Investing that considers environmental, social and governance (ESG) factors is the fastest-growing area of asset management (Exhibit 8). Many portfolio managers have long incorporated these considerations as part of risk management and due diligence and have further strengthened their processes as more information becomes available. As markets reflect the growing difference between companies with superior ESG ratings and those with potentially riskier business practices, it will have implications across asset classes. For example, credit ratings that determine access to credit, for both companies and governments, may be impacted. Stocks of ESG leaders are already earning higher multiples, on average, than ESG laggards (Exhibit 9), which may prompt more capital to flow toward companies with better ESG practices and funds incorporating ESG considerations.
Exhibit 8: ESG equity inflows have outpaced non-ESG flows
Source: Morningstar, Goldman Sachs Global Investment Research. As of September 2021.
Exhibit 9: The multiple spread between ESG leaders/laggards is growing
Source: FactSet, Goldman Sachs Global Investment Research. Reflects 12m forward multiple of top quintile of companies in the GS SUSTAIN E&S headline rank vs that of the bottom quintile; Q5 is 5th quintile. As of September 2021.
Impact investing—investing in a company to both achieve financial returns and have a positive impact toward a specific goal—is increasingly expected by clients as the sector matures. Previously confined to private investing because of the difficulties in finding investments and measuring impact, public solutions are becoming more available as active managers find ways to meet these challenges. New products are not just at the fund level but at the security level. The green bond market is now over $1 trillion and we believe blue bonds targeting oceans are the next iteration.
Regulation that addresses greenwashing and considers ESG as part of fiduciary duty may help more capital flow to sustainable investing. In Europe, where interest in sustainability is high, new regulations now focus on standardizing terminology around ESG and sustainability, potentially making investment products more transparent and building confidence with investors.
In the US, the Department of Labor recently issued a proposed rule to make clear that plan fiduciaries may consider climate change and other ESG factors when making investment decisions and exercising shareholder rights, recognizing that ESG factors can be financially material; when they are, considering them is likely to lead to better long-term risk-adjusted returns.
In addition, important steps such as the development of the Sustainable Accounting Standards Board (SASB)’s framework are improving information quality and credibility in sustainable and ESG investing globally.
We believe ESG considerations will matter more to investment success and alpha generation. Results continue to support the benefits of ESG for risk management and performance. A proprietary, fundamental active approach to ESG investing is critical because much of the data is still inconsistent and subjective.
We believe engagement is a key part of the process, both for gathering information and influencing change; scale ensures corporate access and a more powerful voice through both engagement and proxy voting.
Investors have a wide variety of options to choose from including ESG enhanced strategies, which seek to outperform both standard indices and peer groups, thematic strategies that invest in environmental and social solution providers and impact strategies that seek to make an impact on specific goals. In addition, strategies can be customized, for example for the degree of carbon reduction vs. a stated benchmark or with a climate tilt.
Across all asset classes, many portfolios are not just making investments that consider ESG and sustainability but entire portfolios are also earning official classifications as ESG oriented funds under the European Union Sustainable Finance Disclosure Regulation (SFDR).
In addition to active fixed income strategies that are incorporating ESG, there are several unique and relevant applications of ESG in the asset class. Considering ESG across sovereign bonds may be increasingly important, given the impact of ESG risks to economies. The large US mortgage-backed securities (MBS) sector also has potential to be used toward inclusive housing efforts. The development of the green bond and blue bond markets may add new ways for portfolios to directly invest in sustainable efforts. For US investors, municipal bonds tied to green infrastructure investments are an additional option.
Infrastructure, real estate and private investment may be critical to sustainability efforts. Beyond solar panels and power stations, battery storage is needed for energy generated from renewable sources, such as solar and wind. Additionally, innovation in agriculture is creating a need to finance new products and machinery that are making food production more efficient.
While much of the public dialogue on climate and the economy has focused on industries like transportation, packaging and food, more recently The World Economic Forum, for example, has called out real estate as the sector with the highest energy usage and most significant CO2 emissions. Therefore, real estate represents another potential opportunity for investors to help address climate change.
