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Sustainability Perspectives

Episode 65: The Best Opportunities are Made, Not Found - Goldman Sachs & Sustainable Finance

Joining us in this episode are Hugh Lawson, Global Head of ESG & Impact and Institutional Client Strategy at Goldman Sachs Asset Management, and John Goldstein, Head of the Sustainable Finance Group at Goldman Sachs.

As we begin to see more engagement between investors and corporations in relation to sustainability, in this episode we discuss their insights into the future of investor opportunities, investing from a climate perspective, inclusive economic growth, the Goldman Sachs One Million Black Women initiative and more.

Guests - Hugh Lawson, Global Head of ESG & Impact and Institutional Client Strategy and John Goldstein, Head of the Sustainable Finance Group

  • KEESA: 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 DSG 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, client business with global responsibility for institutional client strategy and the divisions, Environmental, Social and governance and Impact Strategy. 

    Also joining us as 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. 

    BOTH: Thanks for having us. 

    KEESA: So we're seeing more engagement than ever before between investors and corporations as it relates to sustainability. 

    And now it's really taking the form of climate change discussion specifically. Hugh, 

    How is Goldman Sachs responded to this specifically with your asset management clients? 

    HUGH: I mean it's an important topic that 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 5 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. 

    Uhm, 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 ask that question. Some of it brought John Goldstein to the firm. 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 would consider sustainability as part of that process. They will have professionals devoted to that in different ways. 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 on best practices around sustainability and also vote our proxies  as an example. And then John will 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 class. 

    KEESA: Great thank you for that and John who 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 what sorts of levers that are that you have right now that are serving communities. 

    JOHN: Yeah, look, 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 in ways that affect companies, markets the economy and and and really across all of our businesses. So you know to give a couple of examples of what that progression looks like you know, I think green bonds have been around for a long time as companies raise capital for environmental purpose. 

    But I think you know, continuing to lean in and innovate in some of these areas. So we worked with the Italian utility in Al to actually have a performance linked bond to say green bonds 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, and I'm happy, uhm, what we want to do is figure out what is really tying that to performance look like 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 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 that then we can work to scale right? So I think that's one core element of this. 

    Number 2 is integrating it with the same kind of advice we give on anything else that's important, so with our Corporate clients is this is important both for their commercial success and certainly to some of their investors actually creating a toolkit. 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 use some financing? Can M&A help right? 'cause 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 Hugh’s World it's how does this show up in a portfolio from overall construction to implementation. 

    And in investment banking it, you know, integrates into just corporate vice the same way we would anything else. It's central to the forward looking success of our clients. 

    KEESA: Great, so let's shift gears just slightly here and talk about infrastructure Week who know that somebody calling it that, the Biden administration recently unveiled the infrastructure spend approach. With a bit of detail, deeper detail. Let's talk about that and what it means for the markets. 

    So what opportunities does this Infrastructure proposal 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. You could you shed some light on that. 

    HUGH:Yeah, and you know, maybe case of 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? 'cause I think that's a that's a good lead. 

    So clearly governments are active in trying to shift the energy mix and develop infrastructure so infrastructure is defined broadly. It's not just grids and bridges and roads which are certainly important, but it's broader energy ecosystem and you see activity here in the United States, at the federal level at the state level and across Europe. So if you step out and step back and think of an asset owners total portfolio, They would call and we're advising on. They would ask us to think about what risks is the business mix that's expressed in that portfolio, subject to in light of the shift around the energy, energy infrastructure, and broader infrastructure. 

    So are there risks are there business models that are sort of off the mark and not focused. And what opportunities there are. So if you if you think about the scale, whatever is ultimately passed, we're not sure, 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 situation where that Much capital is moving. Undoubtedly there will be opportunities for the private sector to play a meaningful role. And generally speaking, 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 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 iit'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, going to be subject to is this mix shifts and what opportunities are presented by this big movement of capital. 

    JOHN: Yeah, and I Would build on that. I think as you said, you know a lot of these growth themes which we've been focused on for a long time are now, I think better understood, right? They're more visible. They're more apparent they're seen as being less peripheral 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 if you think about last year when U.S. policy was probably more headwind and tailwind on these themes, 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 huge point capital flows create opportunity. However, the growing popularity and awareness of these themes. 

    Also, a means that it requires discernment right to Hugh’s Point, getting in sooner rather than later finding those parts of 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 2 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. 

    Uh, you know this is, you know, on the rooftops of retailers and warehouses and others, tremendous space, tremendous opportunity, but more labor intensive And so 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 to shape it when it may not be fully formed. That's the work that's required. 

    The broad themes I think clearly a lot of capital flowing, but how to participate in those is quite important. 

    The second thing is sometimes the best opportunities are sort of made not found right, and a good example is work we've done with a battery company called. 

    North Fault, Here's an interesting financing challenges 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 a large facility before we 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 certainly not going to 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. 

    KEESA: So two fantastic things You said there number one is with 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, Definitely a tweetable moment, “Best opportunities are made and not found”. We're hearing a lot about the energy storage market. I think I read that it's set to attract about 620,000,000 to the market by 2040, which is amazing 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 ant hora out in California. And with that one specifically, there seems to be more of an alliance partnerships between Department of Energy. You know Shell and I'm interested in John and seeing you know which areas do you think have the most promise and where the partnerships and alliances play a role. If we're really looking at government as well as private sector NGO's coming together to bring these solutions, do you see there to be lots of promise in the partnerships area there? 

