The ESG swell is now a tsunami — are you riding the wave?

Michael Bruun, Head of Private Equity for Goldman Sachs’ Asset Management Division in Europe, the Middle East and Africa (EMEA), recalled a moment mid-pandemic, where he looked up at the sky and noticed it was bluer than usual. Whether it actually was or not, NASA indeed found that air pollution significantly decreased during the Covid-19 lockdown.¹

“Covid caused all of us, at a human level, to slow down, take a breath and appreciate nature,” said Michael.

He pointed to this new level of environmental awareness as a contributing factor in the acceleration of environmental, social and governance (ESG) investing during the past 18 months.

“Investing in ESG used to feel like swimming upstream, but now we have regulators, consumers and technology, all converging to create a sustainability tsunami,” he said. “For the first time, we’re seeing a massive amount of opportunities, with investors in both public and private markets deploying meaningful amounts of money into sustainable strategies.”

Michael discussed this growth and the future of ESG investing at the EMEA Goldman Sachs Charity Forum, with Amy Jupe, Global Co-head of AIMS Private Equity Primaries and Letitia Webster, Chief Sustainability Officer for the Asset Management Division at Goldman Sachs.

To understand where sustainable investing is headed, we have to contrast the past with the present. Ten years ago, only a small amount of capital was directed towards ESG opportunities, but as of 2020, approximately 36% — $35.3 trillion — of all professionally managed assets were invested in an ESG strategy.²

Underscoring that trend is the fact that 90% of S&P 500 companies published a sustainability report in 2019, compared to only 20% in 2011.³ Letitia said this trend is now expanding from public markets to private markets, such as private equity, private credit and real estate, where currently only a small fraction of capital is committed to ESG and impact investments.

“The last decade involved scrutiny of public companies, while the private markets really flew under the radar. There is now an increased expectation for the private markets to ramp up their sustainability efforts,” said Letitia.  

Letitia explained that companies will face increasing pressure to be accountable and transparent about what their impact is, on the environment and society at large, and how they’re managing and monitoring these impacts. She envisions a future where sustainability metrics are easy to track and decipher.

“Just like you have a nutrition label on your crackers and peanut butter showing you how much salt, sodium and fat there is, you may have a similar label [in the future] on your apparel detailing its carbon footprint.”

Empowering consumers with this information is an important tool for guiding more informed choices. Letitia said the demand for transparency is also climbing as Millennials and Gen Z enter their peak earning and spending years with a shared desire for a sustainable future. 

It is not only consumers, but also employees who expect demonstrated commitment to sustainable practices from their employers. Michael said workers are asking for transparency and expecting their employers to act and create science-based emissions targets.

“Fifty-eight percent of people starting a job now ask questions about the company’s sustainability footprint.⁴ If you want to attract good talent, you need a strong sustainability strategy,” said Michael.

Demand for measurable sustainable goals and strategies sends a strong signal that is now making its way into the boardroom.

“When an investor asks a Chief Financial Officer ‘what’s your climate strategy and what are you doing to meet climate goals’, they snap to attention,” said Letitia. “That’s when we get those urgent calls from leadership asking about what they can do and the actions they can take.”

Regardless of where we want to be in the future, our present involves infrastructure, supply chains and businesses that are still dependent on unsustainable resources such as fossil fuels. Therefore, Michael said, the answer is not to go ‘cold turkey’ on all things oil, gas and coal, but to accept these industries will play a role over time as the world adopts a lower carbon energy mix.

“This transition is happening very quickly. That’s why we see a spike in energy prices and a massive strain on supply chains,” said Michael. “Divestment is about transitioning, not simply shutting down oil wells and abandoning steel mills.”

He explained that some of his team’s best and most rewarding investments are transition stories, such as when they helped to transform a Denmark-based gas company into the world’s largest offshore wind company.

Further, Letitia pointed out that it is important to understand divestment is not a panacea for achieving a low carbon future given it takes away shareholders ability to serve as active owners.  

“Divesting just transfers the responsibility of that asset to someone else who might not be as focused on sustainable investing,” said Letitia. “When a firm like Goldman Sachs has clear responsible investing practices, we can act as stewards and help our [portfolio] companies manage that transition. And then we won’t leave people behind.”

The landscape for investing sustainably and in the energy transition specifically is fundamentally different today than it was even a few years ago, which means that divestment is not the only tool available to investors. Both Letitia and Michael cited tremendous growth and opportunity in private market impact investments in renewable energy and sustainable transportation infrastructure.

“Sustainable investing is a long-term strategy and you have to be willing to accept some volatility. But the end destination is incredibly favorable,” said Michael.

Please reach out to your Goldman Sachs Advisor or visit privatewealth.goldmansachs.com for more insights on ESG and impact investing.

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1. NASA: Q&A: Scientists Analyze How the Pandemic Affected Air Quality (accessed October 2021): nasa.gov
    
2. Global Sustainable Investment Alliance 2021: Global Sustainable Investment Alliance, 2020, gsi-alliance.org
    
3. Governance and Accountability Institute: Annual 2020 Flash Report (accessed October 2021): ga-institute.com/
    
4. McKinsey & Company: Trends Shaping the Next Normal (accessed November 2021): mckinsey.com