Ready To Learn More About Our 2022 Investment Ideas?
Equity securities are more volatile than bonds and subject to greater risks. Small and mid-sized company stocks involve greater risks than those customarily associated with larger companies.
Bonds are subject to interest rate, price and credit risks. Prices tend to be inversely affected by changes in interest rates. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds.
Environmental, Social, and Governance (“ESG”) strategies may take risks or eliminate exposures found in other strategies or broad market benchmarks that may cause performance to diverge from the performance of these other strategies or market benchmarks. ESG strategies will be subject to the risks associated with their underlying investments’ asset classes. Further, the demand within certain markets or sectors that an ESG strategy targets may not develop as forecasted or may develop more slowly than anticipated.
EV: Enterprise value (EV) is a measure of a company's total value, often used as a more comprehensive alternative to equity market capitalization. EV includes in its calculation the market capitalization of a company as well as short-term and long-term debt and any cash on the company's balance sheet.
EV/EBITDA: Enterprise value divided by earnings before income, taxes, depreciation, and amortization.
Greenwashing: Greenwashing is the process of conveying a false impression or providing misleading information about how a company's products are more environmentally sound.
The views expressed herein are as December 31, 2021 and subject to change in the future. Individual portfolio management teams for Goldman Sachs Asset Management may have views and opinions and/or make investment decisions that, in certain instances, may not always be consistent with the views and opinions expressed herein.
Views and opinions expressed are for informational purposes only and do not constitute a recommendation by Goldman Sachs Asset Management to buy, sell, or hold any security, they should not be construed as investment advice.
This information discusses general market activity, industry or sector trends, or other broad-based economic, market or political conditions and should not be construed as research or investment advice. This material has been prepared by Goldman Sachs Asset Management and is not financial research nor a product of Goldman Sachs Global Investment Research (GIR). It was not prepared in compliance with applicable provisions of law designed to promote the independence of financial analysis and is not subject to a prohibition on trading following the distribution of financial research. The views and opinions expressed may differ from those of Goldman Sachs Global Investment Research or other departments or divisions of Goldman Sachs and its affiliates. Investors are urged to consult with their financial advisors before buying or selling any securities. This information may not be current and Goldman Sachs Asset Management has no obligation to provide any updates or changes.
Economic and market forecasts presented herein reflect a series of assumptions and judgments as of the date of this presentation and are subject to change without notice. These forecasts do not take into account the specific investment objectives, restrictions, tax and financial situation or other needs of any specific client. Actual data will vary and may not be reflected here. These forecasts are subject to high levels of uncertainty that may affect actual performance. Accordingly, these forecasts should be viewed as merely representative of a broad range of possible outcomes. These forecasts are estimated, based on assumptions, and are subject to significant revision and may change materially as economic and market conditions change. Goldman Sachs has no obligation to provide updates or changes to these forecasts. Case studies and examples are for illustrative purposes only.
Although certain information has been obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness or fairness. We have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources.
Past performance does not guarantee future results, which may vary. The value of investments and the income derived from investments will fluctuate and can go down as well as up. A loss of principal may occur.
THIS MATERIAL DOES NOT CONSTITUTE AN OFFER OR SOLICITATION IN ANY JURISDICTION WHERE OR TO ANY PERSON TO WHOM IT WOULD BE UNAUTHORIZED OR UNLAWFUL TO DO SO.
Prospective investors should inform themselves as to any applicable legal requirements and taxation and exchange control regulations in the countries of their citizenship, residence or domicile which might be relevant.
United Kingdom: In the United Kingdom, this material is a financial promotion and has been approved by Goldman Sachs Asset Management International, which is authorized and regulated in the United Kingdom by the Financial Conduct Authority.
European Economic Area (EEA): This material is a financial promotion disseminated by Goldman Sachs Bank Europe SE, including through its authorised branches ("GSBE"). GSBE is a credit institution incorporated in Germany and, within the Single Supervisory Mechanism established between those Member States of the European Union whose official currency is the Euro, subject to direct prudential supervision by the European Central Bank and in other respects supervised by German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufischt, BaFin) and Deutsche Bundesbank.
