Speaker 1 00:00:24 Joining us today are two guests who are going to share a bit about Goldman Sachs leadership role in the areas of sustainable finance and e s g investing, as well as their insights about the opportunities ahead for investors. Hugh Lawson is a member of the leadership team for Goldman Sachs asset management's client business with global responsibility for institutional client strategy and the division's environmental, social, and governance and impact strategy. Also, joining us is John Goldstein, head of the Sustainable Finance Group, which is responsible for working across Goldman Sachs to deepen the firm's knowledge and grow its capabilities in relation to inclusive growth and climate action. Gentlemen, thank you so much for joining.
Speaker 2 00:01:10 Thanks for having us.
Speaker 1 00:01:11 So we're seeing more engagement than ever before between investors and corporations as it relates to sustainability. Um, and now it's really taking the form of climate change discussion. Specifically, Hugh, how has Goldman Sachs responded to this specifically with your asset management clients?
Speaker 2 00:01:29 Well, thanks, Kisa. I mean, it's an important topic, and I would describe it as a, as a journey. And you know, as you outlined in the introduction, when we think about sustainability, we certainly think about climate, but we also think about inclusive economic growth. And I would say five or 10 years ago, most of our asset owning clients, so these are clients for whom we invest their capital. So think of a pension or a sovereign wealth fund, or an individual may have thought about sustainability as a piece of their portfolio, it would be a specialist segment. Now what's changed is they're asking how is sustainability relevant across the entire portfolio? Um, we accordingly, uh, agree with that. We treat it as an investing question, and we have organized ourselves to serve our clients and their differing investment objectives as they asked that question. Um, some of it brought John Goldstein to the firm.
Speaker 2 00:02:27 We did an acquisition a little over five years ago. But we've also embedded these capabilities throughout our asset management businesses. So each of our investing teams will consider sustainability as part of their process. They will have professionals devoted to that in different ways. Uh, we will also have what we would call federal resources that are shared among our teams. So think of stewardship and engagement. This is where we work with companies, uh, on best practices around sustainability, and also vote our proxies a as an example. And then John, I'll touch on throughout the rest of the firm. That's a model that we've pursued. So in a nutshell, to answer your question, we've added a lot of resource. We treat it as an investing question, and it is relevant not just for a portion of the portfolio, but sustainability is a lens that you apply across all asset classes.
Speaker 1 00:03:18 Great. Thank you for that. And John Hu just mentioned the acquisition of Imprint Capital and bringing that to the fold. How does this approach impact corporate clients? And specifically, I'd love to know, um, what sort of levers that are that you have right now that are serving communities? Yeah,
Speaker 3 00:03:35 Look, I I, I think at the end of the day, you know, the, the story remains the same, but takes different form in different parts of our business and in different types of clients, right? And it is that story he was talking about of an issue that sometimes was, was thought of as being at the periphery, really moving to the core, having a research basis to have a thesis of understanding how climate can drive risk, it can drive opportunities for growth, and it can drive efficiencies and margins, uh, in ways that affect companies, markets, the economy, uh, and, and, and, and really across all of our businesses. So, you know, to give a couple examples of what that progression looks like, you know, I think green bonds have been around for a long time as companies raise capital, uh, for environmental purpose. But I think, you know, continuing to lean in and innovate in some of these areas.
Speaker 3 00:04:22 So we worked at Italian Utility, and now to actually have a performance link bond, uh, to say green bonds are, are great, but in some ways it's paying for effort. Show me you've used the money in the way you said you were. Uh, and, and I'm happy. Um, what we, we wanna do is figure out what is really Ty out to performance look like. Uh, and so there's a commitment within actually the security to hit certain climate goals. In their case, it was 55% of their power generating capacity being renewable, and if they don't hit it, their interest rate ratchets. Uh, and so working with NL to structure the first one of those that since then we've done it with multiple clients, multiple types of securities, and this model of take the issue seriously, generally partner with leading clients to come up with an innovative new model or approach, uh, that then we can work to scale, right?
Speaker 3 00:05:09 So I think that's one core element of this. Number two is integrating it with the same kind of advice we'd give on anything else that's important. So with our corporate clients, as this is important, both for their commercial success and certainly to some of their investors, actually creating a toolkit, uh, to help them understand how do investors see them from a climate perspective? How do they see them relative to 2050 Paris goals, climate alignment goals? And then how does that translate to things they can do? Do they need to accelerate their operational work, which could do some financing? Uh, can m and a help, right? Because so much of this is take worlds that sometimes are disconnected, right? Deep research knowledge and understanding of climate themes and really connecting them with ways to make them actionable. And in Hughes world, it's how does this show up in a portfolio from overall construction to implementation, um, and in investment banking, it, you know, integrates into just corporate advice the same way we would anything else that's central to the forward-looking success of our clients.
