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At GSAM Fundamental Equity, we believe that material ESG (Environment, Social and Governance) factors drive better risk-adjusted returns for investors over time. As long term investors, it is crucial that we engage with businesses to encourage positive corporate and industry change and superior longer term results.
Human judgement and on-the-ground due diligence are key to assessing ESG practices. The following case studies highlight our approach.
The baby apparel industry has experienced rapid growth globally. Early movers in India have established relationships with major Western retailers.
We held pre-existing concerns around management practices across the listed companies in the space due to alleged use of child labour – and a history of poor chemical and waste management.
Despite the structural attractiveness of the industry, we had avoided investing due to these environmental and social concerns. As well as being morally unacceptable, such practices act as a material risk to long term business and return sustainability.
When another baby-apparel company we had been following, announced their IPO intention we spent time with management, visiting production facilities and vetting the supply-chain to ensure superior and sustainable practices. We participated in the IPO and continue to own the stock.
Human judgement and on-the-ground due diligence are key to assessing ESG practices.
Integrated oil and gas company engaged in the manufacture of industrial chemicals.
The company screened well on ESG related factors – on social and governance it was rated as a “Leader” and was in the 1st percentile of its peer group for overall ESG score. This was driven by greater environmental disclosure than peers and well defined governance practices in place.
Carbon-intensive extraction methods were being used and a meaningful exposure to tar sands, making it one of the largest emitters of greenhouse gases in the world.
It is critical to acknowledge environmental impact, not just disclosure.
Our concerns over governance practice, due to the heavy influence of the state led us to believe there has been a disregard for minority shareholders. This reinforced our decision not to invest.
Reliance solely on external ESG evaluation can result in inappropriate conclusions
Source: GSAM, as of March 31, 2019.
1 ESG score sourced from Sustainalytics. For illustration purposes only. There is no guarantee that these objectives will be met. These securities were chosen to represent our ESG analysis. Past performance does not guarantee future results, which may vary. Any mention of an investment decision is intended only to illustrate our investment approach and/or strategy, and is not indicative of the performance of our strategy as a whole. It should not be assumed that any investment decisions shown will prove to be profitable, or that any investment decisions made in the future will be profitable or will equal the performance of the investments discussed herein. A complete list of past recommendations is available upon request. Please see additional disclosures.
We are active participants in various ESG industry efforts, and strive to balance the depth and quality of our contributions, as well as be transparent and collaborative in our approach. The below outlines how we evidence our commitments to various industry collaborations around the globe.
Policy:
Vote on proposals requesting Environmental disclosure.
Action:
Voted for proposal to request GHG reduction policies.
Outcome:
The company produced a report disclosing details on emission management.
Policy:
Vote on proposals to amend a company’s EEO (Equal Employment Opportunity) statement and diversity policies.
Action:
Voted for proposal to disclose data on diversity and inclusion (D&I).
Outcome:
The company redefined its D&I strategy to build a diverse talent pipeline; refining recruiting practices and minimizing unconscious biases.
Policy:
Vote case-by-case on proposals on executive compensation.
Action:
Voted against an executive compensation due to lack of disclosure on performance metrics in the long term incentive plan.
Outcome:
The company replaced the Chair of the Compensation Committee and added two new diverse board members.
Read more on ESG investing and integration within GSAM Fundamental Equity
Read full report on the top score awarded to GSAM in the 2019 UN PRI Assessment Report
