Our economy faces two defining challenges. If business in partnership with government cannot adapt the global economy to avoid the worst impacts of climate change and generate inclusive growth that lifts people out of poverty and expands the middle class, the negative consequences will be vast.
Companies have traditionally treated sustainability as a peripheral issue, focusing narrowly on the way they manage their impact on the environment. We don’t have the luxury of that limited perspective any more. The evidence of climate change is clear. And, people in both developed and developing countries are questioning the ability of their economies to reward their hard work.
There is not only an urgent need to act, but also a powerful business and investing case to do so. That gives me hope for what we can achieve and conviction that financial institutions can play a critical role. Over the next 10 years, Goldman Sachs will target $750bn of financing, investing and advisory activity to nine areas that focus on climate transition and inclusive growth.
These areas such as clean energy and transport, sustainable food and agriculture, financial inclusion and other areas are largely defined by their objectives with measurable results that companies will seek to achieve and expand as they grow. For instance, in sustainable transport, we will invest in and finance projects that shift the mode of transport or increase per-trip efficiency to reduce fossil fuel consumption and environmental impact. Investments in affordable education will increase graduation rates, job placement rates and training hours provided.
Focusing on these specific goals gives us a set of metrics — such as the amount of carbon reduction and the number of people served — that we can track over time both for the companies and for ourselves.
Profitability will always matter — capital must be deployed to those opportunities that have the greatest potential for success, and we must generate strong returns on invested capital to serve those saving for retirement. But finance must also address climate transition and inclusive growth while achieving and sustaining those returns.
We are at the early stages of this work and many of the choices are not black or white, right or wrong. The world will continue to produce and use fossil-based fuels, aeroplanes, cars and industrial goods, and Goldman Sachs will continue to support clients in transactions that are important to economic activity.
However, we must also support our clients as they reduce their carbon emissions and become more sustainable, both in the way they produce their products and in the way their customers use their products. We recently worked with the Italian utility, Enel, which has made sustainability core to its strategy to structure the first-ever general corporate purpose bond that links the payment of its coupon to its goal of at least 55 per cent of its power generated by renewables by the end of 2021.
The markets can and will do much to address climate change, but given the magnitude and urgency of this challenge, that will not be enough. In most places, there is no pricing mechanism to capture the cost of greenhouse gas emissions to society.
To give us the best chance of combating climate change, governments must put a price on the cost of carbon, whether through a cap and trade system, a carbon tax or other means. The resulting incentives will channel capital to low carbon solutions and drive innovation. Combining public policy, technology and capital is a must, not a choice.
Looking ahead, the needs of our clients will increasingly be defined by sustainable growth. Our firm’s long-term financial success, the stability of the global economy and society’s overall wellbeing all depend on it.
The writer is chief executive of Goldman Sachs