Goldman’s ESG Model Favors Glencore Over Big Tech: Here’s Why

Goldman Sachs has recently turned heads in the investing world with a stock-picking model that challenges traditional Environmental, Social, and Governance (ESG) assumptions. Their unique approach incorporates a metric called circularity, focusing on recycling, waste management, and the re-use of materials. This new ESG filter has yielded some surprising results, such as favoring coal giant Glencore Plc while excluding tech giants like <a class="tvreplink" target="_blank" href="https://www.tradingview.com/chart/?symbol=Nasdaq%3AMSFT">Microsoft Corp. and Alphabet Inc.. In this article, we’ll explore how Goldman’s model works, why it’s shaking up ESG investing, and what this means for investors looking to balance profit and sustainability.

What is ESG Investing?

ESG stands for Environmental, Social, and Governance, three key factors that investors consider when evaluating a company's long-term viability. Traditionally, ESG investing has focused on reducing exposure to companies involved in harmful environmental practices, poor labor relations, or unethical governance. The idea is that companies prioritizing these areas are better positioned for long-term success.

However, traditional ESG models often categorize industries like coal or oil as automatic disqualifiers, assuming they are poor bets for sustainability-focused portfolios. But as ESG investing grows, it becomes clear that not all industries fit neatly into this framework.

Goldman Sachs’ ESG Filter: A New Approach

Goldman’s innovative ESG filter emphasizes circularity, a concept that focuses on how companies manage their resources. It’s about creating a closed-loop system where waste is minimized, and materials are recycled or reused. Goldman’s ESG model considers circularity more heavily than traditional metrics, which allows them to include companies like Glencore, known for coal, but also for recycling metals like copper, lithium, and cobalt.

Circularity is essential for businesses aiming to reduce their environmental impact. It goes beyond cutting emissions and focuses on rethinking the lifecycle of products—from production to disposal. Companies that embrace circularity are often more efficient in resource use, helping to limit the depletion of natural resources and reduce waste. This focus aligns with sustainable business models, making these companies more attractive in Goldman’s ESG model.

Glencore’s Surprising Inclusion

One of the most controversial aspects of Goldman’s new ESG filter is the inclusion of Glencore Plc. Despite being a major player in the coal industry, Glencore has earned its spot by excelling in recycling. The company is one of the world’s largest recyclers of electronics, batteries, and other materials crucial for renewable energy and tech industries. This has led to a higher circularity score, making it more attractive to investors using Goldman’s ESG filter.

Waste management is becoming a crucial factor in ESG investing. Companies that actively reduce waste or improve recycling efforts are gaining attention from investors. Glencore, with its massive recycling operations, is a standout example. Even though the company has been criticized for its coal activities, its efforts in recycling materials like copper and cobalt are undeniable, leading to a more favorable ESG rating under Goldman’s model.

The Outperformance of Goldman’s Circularity Portfolio

Since 2021, Goldman’s circularity-focused portfolio has outperformed the MSCI ACWI Index by as much as 16 percentage points. This success shows that the circular economy isn’t just a feel-good investment theme—it can generate significant returns. By focusing on companies that manage waste and reuse materials effectively, Goldman is offering investors a portfolio that balances sustainability with profit.

Glencore isn’t the only surprising inclusion. Vale SA, the Brazilian mining giant, is another company benefiting from its commitment to circularity. Despite past controversies, such as the dam collapse in Brumadinho, Vale has made strides in improving its ESG credentials, particularly around waste management. This makes it another standout in Goldman’s circularity portfolio.

The Circular Economy: A New Frontier in Investing

The circular economy is a growing theme in investing. The idea is simple: rather than a traditional linear economy where resources are used and discarded, the circular economy emphasizes keeping resources in use for as long as possible through recycling, reuse, and efficient design. This approach is gaining traction as natural resources become scarcer, and companies realize the financial benefits of reducing waste.

The European Union has been at the forefront of promoting circularity. In 2020, it launched a comprehensive circular economy plan to double the use of recycled materials by 2030. Although progress has been slow, the initiative underscores the growing regulatory pressure on companies to adopt circular practices. As more governments and institutions prioritize circularity, companies that align with these values will be better positioned to thrive.

Big Tech’s ESG Challenges

While Goldman’s ESG filter highlights the potential of companies like Glencore, it excludes tech giants like Microsoft and Alphabet. The reasoning? These companies have yet to demonstrate how their business models contribute to resource efficiency on a significant scale. Big Tech’s reliance on hardware, data centers, and global supply chains raises questions about their impact on resource depletion and waste.

There’s still hope for Big Tech. As artificial intelligence (AI) and other technologies evolve, there is potential for these companies to play a role in de-materializing the economy. If they can leverage AI to improve resource efficiency, they may eventually be included in circularity-focused ESG portfolios. However, for now, they fall short of the criteria Goldman uses to define sustainable, resource-efficient businesses.

The Growing Pressure on Companies to Adopt Circular Practices

The finance industry is increasingly pressuring companies to document their waste management and recycling efforts. Banks like Wells Fargo and Deutsche Bank are starting to prioritize companies with strong waste management practices. This shift shows how critical circularity is becoming for companies hoping to attract sustainable investment.

The Controversy Around ESG Screening

ESG screening is not without its controversies. Some investors criticize the exclusion of Big Tech while including companies like Glencore and Vale, which have been linked to significant environmental harm. The criteria for ESG screening are constantly evolving, and as new metrics like circularity gain prominence, we’ll likely see further debates about which companies truly deserve the ESG label.

Conclusion

Goldman Sachs is pushing the boundaries of ESG investing by incorporating circularity into its stock-picking model. This shift challenges traditional assumptions about sustainability, making room for companies like Glencore that excel in recycling, even as they operate in controversial industries. The future of ESG investing will likely continue to evolve, with circularity playing an increasingly important role.