The Six Themes Driving Capital Toward Sustainable Solutions

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The challenges of navigating the climate transition were clear to see in 2022, as Russia launched its invasion of Ukraine, energy prices climbed and low investment in energy infrastructure left regions like Western Europe vulnerable to supply shocks. Inflation touched a four-decade high and monetary policy tightening further clouded the economic outlook.

These developments raised new questions for business leaders and investors trying to achieve their sustainability goals. However, “that’s no reason to change course,” GS Chairman and Chief Executive David Solomon says in our firm’s 2022 Sustainability Report. “We’ve long believed the transition to a more sustainable economy would be a decades-long effort.” To date, Goldman Sachs has achieved approximately 55% of our 10-year, $750 billion sustainable finance target.

Of course, much of the heavy lifting will need to come soon. As the report highlights, our Carbonomics research team estimates that the energy industry needs to invest $1 trillion more in capital expenditure per year through 2026 to provide affordable energy while also pursuing decarbonization, compared to what it spent in recent years. “In solving such a complex problem lies enormous opportunity for our clients,” Solomon says. 

The report focuses on the how – demonstrating how Goldman Sachs is working with clients to help them achieve their sustainability objectives. The role we take in aiming to meet the increasing demand for sustainable finance advice, tools, and solutions, helps us inform the market and develop new solutions to better support our clients. Specifically, the report captures notable progress around six key themes.

1. The gray-to-green transition

As capital helps fundamental sectors decarbonize, our firm’s approach is pragmatic. We recognize that going from an emissions-intensive gray economy to a green one will involve participation from today’s highest-emitting companies. Supporting today’s hardest-to-abate sectors – including energy, transport and heavy industry – is crucial to help ensure that economic inputs remain affordable and reliable as market dynamics change and innovative technologies scale.

“Goldman Sachs will continue to support our clients in the energy sector, and we will also advise, finance and invest in businesses creating technologies that can accelerate the transition,” Solomon says. “We need to do both. It’s not an ‘or’, it’s an ‘and’.”

In 2022, Goldman Sachs worked as Chevron’s advisor for the acquisition of Renewable Energy Group, an innovator in the production of biodiesel and renewable diesel. The firm supported a capital-raising by electrical generation companies serving Chile that will help to stabilize pricing as cheaper renewable energy is deployed and coal plants are retired, and also helped Monolith raise capital to scale up production of clean hydrogen. Among other gray-to-green deals, we closed $100 million in financing for the North American Development Bank, proceeds of which will be allocated solely to eligible green projects along the U.S.-Mexico border.

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2. Economic opportunity

We leverage our expertise as a financial institution to work toward a more inclusive economy by pursuing innovative commercial and philanthropic solutions that address economic and social challenges across the U.S. and globally.

Our firm’s signature 10,000 Women (10KW) initiative has mobilized over $2.8 billion in capital to more than 164,000 women entrepreneurs in over 50 countries through the Women Entrepreneurs Opportunity Facility. This facility, created in partnership with the International Finance Corporation 2014, helps to expand access to capital and helps demonstrates the viability of investing in women-owned small and mid-size enterprises.
 
Today we also empower entrepreneurship through initiatives such as our 10,000 Small Businesses (10KSB) initiative, a $750 million commitment to help create jobs and economic opportunity. The 10KSB Summit in Washington in July 2022 was the largest-ever gathering of small business owners in the U.S., bringing together more than 2,000 alumni of the initiative.

We also know that impact follows extensive research. Our Black Womenomics research estimates that reducing the earnings gap for Black women could raise U.S. GDP by 1.4 to 2.1 percentage points each year, creating up to 1.7 million jobs. Informed by this research, our One Million Black Women (OMBW) initiative includes a commitment for $10 billion in direct investment capital and $100 million in philanthropic capital by 2030.

3. Innovation with impact

Private capital has an important role to play in increasing the pace of vital innovation to decarbonize and meet clean water and infrastructure goals. That spells opportunity for private investors, whom Goldman Sachs has looked to mobilize by raising $1.6 billion for an inaugural direct private markets strategy dedicated to climate and environmental solutions.

We helped the lithium-ion battery manufacturer KORE Power raise capital for a gigafactory in Arizona. The firm’s AIternative Investments & Manager Selection (AIMS) Imprint group has allocated capital to the investors in CarbonCure, a company developing carbon sequestration technology that injects recycled CO2 into fresh concrete to increase its strength and decrease the amount of material needed. Finally, we served as exclusive financial advisor when TAE Technologies raised capital to support the commercialization of its Gen6 fusion reactor.

4. Building platforms to scale

Investments in individual projects and innovative companies are important levers to help address economic challenges, but it takes scale to drive transformative impact throughout the economy. Our firm identifies, acquires, develops, owns and operates companies with a path to scale. Directly and through our engagement with clients, we are pursuing a set of opportunities that can help to address needs ranging from energy security to decarbonization to diversity in the boardroom.

For instance, we established Japan Renewable Energy in 2012 and scaled up its renewable asset based across the country, ultimately installing more than 400 megawatts of solar, onshore wind and biomass capacity by 2020. The private infrastructure team within our Asset and Wealth Management segment recently launched Verdalia, a new platform to design and build biomethane plants across Europe, as another example. And, in Global Banking and Markets, we continue to address market structure to support efficient and effective carbon markets through our strategic investment in Xpansiv.

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5. Emerging opportunities related to circularity and biodiversity

A circular economy – one that decouples growth from resource consumption – may help reduce greenhouse gas emissions and address biodiversity loss without compromising growth. The firm’s commitment toward a circular economy begins with research and applied insights into topics such as how to eliminate waste, reduce reliance on finite resources, foster biodiversity preservation, and support forest restoration efforts.

We served as exclusive financial advisor to Nexus Circular, a company that works with hard-to-recycle plastics, for a $150 million equity raise with Cox Enterprises. Nexus is pushing to scale its technology to convert landfill-bound plastics into circular products for use in virgin-equivalent plastics. Separately, we continue to support the protection of pristine nature preserves such as Karukinka Natural Park in Chile while also helping clients such as Restoration Forest Products expand their sustainable forestry practices. 

6. Tools and solutions to drive better decision-making and outcomes

Data is key to so much innovation happening across the global economy, and it’s central to the final theme from our Sustainability Report. The data landscape is complex, and robust approaches to quantifying sustainability are still evolving. Impact measurement is one example of an issue that is still being addressed.

In 2022 Goldman Sachs introduced the GS Climate Transition Tool to help clients quantify transparency and performance of publicly traded companies using existing climate-related disclosures and proprietary data sets. Today, the tool captures more than 7,000 public equities worldwide across 52 sectors.

Meanwhile, our Private Markets Investing business has partnered with a climate management platform to help enable portfolio companies to streamline their carbon management, from target setting to annual reporting. For eligible Private Wealth Management clients, we provide access to a diagnostic tool, with customized metrics relevant to climate transition and inclusive growth goals, helping them to work toward their sustainable investing goals.

This year will surely bring events and developments that complicate companies’ ability to achieve their sustainability goals. But Solomon says all the progress made toward that goal after such a volatile year is a good sign for the future. “Even though 2022 was challenging, I’m encouraged by how much our clients have accomplished,” he said. “Our job, as we see it, is to help them achieve their objectives.”

Originally published at: Goldman Sachs



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