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Environmental, social, and governance investing (ESG) is socially responsible or mission-based investing, a type of strategy that 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:
- Environmental factors measure how business practices impact the world’s ecosystems—the air, land, and water of our local and global communities
- Social factors take into consideration the well-being 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. 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 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.
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 ESG.
For example, an ESG mutual fund may have some non-ESG investments within the fund, and therefore 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.
“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.”- Abigail Pohlman, head of the Sustainable Solutions Group for Goldman Sachs Private Wealth Management
Q: What are you most excited about in the ESG space right now?
A: We’re most excited about the attention being paid to some of the more social factors, or “S” factors. Historically, there’s been a lot of attention focused on climate-related metrics and climate-related disclosures.
Over the past year, we’ve seen a strong focus on diversity, equity, and inclusion. The data there tends to be a little bit more challenging, particularly around what’s being disclosed, what data is available, and how we can truly understand the diversity practices of any given company. I think there’s been a sea change around transparency and disclosure that I’m hoping will help us find more ways to invest creatively with capital markets to drive better and more inclusive growth over the long term.
The second thing I’m most excited about is the increasing access to sustainable investing. The fact that we can now make ESG-oriented strategies available for clients in our consumer business is a huge win.
Q: How can I get started with ESG investing?
A: It’s important to get a good understanding of what ESG means. But, at the same time, knowing what ESG means to you and to your particular investment strategy is vital. There’s not a one-size-fits-all approach, and you should make sure you know what your goals are before you get started.
The good news is there is an expanding number of options and ways to incorporate ESG into your investment portfolio. And ESG funds really make it easier than ever to tilt your portfolio toward a sustainable investing lens.
It’s also important to recognize that big changes can start with small steps. We view approaching ESG investing as a process and not a singular act. If you try to be a purist and do everything at once, you will be setting yourself up for disappointment.
As more and more investors gravitate toward ESG investing, there will be more research available to investors. From our perspective, it is a very exciting time to get started.
This material is intended for educational purposes only and is provided solely on the basis that it will not constitute investment advice and will not form a primary basis for any personal or plan’s investment decisions. While it is based on information believed to be reliable, no warranty is given as to its accuracy or completeness and it should not be relied upon as such. Goldman Sachs is not a fiduciary with respect to any person or plan by reason of providing the material herein, information and opinions expressed by individuals other than Goldman Sachs employees do not necessarily reflect the view of Goldman Sachs. This material may not, without Goldman Sachs’ prior written consent, be (i) copied, photocopied or duplicated in any form, by any means, or (ii) distributed to any person that is not an employee, officer, director, or authorized agent of the recipient. This material is not an offer or solicitation with respect to the purchase or sale of any security in any jurisdiction. Investing involves risk, including the potential loss of money invested. Past performance does not guarantee future results. Neither asset diversification or investment in a continuous or periodic investment plan guarantees a profit or protects against a loss. Information and opinions provided herein are as of the date of this material only and are subject to change without notice.
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