What does it mean to be an environmental, social and governance (ESG) investor? For John Goldstein, co-founder of Imprint Capital and a managing director in Goldman Sachs Asset Management, investing for ESG requires the same rigor and discipline as "traditional" investing, and the distinction between the two is growing increasingly irrelevant. With better tools to parse data and an ever-expanding understanding of risk, ESG investing has gone from niche to mainstream.
This episode was recorded on February 19, 2016.
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Copyright 2016 Goldman Sachs. All rights reserved.
This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is exchanges to Goldman Sachs, where people from our firm share their insights on developments currently shaping markets, industries and the global economy. I'm Jake Seaward global head of corporate communications here at the firm today, we're going to talk about impact and environmental, social and governance, investing also known as Esg Investing Goldman Sachs Asset Management or Gsam last August bought an advisor imprint capital to help broaden the firms. Esg efforts, John Goldstein, who cofounded imprint and now helps lead. Our esg platform is here today to discuss his new,
role in the future of sustainable. Investing John welcome to the program thanks for having me Jake, so John there's been a lot of talk in the financial community about socially responsible investing lately and people are calling it impacted.
Best thing: they call it mission driving investing. Yes, g, investing mapped out for us. How should someone makes sense of all this? The someone is not following it every day, what all the different categories look like from of experience, professionals, we're so parsing. The alphabet soup of these different disciplines is daunting, but important people use the same words to mean different things. Different words mean the same things all around this broad question of. How do we deploy resources in line with things we may care about or want to see in the world? So we divided into three
categories. Alignment, integration, an impact, so first alignment, alignment fundamentally is about making investments in a way that get a certain underline financial exposure. It could be to an equity market, a debt market, you name it.
But with a high degree of alignment relative to a value. Someone has
now those values it could be around gender equity. It could be around climate change, it could be around a whole host of different issues.
But fundamentally the state of the art in alignment is around
maximizing units of that alignment per unit of tracking area
how much you vary from the basic financial exposure. You want something.
I believe this is a recent announcement of a partnership with New York State, who said I want
My basic equity exposure. I want Russell one thousand equity exposure, but I want to
My ownership of carbon so worked to create a portfolio that had a seventy percent reduction in the ratable ownership of carbon emissions with a twenty five basis. Point tracking air relative in the index. So the basic financial exposure with a high degree of worse so they're, still very much exposed to the broader market, but they reduced their carbon impact,
Exactly easy to fit into portfolios, large or small, but a high degree of alarm with things, people care and the state of the art is getting increasingly sophisticated on both sides that equation.
On the alignment better use of data and analytics to build,
understand that alignment to quantify not just to say I'm broadly reducing emissions, but I'm getting a seventy two percent reduction, my ratable ownership of carbon to use analytics in a more thoughtful way, and
in a financially risk, manage responsible way, because that's alignment move on to integration,
whereas alignment is often about the immateriality of integrating these factors. Issues almost the opposite yesterday is actually. How can I find investment value to drive risk in return by integrating research, data, thematic, industry or companies, specific ways
to use, Ie S g as a source of investment edge. The same way, investment managers are always looking for a way to opera form. Their competitors G Alpha yesterday off right
as with anyone seeking outweigh its hard right. Fighting alpha is hard and
history is not the only way to find it and
by no means a guarantee that someone will find. It, however, were increased.
They seem to integrate into the process of really good managers and a very successful one. That's been atop top decile performer over a decade.
When someone asks what percentage of her performance. Would you tribute to your Esg? His answer is: I have no idea. He is completely integrated that process and we're seeing that mainstream really substantially. So the third is impact impact, our private investments with measurable social, environmental output. These are investments that could be underserved communities with financial.
Health, education, job creation. It could be on climate. A thesis is about having the impact this thesis is about having the impact, and we want an alignment between the investment thesis and the impact thesis, because if,
make. Money is how you do good you come.
