GS Finance’s $250,000 notes on MSCI KLD 400 Social ETF feature first-time use of underlying fund

By Emma Trincal

New York, March 25 – GS Finance Corp.’s $250,000 of 0% buffered notes due March 30, 2023 on the iShares MSCI KLD 400 Social ETF was the first offering to be linked to this underlying fund, according to data compiled by Prospect News, although the reference index has been employed before.

The payout at maturity will be par plus any index gain, up to the maximum settlement amount of $1,131.50 per $1,000 principal amount of notes, according to a 424B2 filing with the Securities and Exchange Commission.

If the index falls by up to 15%, the payout will be par.

Otherwise, investors will lose 1% for every 1% decline beyond 15%.

First-time use

The iShares MSCI KLD 400 Social ETF launched in 2006. It tracks a free-float adjusted market capitalization weighted index of 400 stocks of companies that have “positive environmental, social and governance (ESG) ratings” and excludes companies whose products have “negative social or environmental impacts,” according to the prospectus.

The note is the first one to offer exposure to this ETF even though 13 deals tied to the MSCI KLD 400 Social index have priced since 2019, according to data compiled by Prospect News. The total notional of those offerings, which were issued by Goldman Sachs and Morgan Stanley, is only $2.3 million.

Top holdings

Both the index and the fund have a strong correlation with the S&P 500 index, noted a financial adviser.

The top five securities in the ETF – Microsoft Corp., Tesla Inc., Alphabet Inc. (Class A and Class C) as well as Nvidia Corp. – make for 25% of the fund’s weighting. The same names represent close to 14% of the S&P 500 index.

The coefficient of correlation between the MSCI KLD 400 Social ETF and the S&P 500 index is 0.99.

Filtering broader market

“It is very close to the S&P 500 index,” this adviser said.

Excluded from the index are all companies deriving 5% or more of their revenues from alcohol, gambling, tobacco, nuclear weapons, conventional weapons, civilian firearms, nuclear power for electricity, adult entertainment, genetically modified organisms or “GMOs,” fossil fuels (ownership and extraction) and thermal coal power, according to the prospectus.

Sin list

“It’s meant to resemble the S&P. They just filter those items. It’s a clean version of the S&P and that’s fine if you want ESG exposure,” he said.

“Personally, I think it’s unfortunate that they would exclude nuclear power from the index. It’s one of the cleanest sources of energy. The risk of waste is overstated. A whole new generation of technologies has been developed and it’s solving a lot of the waste issues.”

Transparency, SEC

But overall, this adviser said he liked the underlying.

“It has the merit of being very transparent. They disclose their methodology based on rankings. They tell you what’s in it, what’s not in it,” he said.

“I think it’s in line with the recent SEC approach. The SEC is telling Wall Street: you want to sell ESG investments? Go ahead. But the investing public has a right to know what you’re doing and how you’re doing it.”

On March 21, the SEC announced proposed rule changes that would require registrants to include certain climate-related disclosures in their registration statements and periodic reports.

The disclosures, according to the SEC announcement, include information about climate-related risks, which “may impact the registrants’ business, results of operations, or financial condition.” Some of the required information would also include disclosure of a registrant’s greenhouse gas emissions.

“The SEC is targeting these companies making vacuous ESG claims. They’re after greenwashing. The regulator wants more disclosure in the filings, in the financial statements, and that’s a very good thing,” he said.

“It goes all the way back to the legislative history of the Securities Act of 1933, which is all about disclosures.”

This financial adviser also liked the terms of the notes.

“If you don’t really have a bullish view on this index and want a little bit of protection, it’s probably a reasonable structure,” he said.

“From an investment point of view, you simply want a large-cap exposure with an ESG tilt.

“I think it’s a reasonable note.”

Governance

Matt Medeiros, president and chief executive of the Institute for Wealth Management, also liked the notes.

“We have a 15-year track record in ESG investing. We started with an institutional mandate and from that point, a lot of clients joined us,” he said.

He pointed to one of the reasons the concept may have been appealing to some of his clients.

“A lot of research has been done around the ‘G’ of ESG. Good corporate governance practices seem to correlate with good performance or at least the research showed predictability in future returns. Historically when the C-suite provides more value, the stock benefits from it.”

Betting on this asset class through a structured note makes sense, he added.

“We already own the sector, we’re familiar with the ETF. But the buffer gives you a good reason to use a structured note versus owning the fund outright.

“I like having a 15% buffer over one year. The 13% cap makes sense. We anticipate lower market returns over the next year or so. So, we don’t think you’re very much at risk of being capped out.”

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman, Sachs & Co. LLC is the agent.

The notes settled on Thursday.

The Cusip number is 40057LK26.

The fee is 0%.

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