Speaker 1 00:06:03 Great. So let's shift gears just slightly here and talk about, um, infrastructure week. We know that some buzzer calling at that. Um, the Biden administration recently unveiled, um, the infrastructure spend approach with a bit of detail, deeper detail. Let's talk about that and what it means for the market. So what opportunities does this infrastructure proposal, um, have? What opportunities are there for the markets globally? And we can also look at the similarities between what we're doing here and what's taking place in Europe. Pew, could you shed some light on that? Mm-hmm.
Speaker 2 00:06:36 <affirmative>. Yeah, and, and you know, maybe Keitha, what I'll, what I'll do, but let me answer it in the context of, of sort of where John left off on risk and opportunity, right? Because I think that's a, that's a good lens there. So, so clearly governments are active in trying to shift the energy mix and, uh, develop infrastructure. So infrastructure is, is defined broadly. It's not just, uh, bridges and bridges and roads, which are certainly important, but it's it's broader energy ecosystem. And you see activity here in the United States at the federal level, at the state level, and and across Europe. So, so if you step out and step back and think of an asset owner's total portfolio, they would call and we're advising on, it'd say they would ask us to, to think about what risks is the business mix that's, that's expressed in that portfolio subject to, in light of the shift around the energy, energy infrastructure and broader infrastructure.
Speaker 2 00:07:38 So are there risks? Are there business models that are sort of off the mark and, and not not focused on it, and what opportunities there are? So if you, if you think about the scale, whatever is ultimately passed, we're, we're not sure, but, but ultimately the scale is enormous. And the scale in Europe has been enormous. That clearly means capital of size is moving. And whenever there's a, a situation where that much capital is moving, undoubtedly there will be opportunities for the private sector to play a meaningful role. And generally speaking, um, it's better to at least identify them earlier rather than later. And so, on the opportunity side, our job would be to think about those capital flows and how that might be an opportunity that our clients can participate in, you know, at, at a, at an advantageous time. So I guess what I would say is the infrastructure question is an interesting one because of its magnitude and its importance, but it's a, it's a good, it's a good fulcrum to show those two sides of the coin. What risks are business models who are not adapting gonna be subject to? Is this mixed shifts and what opportunities are presented by this big movement at capital?
Speaker 3 00:08:54 Yeah, no, I would, I would, I would build on that. I think as Hugh said, you know, a lot of these growth themes, which we've been focused on for a long time, uh, are now I think, better understood, right? They're more visible, they're more apparent. They're, they're seen as being less peripheral and, and, and more core. I mean, look, look at how a lot of sustainable infrastructure held up during Covid, for example, you know, renewable power, other sectors, these broad thematics. And, and if you think about last year when US policy was probably more headwind than tailwind on these themes, um, there was still significant growth and strong performance in these thematics. Now that the US has gone on the federal policy front from headwind to tailwind on this, and there's increasingly wide appreciation of this to Hughes Point, capital flows create opportunity. However, um, the growing popularity and awareness of these themes also, uh, means that it requires discernment, right?
Speaker 3 00:09:49 To, to Hughes point, getting in sooner rather than later. Finding those parts of the, the, the mix that are attractive have been de-risked, but that fact is not yet fully appreciated by the market where the market hasn't fully realized how to access it. Right? And I, I think two examples for me that stand out, I think, you know, one is a couple years back we saw tremendous growth in utility scale solar, but the middle market was a little more stuck. Um, you know, this is, you know, on, on the, the rooftops of retailers and warehouses and others, tremendous space, tremendous opportunity, but more labor intensive. And so, um, less capital, less penetration, less growth. And we saw an opportunity, built a team and built a strategy based on that. And I think that's become increasingly popular in mainstream. So if you see an opportunity, are willing to put in some sweat and elbow grease, um, to, to shape it when it may not be fully formed, um, that's the work that's required.
