Process and Scope
Our advisory, financing and direct investing teams integrate environmental and social due diligence as part of their normal course due diligence. Transactions which may have significant environmental or social risks, including reputational risks, are elevated for enhanced review and business selection discussion. The Sustainable Finance Group (SFG) assists transaction teams by providing guidance on environmental-related matters, doing independent reviews and identifying mitigants and positive engagement opportunities with the client to reduce material risk.
We also have various committees that oversee our business selection decisions and risk management. For example, our Physical Commodities Review Committee, a cross-divisional governance committee, ensures that we have a consistent approach to evaluating and managing environmental, health and safety (EHS) risks associated with engaging in, investing in, or the financing of physical commodity-related activities.
Client’s Expression of Interest
The client expresses an interest in exploring a potential transaction with Goldman Sachs. Depending on the nature of the proposed transaction, Goldman Sachs could be acting as a financial advisor, underwriter or investor.
Initial Assessment of a Possible Transaction
As part of the overall assessment of whether the firm should pursue a proposed transaction, the Business Intelligence Group (BIG), which is part of the Legal Department, will evaluate when there are particular environmental and social risks by applying the guidelines in our Environmental Policy Framework and reviewing available information. BIG assesses broader risk factors including potential legal, regulatory, governance and social risks during the transaction review process. When potentially material environmental or social risks are identified, decisions around business selection involve escalation to relevant key committee members, business leaders, and when required, the Chairman’s Office. There are several possible outcomes from this initial assessment of a new transaction opportunity; four case studies are outlined below.
BIG may advise that the perceived environmental and social risks are too high and our opportunity to engage with the client to mitigate the risks may be limited, and therefore the firm may decide not to proceed with the transaction.
The firm may collectively decide that the proposed transaction can proceed to the next stage, which requires undertaking due diligence to more thoroughly understand the material risks and mitigants identified during the initial assessment process.
Due Diligence - Understanding Material Risks & Mitigants
Business teams integrate environmental and social due diligence as part of their normal course due diligence requirement where relevant. BIG assists business teams by providing guidance on environmental and social related matters, doing independent reviews, and identifying mitigants and positive engagement opportunities with the client to reduce material risks. Please see our due diligence guidelines and approach for sectors with particular environmental sensitivity. In certain cases, the Corporate Environmental Management team, which is an in-house team of environmental consultants with strong technical expertise, will also conduct in-depth due diligence on environmental, health and safety (EHS) and social issues to assess and mitigate transactional risk for business teams. In this stage, business teams will document the risks and possible mitigating factors in preparation for committee discussions.
If the transaction progresses based on the outcome of due diligence, the next step involves approval by key committees, which meet regularly to review transaction opportunities. Committees are responsible for, among other duties, managing reputational risk for the firm and as part of that remit will consider material environmental and social risks related to relevant transactions.
We have various committees that oversee our business selection decisions and risk management, which may vary by division and region. The approval process can be iterative and there may be critical follow-ups and postings assigned to teams, which must be completed before returning to committee to seek final approval for a transaction.
Outcomes of the Approval Process
Following due diligence and review of the transaction by relevant Committees, there are three potential outcomes, summarized below with select case studies.
Transaction Conditionally Approved Subject to Environmental and Social Conditions
Hydropower in a developing country: Goldman Sachs was asked to arrange a loan facility on behalf of a company developing a hydropower project for the national government. Through our review, we determined an Environmental and Social Impact Assessment (ESIA) was carried out pursuant to the host country’s law and standards, but did not meet international best practice. We engaged our Corporate Environmental Management team, which includes staff with technical environmental expertise. Working together, we were able to encourage our client to re-perform its ESIA according to IFC Performance Standards which are more stringent than local law in this case. The ESIA confirmed there were no significant environmental issues; however, there were a number of affected households through the project’s construction and operational phases, requiring both resettlement and compensation. After reviewing the proposed Resettlement Action Plan, we recommended and our client agreed to increase the compensation to reflect international best practices. After conducting our own on-site due diligence, which included meeting with families who had been resettled and who were awaiting resettlement, we concluded that the project materially followed best practices under IFC Performance Standards for new hydropower development and that the households had been fully consulted and felt appropriately compensated. By facilitating the adoption of more sustainable practices, we are able to better serve the long-term interests of our clients, the communities and the environment in which it operates, and ensure prudent risk management for the firm.
Mining project in a developed country: Goldman Sachs was asked to participate in a financing for a mineral mining company operating in a location with a potentially sensitive ecosystem. After preliminary due diligence, we noted that nearby indigenous communities had raised environmental and social considerations regarding the company’s initial plans for expansion, which entailed new infrastructure. During the period of our discussions and diligence, we engaged our Corporate Environmental Management team and third-party consultants who conducted on-site due diligence, including meeting with community members, technical engineers, and company representatives, and reviewing the EIS and a revised expansion plan. We were able to confirm that the revised plan sufficiently incorporated indigenous communities’ concerns, adequately addressed potential environmental impacts, and demonstrated progress in commitment to socio-economic initiatives (including training, employment, social programs and royalty agreements). Confirmation of these factors and the company’s capacity for environmental and social risk management helped the firm conduct satisfactory due diligence to serve the needs of our client while managing environmental and social risk for the firm.
Transaction Not Approved
Industrial processing facility in a developing country: Goldman Sachs evaluated a transaction to finance an industrial processing facility associated with a mining operation. After undertaking our due diligence, we determined that local community members strongly opposed the facility over concerns around the waste it generated and stored on-site, in addition to the possibility for contamination of local water supplies. During due diligence, we learned that community members did not feel that they were appropriately engaged prior to the development of this facility and the Environmental and Social Impact Assessment lacked an adequate waste disposal method to address these concerns. After engaging with the potential client’s management team, we concluded that there were insufficient mitigating factors to the risks. Because the factory was too far along in construction, our ability to constructively engage with our client was limited and therefore we declined to participate in the transaction.
Thermal power generation in a developing country: Goldman Sachs evaluated a potential financing related to a power plant developer in an emerging market. Through due diligence, we confirmed that the project utilizes subcritical technology, which produces higher carbon emissions and other pollutants compared to other available technologies. We were also unable to fully ascertain the energy needs and assessment of low carbon alternatives in the region. Given this and the use of subcritical generation technology, we declined to participate in the transaction.