Goldman Sachs Emerging Markets Equity ESG Portfolio Fund

Sustainable, Responsible &/or ESG Policy:

Goldman Sachs Emerging Markets Equity ESG Portfolio is categorised as an 'ESG Enhanced' product, i.e., there is a consideration of ESG factors alongside financial factors in the mainstream analysis of investments. The integration process focuses on the potential impact of ESG issues on company financials (positive and negative), which in turn may affect the investment decision. Separately, the fund has also been classified as an Article 8 compliant fund as per the European Sustainable Finance Disclosure Regulation (SFDR).  ESG considerations are an important part of our bottom-up investment process – from due diligence to portfolio construction. We believe companies that employ sustainable practices can generate strong returns[1] over the cycle, and that managers that employ ESG integration can better maximize risk adjusted returns. We employ a proprietary approach that integrates material ESG factors into our financial modelling analysis with the goal of driving higher returns and mitigating risk.[2] We directly engage with portfolio companies to unlock value, improve ESG transparency and practices, and overall create value for all stakeholders.

Within the Goldman Sachs Asset Management Fundamental Equity team, we believe the consideration of ESG factors may help identify alpha opportunities and enhance investment decision making. Given the bottom-up nature of our approach, sustainability is part of the investment approach employed by our Emerging Markets team in managing the Goldman Sachs Emerging Markets Equity ESG Portfolio. We assess ESG practices as part of the investment process and feel this focus on sustainability is seen in the following aspects of our approach:[3]

Philosophy

• Focus on finding sound businesses – i.e. those with the ability to generate sustainably higher returns on invested capital.

Process

• We conduct ~5,000 company meetings a year across the Goldman Sachs Asset Management Emerging Markets Equity platform, including conducting onsite visits to companies’ production facilities and meetings with customers, suppliers and competitors.
• Underpinned by a materiality of risk based framework and our approach to company engagement allows us to undertake in-depth ESG analysis, where relevant, on the companies we are invested in.

Valuation Framework

• Focus is on assessing the underlying value flow within a business – we find cash flow generation to be a powerful indicator of corporate governance standards.
• Quality and sustainability of ESG practices provide a valuable input into our stock selection process – we will not invest in companies that do not meet critical ESG requirements based on their underlying business model and, all things equal, will require lesser potential up-side to invest in companies that exhibit stronger practices.

Platform

• Our analyst team also benefits from the thought leadership and engagement efforts of Goldman Sachs Asset Management’s Global Stewardship team. This is particularly relevant for proxy voting, ensuring analysts are informed about strategic issues, but still retain responsibility for determining how we elect to vote.

As long-term investors, sustainability is ingrained into how we invest across Fundamental Equity’s global business, and ESG considerations are an important part of our bottom-up investment process – from due diligence to portfolio construction. We believe companies that employ sustainable practices can generate strong returns over the cycle, and that managers that employ ESG integration can better maximize risk adjust returns. The portfolio is managed with a bottom-up approach and focuses primarily on assessing the underlying intrinsic value of a business and is actively searching for companies that can produce sustainable returns on capital. As such, companies that exhibit low commitment to the environment, weak labour practices and poor corporate governance would tend to show limited upside in our fundamental analysis. We employ a proprietary approach that integrates material ESG factors into our financial modeling analysis with the goal of driving higher returns and mitigating risk. We directly engage with portfolio companies to unlock value, improve ESG transparency and practices, and overall create value for all stakeholders.

At the stock-level, we consider material ESG factors on a case-by-case basis, leveraging Goldman Sachs Asset Management’s proprietary ESG dashboard, which houses proxy voting records, engagement information, and company-specific ESG data across a range of sub-topics for E, S and G, pulled in from multiple data sources. The ESG data we pull in is based on the financial materiality of an extensive list of E, S & G factors that our analysts have identified as relevant to each company and the industry in which they operate.

At the portfolio level, and tied into the idea of enhancing our process by integrating material ESG factors into investment decisions, we conduct ongoing monitoring of ESG factors on a case-by-case basis. Our investment teams can pull in a company’s ESG rating into our traditional valuation tools and Goldman Sachs Asset Management’s proprietary portfolio construction and risk tools allow PMs to analyze the ESG credentials of their portfolios and simulate the impact of potential trades. Goldman Sachs Asset Management Fundamental Equity (FE) measures ESG metrics, such as carbon intensity, on an ongoing basis across all portfolios, and these metrics are included in Goldman Sachs Asset Management FE’s daily risk reports. We use the conclusions of our ESG Assessment to compare the strategy against peers and industry averages in order to identify best practices. This insight can help inform, challenge or validate the assumptions that the analyst has used in their qualitative analysis and quantitative valuation models.