Speaker 3 00:10:41 The broad theme themes, I think clearly a lot of capital flowing, but how to participate in those, um, is, is quite important. The second thing is, sometimes the best opportunities are, are sort of made, not found, right? And a good example is work we've done with a, a battery company called North Fault. Um, which, um, you know, here's an interesting financing challenge is to, to make batteries cost effective, you need to make a lot of them, right? You need to get a large factory to make them at scale. So the costs are low enough and it's how do you finance, uh, a, a large facility, um, before you have revenue? And in this case, you know, we worked with VW and BMW to secure, you know, 13 billion in advanced purchase orders, right? So that was an interesting transaction that was really kind of made and not found because, you know, the good news is significant growth, as you said, in stable infrastructure. You know, I would anticipate this week is, uh, certainly not gonna dampen that growth. But the question is what do you do about it as an investor? And I think we found it takes specialization, focus, diligence and care to translate that growth into attractive investment opportunities.
Speaker 1 00:11:48 Did you know the number of companies that have a diversity and opportunities policy in place have increased from just 39% in 2013 to 85% in 2017? More and more investors and portfolio managers look for companies that incorporate e s G values into their businesses. Promoting diversity and inclusion within the workforce is not just an important and growing theme, but it drives major e S G value. Definitives quality controlled ESG database delivers diversity and inclusion reports and trends, which can in turn inform better investment strategies. This data set can be accessed via a range of our products at Refinitiv, learn about different packages and offerings by connecting with
[email protected].
Speaker 1 00:12:43 So two fantastic things you said there are, number one is, um, the growing popularity and the awareness of these themes, discernment is needed because you hear so much about them. So we really have to be mindful about what are the best areas to move into. And then, um, definitely a tweetable moment. Best opportunities are made and not found. Um, we're hearing a lot about the energy storage market, and I think I read that it's set to attract about 620 million to the market by 2040, which is amazing. Um, and we know that for renewables to replace fossil fuels, there just needs to be a better way to store that energy. And there are a couple of ventures opportunities that are out there. We're looking at, you know, breakthrough energy ventures. Bill Gates is a part of that. They're focused on alternative energy as well as Anura out in California. And with that one specifically, um, there seems to be more of an alliance partnerships between Department of Energy, you know, shell, and I'm interested John, in seeing, you know, which areas do you think have the most promise and where do partnerships and alliances play a role? If we're really looking at government as well as private sector NGOs coming together to bring these solutions. Do you see there to be lots of promise in the partnerships area there?
Speaker 3 00:13:52 I mean, look, so much of the work in this space, I I would describe is living in the land of and not, or right? You know, and, and I, I think it, it, it's less about one piece or another. But at the end of the day, you know, transforming the power mix, um, you know, to, to dramatically higher levels of renewables, takes a lot of pieces, takes generation, it takes large scale storage in front of the meter, behind the meter. It takes demand response and their investment opportunities and needs in terms of technology and business models all across that spectrum from small or technology companies that are providing innovative technology, um, to ways that utilities integrate this into large legacy businesses, right? And I think the thing we see is they're important roles and opportunities to play. And I, I often will get asked this question is about these, you know, innovative startups or large incumbent companies.
Speaker 3 00:14:40 The answer is yes, right? At the end of the day, there's risk and opportunity for all those players across multiple technologies, multiple parts of the value chain, and we participate in different ways, right? As an investment bank, we help advise companies that are on their own transition pathways, how do they get there bigger, faster, stronger, uh, in a way that leverages their, their core capabilities. Um, we also raise money for, for younger companies, right? That are, that are building new, innovative models, new technologies, raising risk capital for them, then enter the game. Um, similarly on the asset management side, I think, you know, ranging from, I'm thinking about some of the work, you know, Alex del Alexi Deli ER does with large established companies that have climate solutions embedded with them to the work, Taylor, Jordan, the imprint team doing, finding specialist managers, investing in venture capital opportunities. I, I honestly, we see it's a little bit all, all of the,
Speaker 2 00:15:28 Well, let, can I, can I just jump in there for a second? Yes. And just, just put my investor hat on. So, so I, I totally agree with John and not, or, but I'm gonna add discernment still matters, <laugh>. So, you know, these are exciting themes, no question about it. There's lots of activity and there's a role for all of those types of organizations. But as a provider of capital, and this is the mainstreaming point, the laws of economics still apply. What makes it a good investment, generally speaking still applies. And what makes a bad investment still applies. So you have to think about competitive positioning. You have to think about technology risk, you have to think about, uh, execution, the quality of the, the team managing the business, all of those things that would apply to any investment, um, apply here. Now, what's great about this though is that because the direction of travel is so robust on government policy, and there's a tremendous amount of enthusiasm that will mean there should be more opportunities. But among the, the greater number of opportunities, it's important to be discerning. So it's an investing question like any other,
Speaker 3 00:16:39 I, I would, I would add a, I don't know if I'd call it an underline or a highlighter, an all caps key. Just, I think Q'S point is so central and it's, it's informed the approach that I've seen throughout in the run up to the acquisition of imprint to the work within asset management, to our own sustainable finance work. At, at, at the firm-wide level. It is really grounding this as an investment question. We have a body of research, we have a body of insight, as Hughes said, the direction of travel is clear. And when that happens, we do what we would with any other significant topic that permeates markets, whether it's technology or macro, you roll up your sleeves and you do the work. And I think one of the things that inadvertently happens when you apply specialized language, specialized terminology, talk about it as a separate market and add large doses of enthusiasm, things like E S G and sustainability sometimes can start to feel like the not investing approaches to Hughes point that you suspend or change the laws of, uh, of the physics of investing.
