“The needs of our clients will increasingly be defined by sustainable growth,” wrote David Solomon, chairman and CEO of Goldman Sachs in a recent editorial in the Financial Times.1 “Our firm’s long‑term financial success, the stability of the global economy and society’s overall well-being depend on it.”
And with that, Mr. Solomon announced Goldman Sachs — one of the world’s leading global investment banking, securities and investment management firms — would be mobilizing US$750 billion through financing, investing and advisory activity over the coming decade to address climate transition and inclusive growth. The firm would focus on nine key areas, he noted, including clean energy and transport, sustainable food and agriculture, and financial inclusion.
While the headline number certainly grabbed the attention of many in the financial industry, the reality is that Goldman Sachs has always been one of the original pioneers of sustainable finance and environmental, social and governance (ESG)-related investing.
They were one of the first banks to publish a comprehensive environmental policy framework. They also helped bring one of the first vaccine bonds to market when they led International Finance Facility for Immunisation (IFFIm)’s inaugural bond, a US$1 billion 5-year benchmark issuance, when they were founded in 2006 before “social bonds” existed as a discrete concept. And they were early innovators in the green bond and impact investing space.
Our focus is on partnering with all of the businesses to deliver our holistic capabilities while coming up with the right strategy and the right products and services that make sense for each of the businesses and our clients.
“In many ways, we have always been at the forefront of the ESG agenda,” noted Kyung-Ah Park, Head of Environmental Markets and Innovation in Goldman’s Sustainable Finance Group. “But we’re not doing it due to normative considerations and as a way to make others feel good about us. For us, sustainability needs to become a core muscle that we flex to serve our clients and create sustainable economic value.”
Focusing on the opportunity
Goldman Sachs certainly believes there is massive value to be created in the space. And it has seen demand for sustainability-linked services increase dramatically, particularly among corporate clients — including those in traditionally more carbon intense sectors — and pension funds, institutional investors and public sector funds.
“Over the past 12 to 18 months, the dialogue from our clients has really accelerated,” noted Kara Mangone, Chief Operating Officer of the Sustainable Finance Group. “It’s not just the volume of requests and interest we are getting — it’s also the depth and complexity of the challenges our clients are trying to solve. It’s becoming incredibly strategic and multifaceted.”
Recognizing that the firm would need to take a much more proactive and coordinated approach, Goldman Sachs created the Sustainable Finance Group with a mandate to partner with all of the firm’s global businesses to drive innovation, serve clients and capture emerging opportunities related to climate transition and inclusive growth.
“The expertise and insights we can harness for sustainable finance are different in Investment Banking than those in the Global Markets or Asset Management Divisions, but also synergistic and incredibly expansive.” noted Ms. Park. “Our focus is on partnering with all of the businesses to deliver our holistic capabilities while coming up with the right strategy and the right products and services that make sense for each of the businesses and our clients.”
Taking a leadership role
According to Ms. Park and Ms. Mangone, many of the group’s businesses are already ‘leaning into’ the opportunity. Goldman’s Investment Banking Division has brought a number of innovations to the ESG bond market, such as working with the Government of Ecuador to create the world’s first sovereign social bond and leading the world’s first dedicated climate resilience bond, issued by the European Bank for Reconstruction and Development (EBRD). Additionally, to help alleviate the economic and social impact of COVID-19, in 2020 Goldman Sachs has led over US$20 billion of COVID-related bonds globally.
They also led the first non-profit green bond for conservation, bringing together both climate and inclusive growth goals. Other divisions have also been pioneers in renewables — Goldman Sachs Renewable Power Group, a private company managed by Goldman Sachs Asset Management, is one of the largest owners and operators of distributed generation solar assets in the United States and provides risk-adjusted clean energy investment opportunities for investors.
In his Financial Times editorial, Mr. Solomon notes his organization’s leadership in structuring the world’s first‑ever general sustainability performance linked corporate purpose bond for an Italian multinational energy company. Simply put, the bond offers investors an extra 25 basis point coupon if the company fails to meet its stated sustainability key performance indicator (KPI) goal (which is to have renewables be at least 55 percent share of its installed power capacity by the end of next year).
It's not just the volume of requests and interest we are getting - it's also the depth and complexity of the challenges our clients are trying to solve.
“The markets really embraced that deal because it shows the company has a holistic, sustainable strategy,” noted Ms. Mangone. “Investors were attracted to the very tangible covenant that showed the company had skin in the game. And they also wanted to invest in a company that is at the forefront of the climate transition, taking measurable steps to become more resilient and drive stronger growth.”
While the firm is clearly focused on becoming a steward for companies moving towards the low-carbon economy and driving inclusive growth, leadership is also clear that they will not simply abandon their carbon-intensive clients. “The world will continue to produce and use fossil-based fuels, airplanes, cars and industrial goods,” acknowledged Mr. Solomon. “And Goldman Sachs will continue to support clients in transactions that are important to economic activity.”
However, the firm is also very clear that their plan is to help these clients move through the climate transition in a way that allows them to achieve sustainable growth. In large part, this is because Goldman Sachs’ own internal research and analysis suggests that some industries — such as coal-fired electricity generation facilities — are simply no longer economically viable over the long‑term.