Not gonna, get a lot of mission drift. Those things are going to reinforce each other and be a core part of how something grows. So one of
traditional knocks on impact. Investing is that you end up sacrificing market returns because you're not going as broad exposure as you would otherwise, but we've also seen some companies with the factors have the greatest correlation correlational market out performance. So what do you tell clients about those two?
views! This is probably the single most frequently asked question and I think oftentimes. To be honest, the question is asked in the wrong way. Generally speaking, people wouldn't ask or wouldn't think it made tens as does investing work, because the answer to that question is it's hard: it takes effort and care, but it can be done. Well, it's not always done well, but it can be done
while in this is no exception to that- and I think people often are looking for an answer that says it's either magic. It defies the laws of,
six gravity in your magically outperforms or its poison. It is fundamentally means you can perform, and academic research and experience and, frankly disinvestment logic defy those generalization so of a meadow study was published today. Analyzed almost twenty two
studies of impact of yesterday and financial performance and of those studies, ninety percent of them found and non negative relationship. So
I think what we save the case case. This is a drag on performance, doesn't seem to hold water with a pretty broad base of research
Not negative is not the same thing as positive back to its not magic. It does not poison the fact basis. Not poison is quite clear where else not asserting its magic. It takes care and rigour to do it. But when we look at this right, let's get back
The tax I get back to the bucket alignment. Investing is about. Can you drive the appropriate financial exposure with the appropriate level of alignment so back to New York State example, you're? Looking at that
Can it stay with its very small tracking air perform like the market and achieve a seventy percent plus reduction in emissions? That's what the reporting looks like so far, so good, that's! What's going to continue to track
parents, an imprint we saw working in a variety of ways. It is possible to thoughtfully design, implement that such that those portfolios do what they're supposed to do, which is look like the market with a high degree of alignment. That's what performance there
like so in the last several years, we've seen a lot of attention, governments and others bringing focus on impact in the SG. Investing White House had a round table in two thousand and fourteen last December. This was a big topic at the climate conference in Paris and according to the form for sustainable and responsible investment. Esg integration increased almost eightfold between two thousand and twelve two thousan and fourteen reaching five trillion dollars in US manager asses so you've been in this field since it's very early stages. What's driving the big Uptech an activity in the space recently, the fact that the activity has grown is.
Impossible to this, and just when I think about my day to day, where is the interest coming from the strength of interest across different types of investors? So we spent a lot of time. Thinking about why, and I think we've come to the conclusion. There are a couple key factors number one at a base
Global the core drivers have accelerated those core driver. Some of them are financial, which is the case around risk. In return,
something that may have sounded idealistic a few years ago, like there's, risk around coal that was put forth by Ngos. Another activist turns out to have been basically a preface to what was regulatory policy and engagement risk that has profoundly
The sector once again, it's not magic. It's not poisonous hasn't magically mean he's always good investment things, but the idea that this is pure idealism that this has nothing to do with.
Acting is a little bit of a harder proposition to hold, and when we talked managers, the idea
that this is a relevant part. The toolkit is a much more uncontroversial proposition in it was day five years ago in their these very visible signs of. What's happened, you see cop and climate. You see economic growth in emissions, decoupling for the first time ever the world
relationship with carbon is changing. Where is it going it's hard to say, but that it's changing is relatively clear, that when we can have economic growth without emissions growth, something in that is changing and it makes investors mindful, on the risk of a turn front, we're talking to an emerging market debt manager. That just said when they look back at the major
corporate credit events in emerging markets. A large number of them are driven by a small set of corn corporate governance issues, which then they said well. Let's take that empirical. They as we
into our process. We have these visible examples of why this matters from investment perspective.