Once we own a stock within the portfolio, our Investment team and the Stewardship Team work together to use multiple levels of influence – proxy voting, corporate engagement, and active buying and selling – to encourage positive corporate change. Once a security is included in the portfolio, further analysis is maintained on the investment on a regular basis. Subsequent earnings and business developments are monitored carefully, and additional meetings with the management of the company are scheduled. In addition to these formal meetings, there are informal means of communication, consisting of regular more focused dialogues amongst members of the team. Each research analyst within the team is responsible for monitoring the stocks that lie within their area of expertise on a daily basis to incorporate any news or updates into the investment analysis.

[1] There is no guarantee that objectives will be met.

[2] The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk.

[3] ESG scorecards are only one among many available tools that Fundamental Equity’s analysts may leverage to conduct a proprietary ESG assessment where relevant.

Process:

Please refer to the question immediately above for the ESG process for Goldman Sachs Emerging Markets Equity ESG Portfolio.

Internal and External sources of data:

We use proprietary ESG research as well as leverage external research providers The vast majority of our ESG research is internally generated and investor led. As a result, all of our investors conduct ESG research and engagement, which is naturally embedded into our fundamental research process, informs our models and is part of every decision we make at the company level.

Once our investment professionals believe a company’s ESG characteristics may have a meaningful impact on the investment case, are responsible for conducting their own ESG research as part of their fundamental assessment of a company’s business model. In this context, they may leverage fundamental, bottom-up financial analysis, proprietary research, engagement with the company, and recognized third party market data providers. Our research analysts will also complete our proprietary ESG scorecard.[1] This process includes:

• Identification of material ESG risks by sector 

This ESG assessment is based on the financial significance of an extensive list of E, S & G factors that we have identified as relevant to each company and the industry in which they operate. Over the past few years, we have continued to evolve our approach to determining materiality. We have moved from a proprietary framework as we have increasingly found the Sustainability Accounting Standards Board (SASB) approach to be most closely aligned to our interpretation of ESG assessment. In our opinion, SASB has now become the industry standard in helping asset managers and clients identify ESG and sustainability issues that impact long-term value creation and communicate sustainability data more effectively. While we recognize that clients have ad hoc requirements when it comes to ESG investing, we believe that by following the industry convention we can have a solid starting point for our assessment which is complemented by our proprietary research.

At the outset, we identify material ESG risks through the SASB materiality map which highlights sustainability issues that are likely to affect the financial condition or operating performance of companies within an industry. SASB has identified 26 sustainability-related business issues which vary by industry. [Please refer to the below diagram which outlines the key areas of materiality that we focus on across different sectors]. This informs the analyst on key areas to focus on when assessing E, S & G factors within a business. Furthermore, our team has access to SASB’s Sustainability Industry Classification System (SICS) which groups companies based on shared sustainability risks and opportunities. This tool allows our research analysts to look up the sector and industry in which a company is classified. Please note John Goldstein, senior ESG strategist, and Catherine Winner, Head of Goldman Sachs Asset Management Stewardship team, sit on Investor Advisory Group for SASB, hence the consistency of approaches across Goldman Sachs Asset Management. Please refer to the information on the SASB website.

• Completion of ESG Scorecard 

We supplement the SASB-informed framework with our proprietary quantitative and qualitative analysis of the individual companies which is by far the most important part of our research process. Alongside their traditional valuation models, our research analysts will conduct an in-depth ESG assessment; and the proprietary scorecard used is underpinned by the materiality of risk framework[2] outlined above.[3] In other words, this analysis is based on the E, S & G factors that we consider to be material to a specific company and the industry in which it operates. The ESG Scorecard is completed by the analyst covering the name and is signed off by the portfolio manager. Scorecards are uploaded to Concert, our online investment platform, and can be accessed across teams.

Governance forms the foundation of our analysis and is evaluated universally across sectors. We look at questions related to board quality, management quality, risk management and minority shareholder rights to evaluate Governance. Specific policies that we believe constitute governance best practice include (but are not limited to) the following:

• Board members are able to focus on their responsibilities; they attend most board meetings, and are members of a limited number of other boards (over-boarding)
• Poison pills are approved by shareholders on an annual basis
• Independent board members oversee key committees (audit, compensation, nominating)
• Non-audit fees paid to the auditor are not excessive
• There is a clear alignment between executive compensation and long-term company performance
• The company has adopted majority voting (rather than plurality voting), and voting rights are equal for all shares
• Board members are elected annually (rather than serve multiple years with either classified or staggered board terms)

Rigorous analysis of material Environmental and Social factors vary by sector. We look at sector specific questions to evaluate Environmental and Social risks and opportunities.