“We are fundamentally in a long-term client relationship business. As such, our goal is to engage with clients across all sectors including those in more carbon intense areas to help them with their diversification plans and strategies,” noted Ms. Park. “That is the right thing to do to better serve our clients, manage risk, and help address the climate transition. But, ultimately, there will be difficult decisions to decline certain financings, such as in thermal coal, if clients do not diversify.”
What makes a leader?
The leadership shown by Goldman’s executives and management teams is famous. For his part, Mr. Solomon spearheads his own firm’s actions on the climate and inclusive growth agendas. In 2019, Goldman announced new hiring goals for all analysts and all entry-level associates as well as a requirement to interview two diverse qualified candidates for each open role where available in an effort to increase the representation of all diverse professionals across seniority levels. Mr. Solomon also announced in January that the firm will only underwrite initial public offerings (IPOs) in the US and Europe for companies with at least one diverse board member, rooted in Goldman’s commitment to driving inclusive growth through their work with clients. In addition, under Mr. Solomon’s leadership, the firm has joined the UN’s Climate Finance Leadership Initiative and serves as a founding member of the Climate Leadership Council.
The Sustainable Finance Group also has the support of the firm’s most senior business leaders from across the globe. The Investment Banking Division, recognizing that sustainability is a core part of their clients’ agenda, formed a dedicated Sustainable Solutions Council. The group is responsible for coordinating across industry and product disciplines globally to drive content and innovation with client coverage professionals, to help provide corporates with the most comprehensive sustainability expertise available, and to capture opportunities in this fast-growing segment across financing and advisory. The Global Markets Division and Goldman Sachs Asset Management also recently launched their own respective Sustainable Solutions Councils, made up of traders, investment professionals and others to share expertise on sustainable finance and investing, as clients search for ways to achieve climate-change investment commitments.
“Within every division and in every market, we have leaders that are really engaged and focused on driving this into everything we do for our clients,” added Ms. Park.
That has allowed the Group to encourage the second key aspect: collaboration. Rather than trying to dictate the rules of the game to the businesses, the Sustainable Finance Group works hand-in-hand with them to develop and understand the ‘natural roots’ of sustainable finance within each of the divisions. What are the touchpoints? Where are the opportunities? What are the tough questions?
“We always want to be in a place where our colleagues — whether investment bankers or investors — want to bring us in because they understand the commercial value that our perspective can provide,” noted Ms. Mangone.
This requires deep expertise — the third key ingredient to Goldman Sachs’ success. The firm has been clear that they expect their effort to be grounded in a core economic view that is based on historical research and future growth expectations. “We are fortunate to have world-class research and analytics capabilities at Goldman Sachs. These insights, combined with our collective experience working with clients, helps us to understand the link between sustainability and performance. In a world where sustainability is mainstream but messy, our approach centers on having knowledge and data to concretely understand the path forward for our clients and markets.” added Ms. Mangone.
We can do this together
While Goldman Sachs’ vision is to become the ‘go-to’ financial institution for sustainable finance, the organization also recognizes that supporting an orderly climate transition in an inclusive way cannot be achieved through the efforts of one single firm.
Particularly in areas such as measurement, disclosure requirements and evolving policies, the firm is actively working with a range of stakeholders — even competitors — to help create some clarity and standardization around the global approach to ESG and sustainable finance.
“We see a lot of opportunity to work with various stakeholders to help move the market to a positive place in certain core areas that are particularly relevant to achieving some of these important global goals,” added Ms. Park.
As Mr. Solomon noted in his editorial, “There is not only an urgent need to act, but also a powerful business and investing case to do so. That gives me hope for what we can achieve and conviction that financial institutions can play a critical role.”
Goldman Sachs is certainly ‘leaning in’ to play their part.
Helping SME through COVID-19
Goldman Sachs believes small business owners and start-up entrepreneurs fuel the engine of local and national economies all over the world. COVID-19 is putting extraordinary pressure on all of society, and they believe they have a responsibility to help.
For small businesses, Goldman Sachs developed a US$525 million Small Business Stimulus Package that includes US$500 million to provide emergency loans to small businesses across the US, and US$25 million in grants to Community Development Financial Institutions (CDFIs) and other mission-driven lenders.
They’re also providing an additional US$25 million commitment through their Goldman Sachs Gives COVID-19 Relief Fund to support healthcare organizations, frontline responders, and the hardest-hit communities. To further encourage giving toward relief efforts, they’ve also established a special matching gift program for their people, up to a total of US$5 million.
Chief Operating Officer, Goldman Sachs’ Sustainable Finance Group
Kara is Chief Operating Officer of the Sustainable Finance Group, which is responsible for partnering with the firm’s businesses to drive sustainability-related commercial activity. This includes helping to deliver leading expertise and capabilities to the firm’s clients across sustainable growth themes as well as driving innovation.
Head of Environmental Markets and Innovation, Goldman Sachs’ Sustainable Finance Group
Kyung-Ah is Head of Environmental Markets and Innovation in the Sustainable Finance Group. She works closely with the firm’s global business on driving market solutions and innovative financings across sustainability and leads the work on climate transition policy.