Goldman Sachs ESG:
Integrating ESG into Investment Research
Global Investment Research
AHC Group June 2006 Shareholder Value Workshop
Sarah Forrest
44-20-7552-9368
sarah.forrest@gs.com
Goldman Sachs ESG Research
Overview
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Vision and objectives
What is ESG?
ESG investment and the SRI market
Goldman Sachs and ESG – why?
Global Energy – Integrating ESG
10 reasons for integration of ESG and finance
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Goldman Sachs ESG Research
Vision & Objectives
Vision
 To integrate environmental, social and governance issues with
industrial analysis and valuation on a sector-by-sector basis, and to
identify investment opportunities related to carbon finance, alternative
energy, and other emerging ESG issues.
Long term objectives
 To transfer expertise of ESG issues and research methodology to all
sector teams to maintain ESG as part of ‘normal’ research
 Global ESG coverage of GS universe (2000 stocks in 5 years)
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Goldman Sachs ESG Research
What is ESG?
I.
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Environmental
Inputs – Energy, Water
Outputs – Climate Change, Emissions, Waste
II.
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Social
Leadership – Accountability, Reporting, Development
Employees – Diversity, Training, Labour relations
Customers – Product safety, Responsible marketing
Communities – Human rights, Social investments, Transparency
III.
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Governance
Transparency
Independence
Compensation
Shareholder rights
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Management of ESG issues = Proxy for quality of management
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Goldman Sachs ESG Research
The SRI Market: Socially Responsible Investment
SRI Model
Description
Firms
Characteristics
SRI Funds
Firms that offer institutional
and/or retail SRI funds and
employ in-house SRI teams to
conduct non-financial research.
Calvert, CIS, Jupiter, Morley,
Henderson and Sustainable
Asset Management
Branded SRI Retail Funds
Proprietary Investment Criteria
Separation of financial and SRI
research
SRI Research Providers
Firms that provide research
and indices on social,
environmental, and corporate
governance issues
KLD Analytics, Ethibel, and
Innovest
Also: EiRIS, TruCost and
CoreRatings
Conduct no financial research
Employ social and
environmental analysts
Traditional Financial
Institutions New To SRI
Typically global financial
institutions serving a broad
base of clients focused
singularly on performance who
view SRI as a value-add
Fidelity Investments, HSBC
Investment Bank, Merrill Lynch
Investment Managers, U.S.
Trust, and participants in UNEP
* No Branded SRI Retail Funds
Established traditional
investment managers
New to SRI
4 common investment criteria as a competitive differentiator:
- Negative screening driven by client values
- Thematic investing in businesses with direct social or environmental benefit
- Shareholder engagement to alter company behavior
- Sustainability analysis to establish a business case for SRI
Source: Henderson, M. Fox 2003
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Goldman Sachs ESG Research
SRI Assets under Management
The Present
The Future
European Institutional SRI
Assets Under Management: 336 bn Eur
UK
44%
Mercer’s Fearless Forecast surveyed over 200 investment
managers globally on the integration of SRI into mainstream
investing:
• 70%
Germany
1%
• 50%
France
5%
• 60%
Others
1%
Netherlands
49%
believe that the integration of environmental, social and
governance (ESG) factors into investment analysis will be
mainstream within 3-10 years; 5 % predict this in the next
1-2 years
believe that active ownership will be mainstream within the
next 2 years
believe that screening for ESG factors will be mainstream
within 3-10 years
• >35%
believe corporate governance, climate change,
environmental management, and water use will be
important investment themes in 5 years
Europeans are the most convinced, US managers the least
Source: Eurosif, Mercer
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Goldman Sachs ESG Research
Why ESG?
Why Goldman Sachs has launched ESG Research:
I.
Client demand
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II.
Increased focus on corporate governance (Global)
Mainstream investors, Pension and SRI funds (US/Europe)
United Nations Environment Programme Finance Initiative (UNEPFI)
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MAT1 – The Materiality of Environment, Social and Governance Issues to Equity Pricing
III. Enhanced Analytics Initiative (EAI)
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Consortium of buy-side funds allocating commissions to encourage ESG research
Goldman Sachs response
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Feb 2004: Introducing the Goldman Sachs Global Energy Environmental and Social Index (UNEPFI)
April 2005: Launch of ESG Research team
August 2005, Feb 2006: Global Energy ESG and European Media ESG published
United Nations Global Compact keynote address by Anthony Ling on behalf of financial community
Participation in Global Reporting Initiative, UN Principles for Responsible Investment, and
IPIECA/API Energy industry sustainability reporting guidelines
GS hosted investor conferences and road shows for Energy and Media companies on ESG
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Goldman Sachs ESG Research
Integration of ESG with Energy Analysis
•
Overall management quality
Access to the industry’s new legacy assets
Valuation and performance
ESG framework
Top 125 projects
Director’s Cut
Strong correlation between ESG
leaders and new legacy asset winners
Sarah Forrest
Marc Fox
•
Economic returns are driven by access to
new legacy assets
•
Valuation and performance are driven by
economic returns
Jonathan Waghorn
Matt Lanstone
Anthony Ling
Raj Mittal
 ESG: E = Environment, S = Social, G = corporate Governance
Overall management quality
 Using the ESG Matrix we rank an industry in an index. The leaders perform
best in ESG indicators, new legacy assets exposure and increasing cash
returns.
