This spring, Corporate Knights Editor-in-Chief Toby Heaps caught up with Marc Fox, Executive Director of Goldman Sachs GS SUSTAIN research, to discuss how Goldman Sachs sees sustainability-related factors impacting investment returns. 

GS SUSTAIN research highlights long-term investment opportunities by integrating an analysis of the sustainability of corporate performance with Goldman Sachs’ traditional, fundamental analysis. It uses Goldman Sachs’ proprietary framework for analyzing competitive advantage in mature industries and identifying winners in emerging industries. The result is a set of objective metrics on environmental, social, and governance issues (ESG) that can be integrated with overall measures of corporate performance, industry positioning, and return-based valuation methodologies to highlight candidates for long-term investment.


Toby Heaps: Does a company's social or environmental performance have material impacts on its share price valuation?

Marc Fox: We have seen no evidence of isolated events from a sustainability perspective impacting companies materially in terms of share price performance. Rather than jump from sustainability analysis on one side, directly to share price performance on the other, our GS Sustain methodology is designed to assess the sustainability of company performance. If you think of it as crossing a river [from sustainability to share price], we think there are probably four, five, or six stones in between that connect sustainability related metrics to operating performance and returns on capital. And that’s ultimately what the market will reward or punish.

TH: So you look at how ESG factors impact things like access to resources and how that impacts return on capital before the ultimate share price impact?

MF: Exactly. In other words, we see no evidence that the market values ‘sustainability’ in isolation. What the market values ultimately is returns, meaning profitability. Our framework focuses on return on capital relative to industry peers as the key indicator of sustained competitive advantage.

We think companies need to get two things right to sustain industry-leading returns, which is going to drive share price performance. One would be superior operating performance - so we look at different factors of industry positioning. And [the second] would be superior management quality, and we use management of ESG factors as a proxy for that. The idea is that the best managed, best-positioned companies are going to drive superior returns on capital, and that is what the market will reward. What we don’t do is say that the market is going to reward superior ESG performance [for its own sake].

TH: I see, so ESG leadership is a proxy for superior management. But what about operating performance? I’m just thinking if a company is able to avoid conflicts with local communities, which results in quicker access and execution of a large capital project, which then drives superior operating performance, which then drives share price appreciation – doesn’t that mean the market does reward ESG leadership, just with a lag?

MF: One of the things that our global energy team does, for instance, when they define superior operating performance, is look at specific projects around the world - they call them the top 230, those are just the 230 largest oil and gas projects, over 300 million barrels of oil equivalent.

What we have found in dealing with sustainability work in the past 5 years is that there is a strong relationship between companies that have superior access to those projects that are going to be the future of the oil and gas industry, and those demonstrating superior sustainability performance. So that’s why we zero in on how a company is operating locally with respect to communities and the environment and so forth.

Now what is difficult is that with most international oil companies, a specific project may or may not be material to the overall company performance, so it is difficult to isolate a specific project in defining a company’s overall performance. The larger legacy assets where these issues come into play tend to be in areas of high political risk such as parts of Africa or the Middle East. Our energy analysis is focused on the link between sustainability and access to new resources as the driver of future returns.

Goldman Sachs 'wish list' of 10 core KPIs that would benefit global investors in assessing ESG performance across companies:

(1) Social
- payroll ($),
- lost time injuries (LTI rate),
- training (hrs and $)
- social investment in communities of operation ($)

(2) Environmental efficiency
- greenhouse gas emissions (tonnes CO2e),
- energy consumption (joules),
- % energy consumption from renewable sources (solar, wind, hydro, etc)
- water consumption (liters),
- waste produced (tonnes)
- % sales derived from products/services that assist clients in carbon abatement/adjustment