Goldman Sachs is redefining ESG investing by emphasizing circularity, rewarding companies for their recycling and resource management efforts. This shift challenges traditional climate-focused metrics and highlights the growing importance of circularity in sustainable investing.

Goldman Sachs Sheds Light on Circularity in New ESG Model, Rebalancing Interests from Classic Climate Metrics

New York, September, 2024
Goldman Sachs is resetting the bar on ESG investing, and it puts a great emphasis on circularity-the idea of making investment dollars work for companies that make it easier to recycle, clean up waste, or reuse materials. This will rethink traditional methods of ESG calculations, which have, until now, been somewhat focused on climate change metrics as well as increasingly on resource efficiency.
Circularity Takes Center Stage

Goldman Sachs’ pioneering ESG filter that included much importance to circularity-the practice of reducing reliance on virgin sources and waste. This is gaining ground as the battlegrounds of global resource scarcity intensify. The model picked excellence in recycling and resource management even for businesses operating in sectors that had traditionally been viewed as having fewer sustainability prospects.

A prime example of this new focus is Glencore, the world’s largest coal shipper. However, it counts among those companies receiving praise from Goldman Sachs as one that leads on electronics, battery, and other products with critical materials contained in copper and lithium recycling. Glencore scored very well in Goldman Sachs’s circularity-focused ESG model because of its efforts toward resource efficiency.

A lot of companies are taking on new initiatives that haven’t been quite as appreciated by the overall sustainable investment universe,” says Evan Tylenda, head of Goldman Sustain. “Our new ESG filter recognizes the value of these initiatives in the context of global resource constraints.”

Big Tech Falls Short

On the other hand, the big tech houses like Microsoft and Alphabet surprisingly feature nowhere in Goldman Sachs’ top ESG picks. The tech giants face severe criticism over their resource efficiency, especially on how they treat raw materials that would be needed to keep it going. While AI and digital technologies are promising fields from where one could realize material use reductions, Goldman Sachs has not seen significant contributions from these companies toward direct resource efficiency.

Two such areas, albeit where Big Tech still has room for improvement, are resource efficiency and recycling. Themes like these are emphasized on in Goldman Sachs’s ESG model. “Resource efficiency remains a critical issue for the tech sector,” Tylenda says. “While tech companies are innovating, their contributions to circularity and overall resource management have not yet met the standards we are looking for.”
Largely Underappreciated Circular Economy

While climate-focused investments are much more prominent, circular economy is increasingly recognized as a vehicle of the achievement of the sustainability agenda. As the pressure on natural resources increases, increased recognition is being given to the importance of circularity for investment decisions. A new ESG filter has been revealed by Goldman Sachs and reflects the growing recognition of the demand for resource constraint management as an important part of the comprehensive sustainability agenda.

“The circular economy is key to solving for net-zero emissions and biodiversity loss,” Tylenda asserts. “As the transition to low-carbon technologies accelerates, the importance of resource management and recycling will only grow.”

The Broader Impact of Circularity

This was a significant change in the assessment of ESG investments at Goldman Sachs, as it emphasizes circularity and puts a premium on companies demonstrating strong practices in waste management and material reuse. Through this, such a focus helps to get the broader economy toward sustainability and resource efficiency.

Although funds focused on circularity are still a much smaller number compared to climate-focused funds, at less than 100 funds to over 1,100 climate-oriented funds, investors begin to think about the value of circularity in the long term. In a future where resource constraints become a crucial business concern, circularity could reshape sustainable investing into a new landscape.

Goldman Sachs’ new model provides a new conceptualism of ESG evaluation that challenges not only convention or opinions but also pushes toward a much wider, deeper understanding of what it really means to be responsible and sustainable in business. It is actually by focusing on companies that have excelled in efficient use of resources and recycling that Goldman Sachs is pushing toward more nuanced distinction regarding what is responsible and sustainable business practice.

As the global investment community keeps pace with environmental challenges, Goldman’s new interest in circularity could be where the conversation starts about a new direction on how companies will be measured and rewarded for their sustainability. This shift to valuing circularity is an important step toward more balanced ESG investing, which views both in terms of its impact on the environment and in managing resources.

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