Then the non financial side of it stakeholders care a lot. We see this with pensioners. We seized with students I like to joke than the latest survey. One hundred and thirty four percent of millennials want to do the
I think people often put this on millennials and that's true
It goes way beyond that. In terms of other stakeholders, we ve gotten until a little bit of a virtuous cycle,
where that demand, and that recognition has gotten to a point where it's driven innovation in terms of products and service providers which have built proof points and miles of success. Those models, success, drive more demand. More
innovation, try more modest success so that we ve done what we know that accelerating virtuous cycle that is taken a theory and made into what looks like an approachable practice. We have also heard a lot of criticism these days, but she, since the finance,
crisis about so called quarterly or short term capitalism. Dizzy impact investing in energy integration as a possible rebuttal or counterpoint to some of those
I might say rebuttal, but I'd say very consistent with that. We talk to a lot of investors who don't label what they do Esg, but they have the same concerns about short termism. They take a long term perspective. They try to find high quality,
Companies and great management teams that are very well run and they want to own them for a long time. Those are sort of
suddenly sensibilities to industry and sustainability in their very complimentary, and we find this we're going to a its portfolio that tends to invest in managers that have that biased they like quality. They don't like to take lousy companies and clean up. They like high quality teams, high quality companies on them for a really long time, and those companies turned out to have
very good Esg scores, so it's interesting. We hadn't thought about as doing Esg investing, but now that we realize that that connection of high quality companies good management, a longterm perspective, investing not trading, is very in sync. With this approach, and with this model, let's talk a little Goldman Sachs Shop. Last August Goldman Sachs acquired infant capital, the from you built John, so that we could expand our esg and impact investing capabilities for all the clients.
Why the acquisition make sense for your firm. It has been a fascinating process through it. You are very small shop right with sixteen percent firm, happily doing our work based in San Francisco Small New York office, and we assume that's what we keep doing,
came a little but nowhere to us and also to-
ass the world. In back to the comment about the growth in the mark,
this is a sign of where the markers come. So for us, it made sense because we start to realize couple thinks number one investing well take scale, depth and bread.
Infrastructure. We've always been committed to really a course set of things which is want to do more impact in the sd investing we want to do a better job of it and we want to get more leverage and scale out of it, and if you take that seriously a certain point,
the resources of our sixteen percent people. It's hard to scale a little bit hard to scale, and it's just the glimmer of what that reality is like. For example, we work with the quantitative teams here in the data warehouse are an esg,
any analytics going from a few great team.
Of our working with exile to some of the most sophisticated quantitative resources in the world puzzling over how to get meaning insignificance with the issue: data
That's in a new way, the theory of we're gonna have access to more resources. As it's met, the practice has been remarkable so just frankly, to carry on our mission number one. It made sense to this number two once upon a time. People just wanted to do a little bit of this, a toe in the water, five percent of their portfolio, dabble here and
investment there and being a niche firm. That would service that made a lot of sense in that world
The good news in a lot of ways. Is it that people didn't want to stop there, people who started there want to say okay, guys get to twenty. Let's get to fifty. Let's get to a hundred
percent of the whole network of investors that one at least be mindfully engage across their full portfolios and in that context the elder put the whole thing. Together.
In a way? We never thought would be needed or possible with
No one would want it and by the way, it's not possible we're gonna have knit providers like us and large global institutions with their strength, but they don't have the depth and what we do.
Now the world actually wants it.
And we realized thanks to Goldman Sachs, who gently brought this possibility up to us that frankly, we hadn't considered that it was possible. The analytics in this field must be interesting and are not standardized at this point talk a little bit about impact reporting how it's evolving. What is state of the art today not surprising if you feel called impact, investing measuring investing is important and measuring,
impact is important, and I think the impact measurement side is a critical one and one that has not always been, I think, handled effectively. So our approach to it back to some of the earlier comments is find a small set of core metrics that are material to the
that are central to the business model, because we want our financial drivers or impact drivers aligned. How you make money should be part of how you do good, because what that means is we're focused on what matters.
The mission drift are low and it's probably stuff are investing tracks if they're, not tracking, they should be tracking, and we focus on that. I think there a lot of approaches to try to create very expensive standards, and I think one of the things we see is a recurrent theme.
