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Investment Ideas 2022

SUSTAINABILITY REVOLUTION

Sustainable strategies have increasingly been able to have a positive impact and generate competitive long term performance.

We believe we are on the cusp of a sustainability revolution that could have the scale of the industrial revolution and the speed of the digital revolution. Governments, companies and consumers are already making more decisions with sustainability in mind that have real consequences for industries and business models.

 

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.

        

Investment Ideas to Consider

ESG Expands

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. 

 

ESG Customization

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). 

 

Fixed Income Strategies

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. 

 

Real Assets 

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. 

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Sustainability

Risk Considerations

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. 

Glossary

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.

General Disclosures

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. 

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Date of First Use: January 12, 2022

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