Environmental and Social considerations may include:

• environmental and social reporting, disclosure and transparency;
• material environmental litigation and/or controversies;
• material social litigation and/or controversies;
• labour practices, for example track record in treatment of employees and supply chain management;
• human rights considerations; and
• climate change policies and environmental practices.

Governance considerations may include:

• quality of earnings;
• concern for shareholder interests and minority shareholder rights;
• unethical business conduct, for example unethical methods of obtaining contracts and/or close connections with authorities;
• board structure;
• board diversity;
• executive management team, for example CEO/CFO effectiveness and acting in interest of shareholders; and
• executive compensation.

Once the scorecard is completed it is used to compare the company against peers, industry averages and best practice. This insight can help inform, challenge or validate the assumptions that the analyst has used in their quantitative valuation models.

In terms of external resources, we use ESG data from several data providers for various purposes. While ESG data availability and quality continues to improve, we do not believe there is currently one ESG data provider that holistically packages the most useful underlying data. We therefore believe in leveraging multiple providers, including MSCI, Bloomberg and Corporate Knights, to meet our diverse set of needs and use cases. We purchase data from both broad-based sources providing data across environmental, social, and governance characteristics, as well as more narrow data sets, such as those focused specifically on environmental data. We primarily use the raw, granular underlying data, such as carbon emissions, while also selectively leveraging qualitative ESG reports written by external analysts.

This data primarily serves as a starting point of any ESG assessment we conduct for our portfolio holdings. For instance, the first iteration of our proprietary ESG scorecard[4], pulls in historical inputs from external providers. In a second step, our research analysts are required to review the initial inputs and validate or override data fields which conflict their views. Most importantly, our analysts are encouraged to complement backward-looking data with their forecasts around how the business might evolve going forward.

Generally speaking, we would caution to rely exclusively on 1) external providers and 2) quantitative data in this context. We believe that as fundamental manager we know the companies in our universe much better than external sources and have superior access points to management teams and various stakeholders. Further, while third party providers are primarily focused on collecting historical data, we are asking ourselves how a business might evolve over the next 3, 5 and 10 years from now and acknowledge the fact that some areas of ESG research cannot be captured by numbers alone. Having this said, we leverage external ESG data to enhance our bottom-up fundamental research processes, implement client directed exclusions and inform internal analysis of the ESG characteristics of client portfolios.

[1] For the Goldman Sachs Emerging Markets Equity ESG Portfolio, research analysts aim to complete ESG scorecards for all portfolio holdings. For ESG Integrated and Impact Strategies, ESG scorecards might not be completed for all holdings of the portfolio. For ESG Enhanced Strategies, research analysts aim to complete ESG scorecards for all portfolio holdings. Goldman Sachs Asset Management may invest in a security prior to completion of the ESG scorecard. Instances in which ESG scorecards may not be completed for a specific security prior to investment include but are not limited to IPOs, in-kind transfers, corporate actions, and/or certain short-term holdings. Goldman Sachs Asset Management in its sole discretion and without notice may periodically update or change the process for conducting its ESG assessment and implementation of its ESG views in portfolios, including the format and content of such analysis and the tools and/or data used to perform such analysis. Accordingly, the type of assessment depicted here may not be performed for every portfolio holding. No one factor or consideration is determinative in the fundamental research and asset selection process.

[2] The portfolio risk management process includes an effort to monitor and manage risk, but does not imply low risk.

[3]For the Goldman Sachs Emerging Markets Equity ESG Portfolio, research analysts aim to complete ESG scorecards for all portfolio holdings. For ESG Integrated and Impact Strategies, ESG scorecards might not be completed for all holdings of the portfolio. For ESG Enhanced Strategies, research analysts aim to complete ESG scorecards for all portfolio holdings. Goldman Sachs Asset Management may invest in a security prior to completion of the ESG scorecard. Instances in which ESG scorecards may not be completed for a specific security prior to investment include but are not limited to IPOs, in-kind transfers, corporate actions, and/or certain short-term holdings. Goldman Sachs Asset Management in its sole discretion and without notice may periodically update or change the process for conducting its ESG assessment and implementation of its ESG views in portfolios, including the format and content of such analysis and the tools and/or data used to perform such analysis. Accordingly, the type of assessment depicted here may not be performed for every portfolio holding. No one factor or consideration is determinative in the fundamental research and asset selection process.