We can have the proliferation and spread of data. We can have concentration on things that are meaningful. We focus on a small number of things that are meaningful. We report on this with all our investors
because what our clients really is they want to know. What am I doing? I want to do things that have some scale. Have some meaning and have
connection was in one of our investor use. They ended up saving six terawatts of power, that's the equivalent of taking the states of Alaska and Hawaii off the grid for a year, so that's meaning scale and connection. That's what people looking for and it's tied to their core.
Because that also ties to their revenue growth and I think, that's like your ratios, there's an efficiency here and because that's where impact metrics really start to matter. If it's an academic compliance process
That's where I got to put a number in a book. So someone sees a number to book. That's not that useful, but if it helps us make manage and understand our decision, so we can be better allocators of capital, so it can be better investors with our investees and engage in a meaningful way. Then that's useful, and so we view it as an essential part of the investing process, not as a separate exercise. So John there are critics of Esg and impact investing. They think it's somewhat naive to believe that their markets,
wish list every problem and they fear that certain areas that are very high need will not get as much attention as others that generate all the headlines. What do you make of that criticism.
The field has not always done itself favours with the breadth of how it talks about a lot of things, because off
its played into the desire to have these generalizations to paint with a broad brush, because sometimes it's
reclaimed what it can do. So we spent a lot of time with people.
Who are ready to be pushing prodded with claims of how great this is- that's how we do some folks have come out and go
a little too far on the market. Triumphal ism spectrum right market are the answer to all of our problems, and the answer is no: not there the right tool for certain jobs there, promising pieces of the puzzle
for some jobs, and we haven't figured out how to use them for others, and I think this
were being able to play across that spectrum, and this is one of the things that's so nice about the full team here is we have folks that work in philanthropy at the firm? They are folks that work in sort of deeper, much higher touch higher engagement, impacted
investing at that edge of how do you engage markets?
and then we're doing the more conventional portfolio impact. Investing that tension is really hard. If people can only write, one kind of check or people are to invest in one sort of model, but if you can pragmatically say what's the right tool,
for the right job. I spent a lot of time often- and I didn't do it in this conversation, but often I'll start by saying before warrant. My answer to a lot of your question will be it depends, and I think that's very true of this field and that's what growing this field looks
like it's getting away from this desire to have generalizations in this binary back and forth, market solutions are good. Market solutions are bad right. You're. All of these different dynamics getting past that two saying all these tools have relevance in different ways in different pathways mechanism. So it's fine to do them well and let's learn and lets take all of these two where they can go peeling get stuck in ivory tower very easily. In this space we had a family foundation, client we're working with them.
Stuck arguing for three years about how much impact investing to do. You had one of the family members that was the co founder of a very successful venture capital firm that thought they should eventually get to two percent and then a family member that thought they should get to one hundred percent and somewhere between
who, at a hundred percent or, as I say somewhere between the mood in New York City, there are having a hard time finding common ground.
Because they were philosophizing about the quality of a market. Neither of them really participated in, and so instead we. So. What are you really? This? You ve got a good committee. You ve got good process, good centres of care. Why are you agree to use the same process? The same people? Look at some slightly different investments. They pass muster, invest in them, they dont down to invest in them.
Work? Keep them didn't fire them, and everyone agreed that, albeit with very different expectations, would happen because that governs conversation. The previous conversation,
was an ivory tower philosophizing conversation. This is in investing in a governance conversation, so they got started with their very different expectations in the portfolio within three years. Got about sixty percent, along with their miss
they had some one else, do an outside look at it and they felt when they looked out. There had been a financial opportunity cost and everyone thought they'd one. So MR two percent had held back the tides of folly by insisting on good care and disciplined
that was why it was working and other really member was just ecstatic at how far things going. We often see those when you get past this very buying
very high level debate and you figure
Is that what we really need to be stuck on? What's the real conversation, which generally is, could be more nuanced and more textured and more based on practising process as opposed to debate? That's what progress happens is that a typical com
station when you're starting with someone. Now, if I may, I wanted what is it like when you first walk into someone? That's been talking about this with the kind of advice that you have given them, or does it just depends Wade
but there are certain common alleys and always happens to step. One is we generally knowledge, and especially in or meaning with producers interests these?
