With environmental issues at the forefront of investors’ minds, we are putting greater focus on environmental, social and governance (ESG) research and sustainability analysis implementation in our Goldman Sachs Asset Management (GSAM) division.
Responsible and Sustainable Investing at GSAM
At GSAM, we believe responsible and sustainable investing extends beyond the evaluation of quantitative factors and traditional fundamental analysis. Where material, it should include the analysis of an entity’s impact on its stakeholders, the environment and society. We recognize that these environmental, social and governance (ESG) factors can affect investment performance, expose potential investment risks and provide an indication of management excellence and leadership. As a result, it is important for our investment professionals to understand how ESG factors influence our investment decisions. To this end, GSAM is working to more formally integrate the analysis of these factors into our investment processes, where appropriate and consistent with our fiduciary duty, as well as communicate on our progress in this regard and contribute to the development of best practices within the investment community.
GSAM is signatory to the United Nations Principles of Responsible Investment (UNPRI) and the UK Stewardship Code, and is committed to responsible and sustainable investing and the formal integration of ESG principles into investment strategies and client solutions globally, where applicable and consistent with fiduciary duty. For further information, please visit our GSAM Citizenship website and see our GSAM Statement on Responsible and Sustainable Investing.
The GSAM Fundamental Equity team manages a range of equity strategies across market capitalizations, investment styles and emerging and developed markets. We invest with a long-term view and seek to invest in companies with shareholder-oriented management teams and a focus on quality characteristics. These characteristics include sustainable or competitive operating advantages, strong balance sheets and cash flow generation, management teams who are excellent stewards of capital, and the ability to earn in excess of the cost of capital.
The GSAM Fundamental Equity team has long considered ESG, particularly governance, issues to varying degrees in the investment process. Integrating ESG factors into the investment process is a valuable way to identify key risk and return drivers for our investments. Adherence to best practices in the ESG areas can benefit a company by minimizing its costs and liabilities, and enhancing its profitability and competitive positioning. When evaluating companies and meeting with management teams, we believe that a proactive focus on sustainability can be an indication of a strong corporate strategy and business model.
In order to quantify a company’s commitment to ESG responsibility, over the past several years we have developed an in-house 60+ factor ESG evaluation scoring method which we apply to all names within our US and Global Responsible Equity strategies. Within these portfolios, we start by identifying investment candidates that we believe can deliver superior risk adjusted returns over time. We then seek to emphasize companies that demonstrate ESG leadership alongside superior industry position and financial resiliency. These companies must meet or exceed our ESG hurdle rate based on our evaluation factors, and we also look for ESG red flags that may signal potential issues at the company. Thoughtful and disciplined risk management is another critical step in the process.
In addition to resources dedicated solely to ESG and governance analysis, designated portfolio managers and/or research analysts within our regional investment teams help apply our in-house evaluation method to names within these portfolios and also help integrate a smaller subset of these factors into the broader Fundamental Equity universe where relevant.