 For global energy, winners from our Global Energy ESG report (Aug 05)
and Top 100 projects report (Jan 05) outperformed their peers by 19% and
14% on average between Jan 05 and Jan 06
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Goldman Sachs ESG Research
ESG adds to share price performance
16%
12%
8%
4%
0%
-4%
-8%
-12%
-16%
-20%
-24%
-28%
High reward, near
term
High reward, long
term
Manageable
exposure
High exposure,
already priced in
Long term, lower
return
Performance of Energy ESG framework, Top 100 and cash returns categories
(Jan 2005 to Jan 2006)
Average US$ share price performance versus industry peers (%)
Average US$ share price performance versus industry peers (%)
Performance of Top 100 Categories (Jan 2005 – Jan 2006)
20%
16%
12%
8%
4%
0%
-4%
-8%
-12%
-16%
-20%
-24%
Leader board
Up and coming,
Average performers
Laggards on disclosure
Source: Company data, Datastream, Goldman Sachs research
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Goldman Sachs ESG Research
Top 125 projects likely to drive returns
Duration and IRR of Majors’ Top 125 and Top 100 portfolios versus
existing businesses
Industry divisional capex split into maintenance and growth, and
further split into Top 125 Projects and other
G&P growth
2%
Chems
maintenance
5%
Chems growth
0%
R&M growth
0%
R&M maintenance
16%
Upstream growth
37%
Upstream
maintenance
38%
Top 125
Projects
63%
Other
upstream
growth
37%
Long run CROCI (and IRR for Top 100 / Top 125) (%)
20%
G&P maintenance
2%
18%
Top 125 Projects
16%
14%
E&P
Top 100 Projects
(at January 2005)
12%
R&M
10%
Corp
Chems
8%
6%
4%
16
18
20
22
24
26
28
30
32
34
Average gross asset life (years)
Source: Company data, Goldman Sachs research estimates
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Goldman Sachs ESG Research
Technical, political, fiscal and labour risks increasing
Opportunity
Risks
• 125 projects, 177 mnboe, 50 more projects out there
• 20 mnboe/d in 2012E (16% global oil and gas production)
• US$660 bn capex (c. 60% of total growth capex), US$70 bn cash flow uplift
• 1.5x profit to investment ratio
• Technical
• Political
• Fiscal
• Labour
Delivery of new legacy assets has been poor with a c. 3 month delay for projects in the development
phase on average since January 2005 versus our estimates; evidence indicates that industry capital
costs are up c. 35%, production costs up c. 25%
What is needed
for success
Impact on
performance
Winners
• Management quality with respect to technology, operations, employees and environment
• Capital discipline on acquisitions
• Talented, motivated workforce with correct skills
• Investment for the medium and long term
• Increasing focus on gas and non-conventional energy sources
• Ability to negotiate with host governments on fiscal regime and new projects
• Top 100 winners have outperformed their peers by on average 14% (Jan 05 – Jan 06)
• ESG + Top 100 + cash returns winners have outperformed by on average 19% (Jan 05 – Jan 06)
• Top 125 near term winners: BP, BG, ENI, Nexen, Petrobras, Statoil
• ESG + Top 125 + cash returns winners: BP, BG, Petrobras, RDShell, Statoil, TOTAL
Source: Goldman Sachs research
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Goldman Sachs ESG Research:
The Key Drivers of SRI- Goldman Sachs ESG Framework
Day to day...
...Medium term...
... Vision
Economy
Industry
Corporate Governance
- Markets
- Exchange rates
- Interest rates
- Commodity prices
- Globalisation
- Energy supply /
demand
- Emerging markets
- BRICs
Audit fees,
Option
expensing
CEO/Chair separation,
Independent Board Committees,
CEO compensation
Block holdings,
Protection of
minority
shareholders
ES Management
ES Reporting and
Assurance
Leadership diversity, Leadership
compensation link to ES performance
Leadership ES
responsibility
- Innovation, technological
advances
- New competition
- Substitutes
- New regions, new
markets, new products
- Costs, incl. taxes
- Market share
- Public image
- Regulations
Social
Fatalities, Injury rates,
Payroll per employee
Number of employees and contractors,
Employee diversity at all levels, Employee
health, recruitment policy, labour rights
and training
Human rights and
security, Business ethics
and transparency
Environment
Resource use, Hazardous
spills and discharges
Renewable and alternative
energy, Biodiversity and
ecosystem management
Investment in the Future
Society
- Communities
- Population growth
- Health, disease
pandemics
- Consumers
- Suppliers
- NGOs, lobby groups
- Education
- Government policy, taxes,
regulations
GHG emissions and trading, Waste
management, Investment in gas assets
Community investment
R&D and Capex versus returns to
capital providers, Growth versus
maintenance capex
R&D investment
Industry Themes and Company Valuation
Access to (high quality) resources, brand, new products,
advertising, intellectual property, supply chain
Returns, earnings growth,
dividend growth, capital structure
Environment
- Water
- Land
- Animals, plants
- Air
- Weather patterns
- Climate change
- Biodiversity
- Agriculture
Stock market performance
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Goldman Sachs ESG Research
Winners on ESG, Top 125 and cash returns
ESG
framework
Industrial analysis
Winners
Valuation
and
performance
Source: Goldman Sachs research
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Goldman Sachs ESG Research
10 reasons for integration of ESG in finance
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Unique role of finance between companies and investors
Experience with risk and return balance, meeting liabilities
ESG as foundation for sustainable and strong economy
UN Global Compact initiative in 2000
Global social and environmental challenges, e.g. secure energy
supply, climate change, water shortages, BRICs growth
Increasing awareness of ESG issues by analysts and investors
Increasing availability of ESG data
UNEP-FI working group of investors request ESG research
World Bank Equator Principles
Sector-specific technical, political and product-related risks
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