Speaker 3 00:17:41 Um, which for us is not a, not a recipe for success. Um, it's not a way to ground a program, and it's not a way to drive strong execution. And I think from, you know, back what really united us back when, when, you know, Hugh led the acquisition of Imprint to the work we do, investment management to working with our own leadership and board, um, to launch the sustainable finance group, it really has always been grounded in this research driven view of secular themes that will have significant impacts on companies, on the economy, on markets, and thus on our business. And the key was not to enthusiastically chase them, it was to do the work wall up our sleeves. So we had that discernment and that discernment translates into either being a good advisor, uh, being a good capital provider, being a good, you know, investor across the range of things that we do. But it is that common core, right? This is where the world is going, and our job is to navigate it well.
Speaker 1 00:18:31 So we have the theme of discernment. We also, um, have the theme around sticking with the basics, whatever, what made a good investment previously is gonna make a good investment. Now. So sticking to those basic basics, can we talk about the firm Goldman Sachs, operationally? So what sort of things is Goldman Sachs focused on in terms of using, um, your name, your institution to make a difference in various communities? And I specifically would love to chat about the 1 million Black Women Initiative and initiatives like that. What is the role, what is the plan and what is the desired outcome for these specific investments?
Speaker 2 00:19:07 Yeah, you, you know, I would say fu fundamentally, you know, when you're talking about sustainability, you're really talking about what businesses do and how they do it. And so I think it's incumbent upon, you know, every significant enterprise to say whatever role you play in the part of the economy. What are you doing to use your advantages and talents to sort of ma make the economy more inclusive and more vibrant? And so clearly we, we stand at the crossroads of capital flows. We advise clients, and one of the things that our, our research colleagues, um, had some work they had done, and it's published in a, in some research called Black Womenomics, which is available on our website if people are interested, is, is the critical role that, that black women in particular play in the US economy as entrepreneurs, as caregivers, as essential workers.
Speaker 2 00:20:01 And the multiplier effect of creating, uh, greater opportunity and directing capital into that space to which they, they can avail themselves, would be enormous for inclusive growth in the United States. And so the firm committed 10 billion, uh, to invest as well as, uh, additional a hundred million of philanthropic capital to try to narrow opportunity gaps, uh, and for a bold goal of at least 1 million black women in the United States. And, uh, our research was, was ultimately what lay behind it. And so, uh, we, we feel that as a financial institution using our investing, uh, ability to support entrepreneurs ability to shepherd companies through their life cycle is a really important role. And so we're gonna apply those talents where we can to try to make the economy, uh, more inclusive and more vibrant.
Speaker 3 00:20:56 And, and I think it's, it's, it's this model of when we, you know, look under the hood and break down climate transition, inclusive growth, those things then permeate, you know, the three levers that we have, as you said, there's what we do, our products and services, how we work with clients, there's how we do it, our own organization, people, culture and footprint, and then how we tackle things that we can't do on our own, right? Which gets into advocacy, policy engagement, which could be lifting things up, uh, with research, you know, as he was talking about it could be philanthropy, ways we engage externally. And I think that's where those two core pillars, you know, they, they don't just show up in one part of the business or one part of the organization, you know, on diversity, equity, inclusion, you know, we've woven that in all the way to, including in our, you know, our money market fund lineup, right? How do we add these elements across a wide variety of what we do, um, which is our core business, you know, what we do, how we do our organization, people, and culture, and then recognizing we can't do it all on our own. Um, and that's where philanthropy partnership and policy come in.
Speaker 1 00:21:58 Great. So the partnerships there, um, fully at play, finally, would love to get your thoughts on where you expect the asset management area in terms of E S G investing and sustainable finance to be five years from now. Clearly, this is not an anomaly. Clearly it's not going away. Um, where do you see us being in five years, and how do you think we'll get there? If you could just outline a couple of steps in terms of how you think we'll jump from where we are now to where we will be in the future?
