Greg Vigrass, President of Folio Institutional, and Steve Schueth, President and Chief Marketing Officer of First Affirmative Financial Network about that acquisition in 2016. Both admitted that consolidation in the industry was a trend, but that First Affirmative would continue to vote shares on behalf of many of its clients, using its own proxy voting guidelines.

What looks unlikely – in contrast to that deal, and to the Eaton Vance acquisition of Calvert, which led the transformation of a more establishment asset management firm into an ESG powerhouse – is that First Affirmative’s values for its voting guidelines will be adopted wholesale by Goldman Sachs.

According to figures provided to RI by Jackie Cook, Director of Sustainability Stewardship Research for Morningstar, First Affirmative filed nine resolutions between 2016 and 2019. Of these, Goldman Sachs only supported two climate change resolutions at energy company Kinder Morgan in 2016 and 2017 and a greenhouse gas emissions proposal at engineering company Emerson in 2016. It voted against the other six. A two-thirds support rate is maybe higher than expected. The other resolutions mainly focused on lobbying and political spending disclosures, with one food waste reporting proposal at Whole Foods, now part of Amazon.

Much of the SRI community declined to comment on the Goldman acquisition of Folio, indicating that it was something they had neither an opinion about nor knowledge of. Others were more direct. “This is sort of like Tyson Foods buying an organic chicken producer. But way, way bigger. The end of independent SRI? I guess we were already there,” said Heidi Welsh, Founding Executive Director of the Sustainable Investments Institute (Si2).

And Tim Smith, Director of ESG Shareowner Engagement at Boston Walden Trust, said: “This is certainly a sign that mainstream firms like Goldman Sachs believe the ESG market is a wave of the future and well worth investing in. It also further isolates ESG critics at the Wall Street Journal who still argue against screening for stocks that perform poorly against ESG standards and against shareholder advocacy. As Goldman Sachs gets deeper into this world, it validates its importance and value to shareholders.” 

Right now, however, for the mainstream US financial press, the existence of ESG investing business and The SRI Conference as part of Folio appears completely irrelevant to the deal. 

For them, this is all about Goldman buying a mainstream custody business for registered investment advisors (RIAs) so that it can compete with the likes of Fidelity and Charles Schwab, which is in the process of acquiring TD Ameritrade, and Morgan Stanley, which is buying E*Trade. It is about the technological resources that FOLIOfn can bring to the deal. SRI barely registers a footnote in their coverage; it just comes as part of the deal.

On the other hand, Anthony Eames, director of Responsible Investment Strategy at Calvert Investments, commented: “Folio owns First Affirmative which is a significant, and longtime Calvert client. I believe the media coverage has indicated that Folio’s connection to that ESG advisor community, and their production of the annual SRI Conference were likely motivations for GS’ acquisition.”

However, it seems unlikely that a Goldman-owned firm would to date have run an SRI conference that included on its agenda sessions on driving investor power, the opioid epidemic, solving the water crisis, indigenous peoples rights and ‘Shareowner Advocacy in the Global Struggle for Full LGBTQ Rights’, as recent SRI conferences have. 

But maybe Goldman will take the custody business, integrate it into the existing Goldman Sachs Personal Financial Management (formerly United Capital) and leave the rest of Folio to get on with doing what it does best, while being able to offer its existing clients a well-established and industry-trusted ESG advisor?

"I recommend that GS [Goldman Sachs] executives who attend the conference, even virtually if that is the case, wear their tie-dyed shirts" – John Streur, Calvert

Folio Financial’s press office referred me to Goldman Sachs, whose press office did not reply to enquiries in time for this article.

Andrew Behar, CEO of As You Sow, the non-profit shareholder advocacy group, said: “So, I guess this means ESG is now officially mainstream now that Goldman runs the SRI conference and FAFN [First Affirmative Financial Network]. It was inevitable that Wall Street would adopt the risk reduction that ESG requires, especially now that they are all stakeholder-centric.” But, he added: “It’s hard to see the massive systemic change as we are in the day-to-day churn – all of this. This is the emergence of a new regenerative economy.”

Other industry commentators noted that the deal further validates the core business model of FOLIOfn, which “was always interesting” but whose continued success did not at first seem assured.

John Streur, CEO of Calvert, said the firm has been a partner to the financial advisors who use First Affirmative, as well as a sponsor of The SRI Conference since its inception. “I recommend that GS [Goldman Sachs] executives who attend the conference, even virtually if that is the case, wear their tie-dyed shirts,” he said.

On the market implications of the deal, Streur said: “This is a story of convergence, rather than mainstream becoming SRI or vice versa. The interests of society have essentially caught up to the interests of the outlier SRI firms of 20 years ago, of which First Affirmative was one. The real question is ‘what’s next’? Folio was also an outlier, backed by Steve Wallman’s ideas of fractional share ownership and customisation well ahead of their time; now of interest to the mainstream. In the responsible investing world,” he continued, “we don’t fight the mainstream, or actively disagree – we just think independently and do not necessarily pay a lot of attention to what the mainstream is saying. So I think that is the real question: will the new structure afford the independence for Folio and First Affirmative to pursue new, sometimes radical ideas?

It is consolidation. It is convergence. It will give access to volume – another key note of Wallman’s letter. But, while some are unconcerned about these aspects, for others who may not want to go to a Goldman Sachs’ subsidiary for ethical SRI advice and investment options, it is now a smaller market. 

That, perhaps, opens up the way for a new entrant.