[4] For the Goldman Sachs Emerging Markets Equity ESG Portfolio, research analysts aim to complete ESG scorecards for all portfolio holdings. For ESG Integrated and Impact Strategies, ESG scorecards might not be completed for all holdings of the portfolio. For ESG Enhanced Strategies, research analysts aim to complete ESG scorecards for all portfolio holdings. Goldman Sachs Asset Management may invest in a security prior to completion of the ESG scorecard. Instances in which ESG scorecards may not be completed for a specific security prior to investment include but are not limited to IPOs, in-kind transfers, corporate actions, and/or certain short-term holdings. Goldman Sachs Asset Management in its sole discretion and without notice may periodically update or change the process for conducting its ESG assessment and implementation of its ESG views in portfolios, including the format and content of such analysis and the tools and/or data used to perform such analysis. Accordingly, the type of assessment depicted here may not be performed for every portfolio holding. No one factor or consideration is determinative in the fundamental research and asset selection process.

Resources, Affiliations & Corporate Strategies:

Resources & Governance

Within Goldman Sachs Asset Management, many of our investment personnel conducting sustainable investment research, focusing on ESG factors in portfolio construction, and driving our stewardship and engagement efforts sit within each of our investment teams. We devote considerable resources to sustainable and impact investing and have over 200 professionals who spend the majority of their time on sustainability related research, portfolio management, stewardship, engineering, and/or risk management.

The Sustainability and Impact Client Solutions team is a dedicated resource within Asset and Wealth Management that mobilizes the full range of insights, advisory services, and investment solutions across our client segments.

In Public Markets Investing, sustainable investment professionals are supported by the centralised Sustainable Investing Platform (SIP). There is emphasis on enhancing and setting the direction for sustainability through sustainability research and regulatory expertise. SIP develops sustainable investing data, methodologies, and internal education; provides sustainable investing strategic advice and analytics to Public Markets Investing teams and clients; and enhances ESG integration (inclusive of climate) within certain investment strategies. Additionally, Public Markets Investing has appointed ESG SI Heads who are embedded within its investment teams: Equities, Fixed Income, and Multi-Asset Solutions.

In Private Markets (GS Alternatives), the GS Alternatives Sustainability & Impact (“S&I”) team is led by the Chief Sustainability Officer for Private Markets Investing and is focused on institutionalizing ESG practices across GS Alternatives, as and where relevant, enhancing data collection and monitoring, implementing, and reporting on new regulatory requirements and codes, and communicating with GS Alternatives about updates in the sustainable finance space, where applicable. This includes conducting training, designing, and implementing ESG governance frameworks, analyzing ESG data and developing strategic initiatives as applicable. The S&I team assesses upcoming and developing ESG regulatory and industry standards, leveraging guidance from internal resources as well as external conferences, counsel or advisors and implement improvements to our ESG processes, as necessary. The S&I team partners closely with investing professionals (across Sustainable Investing Group, Private Equity, Infrastructure, Growth Equity, Real Estate and Private Credit), Alternatives Capital Formation (“ACF”), Fund & Information Management Group, Legal, Compliance and Operational Risk Environmental Group, among others, to design, implement, deliver, enhance, and monitor the ESG program, as relevant, for GS Alternatives.

Goldman Sachs Asset Management’s External Investing Group (“XIG”) has meaningfully expanded its ESG and impact investing capabilities and resources in recent years. In 2015, Goldman Sachs Asset Management acquired the assets of Imprint Capital Advisors LLC, a dedicated ESG and impact investing investment advisor with over 17 years of experience creating, building, and managing ESG and impact portfolios. Today, as part of XIG’s open architecture platform, the XIG Imprint team is dedicated to identifying, researching, and selecting leading third-party impact investment managers across asset classes and impact themes, both in private and public markets. The XIG Imprint team now manages over $9bn in client assets across public and private markets and serves as a valuable resource for the broader XIG platform to further strengthen its ESG and impact capabilities across asset classes.

In addition to our efforts within Goldman Sachs Asset Management, within the Executive Office, our Sustainable Finance Group (SFG) serves as the centralized group that drives climate strategy and sustainability efforts across Goldman Sachs. This includes commercial efforts alongside the firm’s businesses — all with the goal of advancing the success of our clients and promoting sustainable, inclusive growth and advancing the climate transition.