and there'll, be some people with their sort of shoulders clenched a little tight. Someone brought you in there, but maybe not all of them. Someone rose in, but not everybody and so they'll look a little and we'll often start by saying I'm going to guess that in the past, at some point someone has come in and made overly broad claims not backed by facts that didn't exactly understand your context and what you're doing and was maybe a little more promotional and maybe left you with a little skepticism and you'll, see some nods and then we'll say. Well, maybe this is good news, but that's not what we do and then the shoulders go down and we start having a conversation. So then we say: okay, look. We've done this over time. We have no experience
so now, we've seen people are in one of two situations that tell us where you are. People are they're actively stuck, which is some of you disagree with some of the rest of you or you're passively stuck, which is there's not really disagreement. You just not sure where to start
So the example I gave earlier that's actively stuck people disagreed and so often there it's get them off the wrong question to the right question: to find a common ground. Have you found a difference in the receptivity between sort of state, punch and fans and the like official large institutions like that and the smaller family foundations or maybe foundations of organization
There are already doing good in their day to day work. It's been fastening in a sense it when we passed by geography by sector whose, where and what's going on so
We go to Continental Europe. The question is not whether to do this, or even what to do it's what's next, so these are institutions that have worked to be mindful around their portfolios. For some time, they've often worked to start in public markets and what they want to know is what's in private markets, they want to know. What's next, we see the same thing in Australia. We see the same thing too to be with faith based clients. The face have been real leaders. The face really have been longtime pioneers in doing some of this work in terms of screening and in terms of activism, but now particularly with the people in cyclical and other focus on climate, their questions. Okay, what do we do and climate? How do we make private investments around climate? So some of these segments have just been steadily moving ahead. I think we're seeing other large official institutions interested they're mindful and their question is scale, which is how can I meet my fiduciary obligations and put the capital out at a scale? I need to do that
accomplishes mission, mission, objectives and future goals, and I think that's been really exciting part. Frankly, of joining Goldman Sachs, which is people often ask the question, is: are too much money chasing too few opportunities or the opposite too little money too much stuff? That's not getting funded
There is neither is true, there is a lot
out of appetite to put capital to work in the space, and there are a lot of things
It could be investigated and generate appropriate returns and impact. They may just not all be structure package right and so the ability to, in some cases, commission new products, new structures, new vehicles to build those on rams, often in partnership with our clients. So you other ia, we're talking a large institutions that actually want to be part of that.
Process of building the market so that they can meet their own demands and help build on ramps. For I think that's what we often see with the large institutions who have been moving along universe,
Students have had their own path, where a lot of student advocate a pressure for the SAT, a lot of pressure from the outside, but institutions that are very proud of their investment heritage. Very strong investors very smart, very successful and we've had some conversations very recently folks, trying to figure out how to square that circle with very excited activists that are pushing for change a strong investment culture and have it
meat, you have foundations, have an inch in case where they ve lagged more than I think many would expect in terms of actually using their endowments in this work, which has been an interesting thing to see. So, as you think about the divide between yesterday investing in and let's call it just the lack of a better to mainstream investing. Where are you
I think that distinction stands five, ten years down the road. What does that look like in the future? So I think there are two main things. I'd say when we look at the future on this front. I think number one- and I don't know if this is a prediction or a hope is people will get past labels into the
underlying reality. So when we look at a lot of impact, investments and est investments were around the table with people that have
No idea what impact investing is, I was sitting in
or after meeting? Haven't a beer before at the airport? With a colleague, and I heard the person behind
mention the name of a sustainable timber fund were invested in. I turn us do you mentioned this manager? They said yeah, we're investors in there.