    JOHN: I mean look so much of the work in this space I would describe as living in the land of and not or. I think It's less about one piece or another, but at the end of the day you know transforming the power mix you know 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, takes demand response and their investment opportunities and needs in terms of technology In business models, All across that spectrum, from small or technology companies that are providing innovative technology to the 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 often will get asked this question is about these, you know innovative startups or large incumbent companies. 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 their bigger, faster, stronger in a way that leverages their core capabilities? 

    We also raise money For younger companies, right that are that are building new innovative models, new technologies, raising risk capital for them then to the game. similar in the asset management side. 

    I think you know ranging from and thinking about some of the work you know, Alexa Diliere 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 honestly we see it's a little bit all of the above. 

    HUGH: I could I just jump in there for a second and just put my investor hat on? 

    I totally agree with John And not or, but I'm going to add discernment still matters. So, you know these are exciting themes, no question about it. But as a provider of capital, and this is the mainstreaming point. The laws of economics still apply. But 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 execution, the quality of the team, managing the business, all of those things that would apply to any investment, 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. 

    This, but among the greater number of opportunities, It's important to be discerning, so it's an investing question like any other. 

    JOHN: I I would I would add a, uh, I don't know if I'd call it an underline or a highlighter in all caps. 

    Key just I think QS 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 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 Hugh said, the direction of travel is clear and when that happens we do it. 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 ESG and sustainability sometimes can start to feel like the not investing approaches to Hugh’s Point that you suspend or change the laws of the physics of investing, which for us is not a not a recipe for success. It's not a way to ground a program and it's not a way to Drive strong execution. I think from you know back what really united us back when you know Hugh led the acquisition of Imprint to the work we do invest in management, to Working with our own leadership and board, To launch this 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 us, on our business. 

    And the key was not to enthusiastically chase them, it was to do the work, roll up our sleeves So we had that discernment. And that discernment translates Into either being a good advisor, being a good capital provider, being a good, you know, investor across the range of things we do, but it is that Common Core, right? 

    This is where the world is going, and our job is to navigate it well. 

    KEESA: So we have the theme of discernment. We also have the theme around sticking with the basics, whatever What made a good investment previously is going to 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 your name, your institution to make a difference in various communities, and I specifically would love to chat about the 1,000,000 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? 

    HUGH: Yep, you know, I would say 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 make the economy more inclusive and more vibrant and so clearly, we stand at the crossroads of capital flows, we advise Clients and one of the things that our research colleagues had some work they had done and it's published in in some research called Black Womenomics which is available on our website If people are interested, is the critical role that that black women in particular play in the US economy as entrepreneurs as caregivers as essential Workers and the multiplier effect of creating greater opportunity, And directing capital into that space to which they can avail themselves, would be enormous. For inclusive growth in the United States and so the firm committed $10 billion to invest, as well as an additional $100 million of philanthropic capital to try to narrow opportunity gaps. And for a bold goal of at least 1,000,000 black women in the United States. And our research was ultimately would lay behind it. And so we feel that as a financial institution, using our investing ability to support entrepreneurs, ability to Shepherd companies through their life cycle is a really important role. And so we're going to apply those talents where we can to try to make The economy a more inclusive and more vibrant. 

    JOHN: And I think it's it's this model of when we, you know look under the hood and breakdown 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. From right, which gets into advocacy policy engagement, which could be lifting things up 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 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 will Open 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, which is our core business? You know what we do? How we do an organization, people and culture and then recognizing we can't do it all on our own And that's where philanthropy, partnership and policy come in. 

    KEESA: Right, so the partnerships there come fully at play. Finally, I would love to get your thoughts on where you expect the asset management area in terms of SG investing and sustainable finance to be five years from now. Clearly this is not an anomaly. Clearly it's not going away. 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? 

     HUGH: Well, my belief in my hope is that there will be a convergence around metrics and ways to measure sustainability and progress on both climate and inclusive growth in in portfolios. It's a little bit like saying today 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 and so here we're talking about sustainability and having it be more central to portfolios. Uhm, I imagine that there wasn't a podcast, but if there were 30 years ago or 40 years ago, people might have been talking about risk metrics as something to be added to portfolios. Now we don't do that. I mean things like Sharpe ratio, information ratio, volatility, beta correlation Etc are just part of the way in which portfolios are evaluated, measured and managed. That is, I think metrics around sustainability will be the same. 

    Now that doesn't mean that all portfolios will necessarily agree over 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 Any investor, what they are tools to help you clarify how you're doing and and making the most of your capital. 

    So my expectation is that in in five years will be closer to that state of affairs than we are Today 

    JOHN: Yeah, it's a related question I get asked all the time is if this is a part of where the world is heading Part of good investing, Will, the terminology and field go away right?  I have a slight sort of nuanced, I I think he would 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 #1 the bar of market expectation and baseline performance rises. So, the basic expectation of what doing this well looks like will rise and be more uniformly applied. 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 change is about your own forecast. 

    How do you think about it the melding of views on this with people 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. Because there are 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 also think different people will choose that 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, They have a particularly differentiated approach. I think you're going to see that here, which is no one can, will be able to say I don't do this, but some people will say this is actually my edge, right? And so 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 up and then what's going to 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.  

    KEESA: 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 who you mentioned, Putting resources to work, really leveraging the resources and research. Some of the key takeaways here, The best opportunities are made and not found and we talked about how these were made, Those opportunities were made with Goldman Sachs and also 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. 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. So how do we tackle the things that we can't do alone? And that's where partnerships, philanthropy, etc come into play. 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 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. 

    HUGH: Thanks for having us.

     JOHN: Yeah, exactly, thanks so much.