Affiliations / Memberships

Goldman Sachs and Goldman Sachs Asset Management seek to promote best practices in ESG and stewardship through various memberships and affiliations. Below, find a select list of our affiliations/memberships:

Goldman Sachs:

1. Taskforce on Climate-Related Financial Disclosures (TCFD) – Goldman Sachs has been a supporter of the TCFD since 2018 and published its first report in 2019.
2. OS-Climate – In 2021, Goldman Sachs joined as the founding US bank of OS-Climate, a cross-industry coalition and open-source platform for climate data and analytical tools that will be critical for clients to achieve their net zero ambitions.
3. CDP – Goldman Sachs has been a signatory to the CDP climate change survey since 2006 and has made our climate change-related disclosures publicly available since 2010. In 2021, to facilitate dialogue with our vendors around their own emissions management programs, we joined CDP Supply Chain as a lead member.
4. The Climate Group (RE100, EV100, EP100) – As part of our commitment to advancing renewable energy markets, we were the first US corporate to sign onto all three of The Climate Group’s RE100, EV100 and EP100 programs. Goldman Sachs Group joined RE100 in 2015, and EV100 and EP100 in 2019. These initiatives are focused on, respectively: 100% procurement of electricity from renewables; electric transport; and energy productivity. Additionally, we set a firmwide target of sourcing 100% renewable electricity, which we achieved in 2020.

Goldman Sachs Asset Management:

1. PRI – Goldman Sachs Asset Management has been a signatory to the United Nations Principles of Responsible Investment (UNPRI) since 2011.
2. Climate Bonds Initiative – Goldman Sachs Asset Management became a Climate Bonds Initiative Partner in 2015.
3. One Planet Sovereign Wealth Fund Framework – Goldman Sachs Asset Management became a member of the Asset Manager Working group within the One Planet Sovereign Wealth Fund Framework in 2018.
4. International Capital Market Association (ICMA) – Goldman Sachs Asset Management joined ICMA’s Green, Social & Sustainability Bond Committees in 2019.
5. Institutional Investors Group on Climate Change (IIGCC) – Goldman Sachs Asset Management has been a member of the IIGCC since 2019.
6. Sustainability Accounting Standards Board (SASB) – Goldman Sachs Asset Management has been a member of SASB since 2018.
7. Japan Stewardship Code – Goldman Sachs Asset Management has been a signatory since 2014.
8. Singapore Stewardship Principles – Goldman Sachs Asset Management has been a supporter of the Singapore Stewardship Principles since 2016.
9. 30% Club Japan – Goldman Sachs Asset Management became a member of the 30% Club’s Japan Investors Group in February 2020.
10. UK Stewardship Code – Signatory to the 2020 UK Stewardship Code since 2022 and were previously a signatory to the 2012 code.
11. Asia Corporate Governance Association (ACGA) – Goldman Sachs Asset Management joined the ACGA in 2022 and is a member of the China Working Group.
12. Council of Institutional Investors – We have been a member since 2017 and hold a seat on their Corporate Governance Advisory Council
13. ESG Disclosure Study Group – We became a founding member of the EDSG in June 2020. EDSG is a Japan-based organization focused on carrying out research related to ESG information disclosure best practices to enhance corporate value and growth as well as the sustainable development of society.
14. International Corporate Governance Network (ICGN) – We became a member of the ICGN in January 2020. Established in 1995 as an investor-led organization, the ICGN’s mission is to promote effective standards of corporate governance and investor stewardship to advance efficient markets and sustainable economies worldwide.
15. Japan Stewardship Initiative – We are part of the steering committee.
16. EDCI: Goldman Sachs Asset Management signed onto the Institutional Limited Partners Association (ILPA) ESG Data Convergence Project in 2021, which convenes leading GPs and LPs in an effort to standardize ESG data collection in the private equity sector.
17. GRESB: Goldman Sachs Asset Management have been participating members of GRESB since 2023.
18. PRI Nature Reference Group: Goldman Sachs Asset Management became a member of the reference group in 2024.
19. Impact Capital Managers (ICM) – Goldman Sachs Asset Management joined the ICM membership association as of 2024.
20. Global Impact Investing Network (GIIN) – Goldman Sachs Asset Management became a member as of August 2024.

Dialshifter

This fund is helping to ‘shift the dial from brown to green’ by…

The Goldman Sachs Emerging Markets Equity ESG Portfolio seeks long-term capital appreciation with a high degree of consistency by investing primarily in the equity securities of Emerging Markets issuers that show commitment to Environmental, Social and Governance (ESG) leadership.[1]

The portfolio has an established negative screening framework based on set revenue limits, that excludes companies with exposure to controversial ESG sectors. In an effort to align our portfolio holdings even more closely to the value systems of our clients, we exclude companies that operate in so-called ‘red flag’ industries to guarantee not allocating capital to potential offenders altogether.

[1] The information contained on this page does reflect binding characteristics of the portfolio for the purposes of the EU Sustainable Finance Disclosure Regulation (“SFDR”).

SDR Labelling:

Not eligible to use label (out of scope)