I said oh great you're, an impact investor and they said what that- and I said what did you explain? Your contacts is where the real assets investment team for European National Pension Fund, we own a man's large chunks of forestry. We, like the ethical,
for operators. We know it, we wanted more exposure, but we needed to do graphically diversify. So, let's look at US exposure. We start with a long list of forty five managers, narrow it down to a short list of fifteen and allocate to five. They listed the five and two of the five were our favorite sustainable timber managers. So I said in our book that makes you an impact investor and they said no. Those are just good managers, good teams with great track records and a differentiated thesis that lets them make money getting
not auction deal flow, often in partnership with community groups and others. So hopefully the world will get path, labels and just pragmatically see as investors. Some of these things are.
Really good investments. I think that's prediction number one people get past that prediction number to slash. Question number two is once upon a time there.
We pass. The three pass initially were ignored
The all of this do it is a common
I and matter or do. It is an investment question. I think the first path is becoming less
Because the idea of covering your eyes and ears and steadfastly ignoring the idea, if there's any value, to be gotten from any of these things, I think the real question
question now. Is people either treat this as a compliance matter and they am an Esg officer that writes a nice report and they have checklists and questionnaires and awards back to the conversation earlier or smart investors roll up their sleeves and figure. This out, the latter path will be successful from a financial perspective. I hope- and I think, and from an impact in a societal perspective. Smart investors figure out. Where does this pencil? Where is this material in
this drive return work in this manage risk. How can this be part of a good process, a lot of smart investors out there and having their brain power and their energy term to this entrepreneurs? Investors executives? That makes a difference.
I say I'm nervous about a white paper in a questionnaire arms race, which we see because doing the work.
In that integrated holistic way takes a lot of work. It takes a lot of thought, its creative, it's hard. It's
it's learning it's growth and a lot.
You're, set out a bunch questionnaires, and I think that's my real question about the future. So I hope the future is smart investors rolling up their sleeves and doing more of this in doing it better and getting on that cycle of improvement. Where demand drive innovation, dry, small success begets more demand.
One last question see the plumbing of the whole process. Around Esg Investments has changed,
the talk a little about how you think that the process by which you do this will evolve, and if you could maybe talk a little bit about the proliferate
of data in the space because it used to be that companies the
That's a long running and publishing issue reports, but now almost everyone's doing and doing there is getting to be a voluminous amount of that. Yes, it's a nice connection to the last question. Comment fear slash opportunity which is proliferation of data can be something that then
Smart local people dig into and say how do we get greater quality coverage in meaning
over time may mean less better data, that's more meaningful and constructive, as opposed to just more whether definitely standard steer, because.
Been working on this for years, series
in the old days started says we will, as are you trying to figure out how to systematize in the way you see financial reporting by proliferate
that is a message that more is not better. I think we can get on the virtuous
were creating, for example, in this,
that are tied to data suddenly makes a bunch of people, stakeholders and that data being good and it means their consequences to the data and so back to the plumbing. Like that's a plumbing question, how do we have better data fed in market market that move capital which move capital, which means we need people, a stakeholders in of constant cycle of improvement
Data in terms of the meaning and the coverage doesn't mean we need more. We need better and I think, if it's a compliance, question we're going to see a proliferation of data and we're going to see beautiful, charts and graphs based on that data. If it's an investing question we're going to see people
parsing and reporting in building this out in a way to extract meaning either
Alignment investing if you're trying to
maximize units of alignment per unit tracking air. You got to measure alignment, it's about alignment if it's SD integration, it's. How does that give us deeper and better insight into the performance of companies into the.
Prospects of companies. We either engaged to make it more focused and more actionable or
This has a lot of it. You know, and I
That there is a real opportunity and there is a real risk that we can engage in that virtuous cycle, because it puts a constructive use, which means you got a lot of stakeholders and making it better or people to settle into a compliance regime of publishing a lot of papers. John thanks so much for joining the great discussion at stake. They ravening. That concludes. This
the sort of exchange. The Goldman Sachs objects seaward. Thanks for this spot, Gasters
where did on February, nineteenth two thousand sixty the views and opinions expressed here and should not be concealed,
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Transcript generated on 2021-05-20.