Speaker 2 00:22:26 Well, my, my belief and my hope, um, is that there'll be a convergence around metrics and ways to measure sustainability and progress on both climate and inclusive growth in, in portfolios. Um, it's a little bit like saying today, uh, we talk about electric vehicles, and then I guess that implies that there are other vehicles, but at some point they just may be vehicles. Um, and so here we're talking about sustainability and, and having it be more central to portfolios. Um, I imagine that, uh, there was, well, there wasn't a podcast, but if there were 30 years ago or 40 years ago, people might have been talking about risk, uh, metrics as something to be added to portfolios. Now we don't do that. I mean, things like sharp ratio, information, ratio, volatility, beta, uh, correlation, et cetera, are just, just part of the way in which portfolios are evaluated, measured, and managed. Um, I think metrics around sustainability will be the same. Now, that doesn't mean that all portfolios will necessarily agree, or those metrics will have the same implications for all investors, just in the same way that the risk metrics I outlined don't dictate a specific portfolio for, for any investor. What they are are tools to help you clarify how you're doing, uh, and, and, and making the most of your capital. So my expectation is that in, in five years, we'll be closer to that state of affairs than we are today.
Speaker 3 00:23:59 Yeah. A related question I get asked all the time is, if this is a part of where the world is headed and part of good investing, will the terminology and field go away? Right? And, and, and, and I, I I, I have a, a slight sort of nuance that I, I think you would probably agree, which is, as with all these tools, you know, all these risk metrics, all these things, what happens is as they become more widely understood and appreciated, smart investors of all types dig into them. And number one, the bar of market expectation and baseline performance, um, rises. So the basic expectation of what doing this well looks like, um, will rise and be more uniformly applied. Um, however, to Hughes point, as this gets more integrated with how people invest, they will have their own take and spin on it. What metrics matters, how to evaluate is about rate of changes, about your own forecast.
Speaker 3 00:24:47 How do you think about it? The, the melding of views on this with people's own views as investors, means that the conclusions people come to will vary, which is a good thing, right? I think that, that, that shows that this is being treated as an investment issue because, uh, there aren't a lot of investment issues where everybody agrees, right? And so why would there be these issues where everybody would magically agree? That said, you know, I, I also think different people will choose thi, you know, whether this is a basis for competition or not, right? You know, in the same way as these tools are widely adopted in terms of risk, everyone has a level of competency, but some people, their claim to fame is they're particularly good at them, that they have a particularly differentiated approach. I think you're gonna see that here, which is no one can will be able to say, I don't do this. Um, but some people will say, this is actually my edge, right? And so I, I, I think these terms won't go away, but increasingly the expectation of what everyone needs to be able to do and the competencies they need to have will rise. Um, and then what's gonna be different is not whether people do it, but how they do it, the conclusions they come to, and what special added value they bring to the puzzle.
Speaker 1 00:25:53 Phenomenal conversation. So we know that previously sustainability was a part of the portfolio, a piece of it, and now folks are really asking how can sustainability be relevant across the entire portfolios, or at least asset management. And this is done, um, who you mentioned putting resources to work, really leveraging the resource, resources and research. Um, some of the key takeaways here, the best opportunities are made and not found. And we talked about how these were made, the opportunities were made, um, with Goldman Sachs and also, um, what makes a good investment? Well, it's the same few characteristics that we've always talked about. They still apply executive management, competitive risk management team, et cetera. Um, some of the key items that, that you focused on is what do we do as a company? How do we do it? And there are some things that you said a company Goldman can't tackle alone.
Speaker 1 00:26:48 So how do we tackle the things that we can't do alone? And that's where partnerships, philanthropy, et cetera, come into play. Um, also as we look toward the future, the metrics on measuring climate and inclusive growth in portfolios, we're expecting to see greater ways and means to measure those things. And also sustainability will be central to portfolios as we move down the line in the future. Um, and one of the best areas of this is that the bar of expectation and performance will rise. And we look forward to that time. Such an amazing conversation. John and Hugh, thank you so much for joining us.
Speaker 2 00:27:25 Thanks for having us. Yeah, exactly. Thanks so much.
Speaker 1 00:27:30 We invite you to subscribe to the Refinitiv Sustainability Perspectives Podcast on iTunes, Spotify, or wherever you stream your content. What did you think about the podcast? Leave us a review on iTunes or follow us on LinkedIn and Twitter for updates on our show. You can even check us out on YouTube now. Thank you for joining. See you next time.