Switzerland: For Qualified Investor use only – Not for distribution to general public. This is marketing material. This document is provided to you by Goldman Sachs Bank AG, Zürich. Any future contractual relationships will be entered into with affiliates of Goldman Sachs Bank AG, which are domiciled outside of Switzerland. We would like to remind you that foreign (Non-Swiss) legal and regulatory systems may not provide the same level of protection in relation to client confidentiality and data protection as offered to you by Swiss law.
Asia Pacific: Please note that neither Goldman Sachs Asset Management International nor any other entities involved in the Goldman Sachs Asset Management (GSAM) business maintain any licenses, authorizations or registrations in Asia (other than Japan), except that it conducts businesses (subject to applicable local regulations) in and from the following jurisdictions: Hong Kong, Singapore and Malaysia. This material has been issued for use in or from Hong Kong by Goldman Sachs Asset Management (Hong Kong) Limited, in or from Singapore by Goldman Sachs Asset Management (Singapore) Pte. Ltd. (Company Number: 201329851H) and in or from Malaysia by Goldman Sachs (Malaysia) Sdn Berhad (880767W).
Australia: This material is distributed by Goldman Sachs Asset Management Australia Pty Ltd ABN 41 006 099 681, AFSL 228948 (‘GSAMA’) and is intended for viewing only by wholesale clients for the purposes of section 761G of the Corporations Act 2001 (Cth). This document may not be distributed to retail clients in Australia (as that term is defined in the Corporations Act 2001 (Cth)) or to the general public. This document may not be reproduced or distributed to any person without the prior consent of GSAMA. To the extent that this document contains any statement which may be considered to be financial product advice in Australia under the Corporations Act 2001 (Cth), that advice is intended to be given to the intended recipient of this document only, being a wholesale client for the purposes of the Corporations Act 2001 (Cth). Any advice provided in this document is provided by either GoldmanSachs Asset Management International (GSAMI), Goldman Sachs International (GSI), Goldman Sachs Asset Management, LP (GSAMLP) or Goldman Sachs & Co. LLC (GSCo). Both GSCo and GSAMLP are regulated by the US Securities and Exchange Commission under US laws, which differ from Australian laws. Both GSI and GSAMI are regulated by the Financial Conduct Authority and GSI is authorized by the Prudential Regulation Authority under UK laws, which differ from Australian laws. GSI, GSAMI, GSCo, and GSAMLP are all exempt from the requirement to hold an Australian financial services licence under the Corporations Act of Australia and therefore do not hold any Australian Financial Services Licences. Any financial services given to any person by GSI, GSAMI, GSCo or GSAMLP by distributing this document in Australia are provided to such persons pursuant to ASIC Class Orders 03/1099 and 03/1100. No offer to acquire any interest in a fund or a financial product is being made to you in this document. If the interests or financial products do become available in the future, the offer may be arranged by GSAMA in accordance with section 911A(2)(b) of the Corporations Act. GSAMA holds Australian Financial Services Licence No. 228948. Any offer will only be made in circumstances where disclosure is not required under Part 6D.2 of the Corporations Act or a product disclosure statement is not required to be given under Part 7.9 of the Corporations Act (as relevant).
Canada: This presentation has been communicated in Canada by GSAM LP, which is registered as a portfolio manager under securities legislation in all provinces of Canada and as a commodity trading manager under the commodity futures legislation of Ontario and as a derivatives adviser under the derivatives legislation of Quebec. GSAM LP is not registered to provide investment advisory or portfolio management services in respect of exchange-traded futures or options contracts in Manitoba and is not offering to provide such investment advisory or portfolio management services in Manitoba by delivery of this material.
Japan: This material has been issued or approved in Japan for the use of professional investors defined in Article 2 paragraph (31) of the Financial Instruments and Exchange Law by Goldman Sachs Asset Management Co., Ltd.
Date of First Use: January 12, 2022