Helping clients navigate complex sustainability challenges and opportunities

Goldman Sachs has been helping clients and partners with their sustainability objectives for over two decades, and the challenges remain formidable, according to the firm’s 2023 Sustainability Report, titled “Driving Long-Term Value: Our Client-Centric Sustainability Strategy.”

We spoke with Kara Succoso Mangone, head of Goldman Sachs’ Sustainable Finance Group, about the firm’s sustainability report, the road toward net-zero carbon emissions, what hurdles remain, and how they are being addressed.

Where does our energy system stand on the road to net zero? Is there a gap between global climate ambition and the reality of where we are today?

All economies around the world depend on a well-functioning energy system for their basic goods and services. Today that energy system is supported by fossil fuels, to the tune of 80%, making it a very significant dependency.

At the same time, we have seen a strong increase in renewables, with renewable energy capacity additions around the world growing by 50% last year to a record high. The cost of some renewables has come down significantly — the cost of energy from solar for example is estimated to have fallen about 80% between 2010 and 2019. So tremendous momentum on that side.

Meanwhile, demand for energy is expected to rise because of several factors, including power consumption needed to support the electrification of the economy, on-shoring/the increase in domestic manufacturing, and data centers and generative AI. For instance, global data center power demand is poised to more than double by 2030.

The energy system is extremely complex, and subject to many external forces. Over the past few years geopolitical conflicts, supply chain disruptions, and inflation, to name a few, have had impacts on energy and decarbonization. What we’re seeing play out is a transition to a lower carbon energy that is very intricate and complex and will likely take time.

How is the transition going to happen, and how will the gap between ambition and reality narrow?

There are three primary levers to address gaps — government, private sector, and a mix of the two.

The challenging geopolitical and macroeconomic landscape facing decarbonization strategies underscores the critical role that governments need to play, have played, and should continue to play in this area. That’s everything from setting policy, to providing incentives, to helping solve implementation challenges. They must balance this with a focus on energy security and affordability as well. And, obviously, the private sector plays a very, very critical role, investing in innovative decarbonization technologies that can accelerate transition — all while continuing to finance traditional energy needs. The interplay between these two levers is critical — as government policy has an impact on our clients’ decarbonization goals and our ability to support them.

There’s also a third lever, public-private partnerships, which combines the two. Particularly in developing economies, we see the opportunity to leverage innovative financing structures like blended finance to support certain projects or markets that have specific risks and challenges that would otherwise be difficult to address.

The cost of energy transition has been estimated in the $3 trillion to $6 trillion range per annum through 2050. Can you put that amount in perspective?

It’s an enormous amount and there is quite a large range in estimates. The point is that we are not talking about millions or billions, but trillions. Those estimates are big in part because carbon-emitting processes and inputs support so many sectors across the economy and not all technology solutions are presently at commercial scale.

When you look at the investment needed to lower the carbon profile of very large industries — for example, transportation or buildings — you start to get to close to $1 trillion of carbon abatement annually. This can include the development and scaling of traditional renewables, like solar and wind, to emerging technologies like green hydrogen, carbon capture, and geothermal — but also the storage and infrastructure components. These are all really important areas that require vast sums of investment.

All pockets of financing — the private sector, the public sector, and a blending of the two — are critical because decarbonization technologies are at very different points on the cost curve. And a project that is economical or commercially viable in one market may not be in another market.

Goldman Sachs has a $750 billion target for sustainability finance. What is that exactly and where is the firm in terms of meeting that goal?

In 2019, we launched a 10-year $750 billion commitment to support client demand for sustainable finance solutions across our financing, investing, and advisory work. It was a move to capture the commercial opportunity we saw with our clients emerging from two broad themes. The first is climate transition and the other is inclusive growth, which includes areas where we see interest from clients including financial inclusion and investing in communities. We have made a lot of progress since 2019 and have so far achieved ~$555 billion in commercial activity. That’s almost 75% of our target within the first four years. It breaks down to $302 billion in climate transition and $74 billion in inclusive growth, with the remainder in themes related to both.

Examples include allocating capital to a leading lithium-ion battery materials manufacturer that is looking to strengthen the US battery supply chain for electric vehicles. Another example is investing in a leading behavioral health provider enablement platform striving to increase access between mental health professionals and patients.

Notwithstanding that commitment, how else does sustainability and sustainable finance fit in at Goldman?

We have a long history in sustainability and we have expanded our commercial capabilities in sustainable finance over time to best serve our clients in meeting their sustainability goals. There are really three components to our strategy. First is the work we do with our clients — and because our business is focused on delivering a broad range of services to a diversified client base, this is arguably the most meaningful work we do in sustainability. Second is how we manage our firm and operations – it’s important for us to walk the walk — and third is how we address market gaps where we leverage our platform, our capabilities and insights, and expertise alongside strategic partners.

What are some of the key programs and partnerships through which Goldman is promoting sustainable economic growth?

One of the earliest examples is back in 2004 where we partnered with the Wildlife Conservation Society (WCS) to form Karukinka Natural Park — 735,000 acres of land in Tierra del Fuego in Chile. It’s a park with incredibly rich biodiversity, and we worked with WCS to preserve this land in perpetuity.

More recently, we launched a blended finance climate innovation facility with Bloomberg Philanthropies and the Asian Development Bank, which catalyzed ~$500 million of public and private pools of capital invested in seven low-carbon technology projects in India and Vietnam.

We have also worked extensively to support economic opportunities through programs like our 10,000 Small Businesses program, where we have deployed more than $750 million toward business education and access to capital, and One Million Black Women, an initiative to help Black women and solo entrepreneurs grow their businesses, and where we have deployed ~$2.3 billion.

What is the role of regulation in terms of sustainability investing?

Sustainability reporting was mostly voluntary up until a few years ago, so we have had decades of disclosure built largely on voluntary frameworks. That era is ending with a proliferation of regulatory frameworks — from market taxonomies to mandatory reporting requirements — across different markets. Depending on what your company does and where it operates you might have four, five, or six different jurisdictional regulatory requirements with which you will need to comply over time.

Notably, reporting is just one component of regulation and policy. You also have incentives like those in the Inflation Reduction Act in the US which are helping to decrease the cost of low-carbon solutions. And then we have carbon emissions schemes like the EU Emissions Trading System which require in-scope companies to pay for emissions.

What are companies going to have to do to meet new regulatory reporting requirements?

In 2025, the European Commission’s Corporate Sustainability Reporting Directive will come online which will entail providing hundreds of potential metrics that will cover not only financial exposure, but also environmental and social impacts. Most corporations have never done this before, so it’s going to create the need for new operational processes, reporting controls, and data measurement and management. We will be one of the first US banks that is subject to the full scope of this regulation next year, so we are investing across this area.

Data has always been a very important backbone of sustainable finance, as you need data to form investment decisions as well as measuring impact and mitigating risk. Now it’s going to play an even bigger role in terms of regulatory reporting requirements.

Could AI be helpful in helping companies with new data requirements?

We’re early in the process, but we do see a few potential use cases for generative AI in this space. We’re talking about large volumes of datasets and different sources of information that could be automatically structured and summarized in a decision-useful way. There’s a potential to leverage AI in several areas, such as analyzing a company’s emissions disclosures or more efficiently capturing and mapping weather or nature-related data, and this will evolve in the next few years as reporting requirements grow.

 

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