Unpacking What ESG Investing Really Means

When you’re looking to make an investment, numbers are important, A.K.A. those long, number-heavy financial statements. But many investors are increasingly considering non-financial information about a company when making investment decisions, things like how it’s tackling climate change, diversity or equal pay. This type of investment strategy may be referred to by a few different names – like environmental, social and governance investing (or ESG investing, for short), socially responsible investing or mission-based investing. And while there are distinctions between those terms, there’s no doubt this type of strategy is becoming increasingly popular.

But what is ESG investing, and how can you incorporate it into your portfolio? We sat down with Abigail Pohlman, head of the Sustainable Solutions Group for Goldman Sachs Private Wealth Management, to learn more about ESG investing and how Goldman Sachs approaches this type of strategy. 

Q: What is ESG investing?

A: ESG investing is defined as investing that incorporates sustainability principles and ESG criteria into the investment decision-making process. 

ESG stands for environmental, social, and governance, and here’s what each category broadly means: 

• When you think about the environmental factors, they measure how business practices impact the world’s ecosystems – the air, the land, the water of our local and global communities.
• The social factors take into consideration the wellbeing and safety of employees and how businesses are interacting with the communities in which they operate
• Governance factors evaluate the ethics and longevity of corporate management. They’re really asking: “How well is this business run?” 

ESG can mean different things to different people, and there is no agreed-upon definition of these specific criteria. Investors can focus broadly on a full suite of ESG criteria or focus in on a narrow set of one or two criteria that mean the most to them.

Q: What does ESG investing look like at Goldman Sachs?

A: We believe that ESG and sustainable investing are, first and foremost, investing. What we mean is that sustainable investing requires the same discipline and rigor as any other investment strategy, while still focusing on the goal of achieving financial returns.

We believe that the best strategies start by understanding our clients’ objectives—both ESG and broader investment objectives—and then identifying what’s available as investable opportunities in the market.

Goldman Sachs has a tradition of environmental stewardship that goes back decades. In 2019, we made a 10-year commitment of $750 billion in financing, investing, and advisory activities to address climate change and achieve sustainable and inclusive growth. By the end of 2020, we were very proud to announce that we had achieved more than 20% of our sustainable finance goals. 

Finally, Goldman Sachs is committed to being an active participant in ESG efforts, which includes providing the necessary resources for our clients to incorporate ESG factors into their investment strategy.

Goldman Sachs is committed to being an active participant in ESG efforts.

Q: What are some misconceptions about ESG investing?

A: One of the biggest misconceptions is that ESG investing is all one thing, and there’s a “right” way to do it. In fact, there are different tools and approaches. For example, there are some strategies that are trying to reflect the market, and there are other strategies that are trying to beat or outperform the market. 

There’s also a misconception that you must sacrifice returns in order to make a positive impact. Goldman Sachs takes the position that ESG strategies not only perform well relative to non-ESG counterparts, but in some cases, they can also outperform.

In many cases, ESG is just “good” investing. Two examples are:

• A company that has better environmental policies and procedures is going to open itself up to some cost savings associated with water usage, potential permitting delays and legal costs
• A company that has a more diverse leadership team and workforce has the potential to see lower recruiting costs, higher innovation and potentially higher productivity

It’s also important to be wary of labels around ESG. Because a strategy is labeled as “ESG” or “sustainable” does not mean that it’s a pure, 100% ESG strategy. And it may not meet your definition of what ESG is.

Take an ESG mutual fund. There may be some non-ESG investments within the fund, and there may not be a suitable ESG option to fulfill a specific need across the entire mutual fund’s investment criteria. Even though the fund may not take a pure approach, it's still going to favor ESG investments – meaning companies with better ESG practices – and/or it’s going to “tilt” toward investments that are incorporating these factors.