Goldman Sachs GS SUSTAIN: ESG of the Future ... but the timing of such a shift is less clear due in part to “Fear of Misaligned Exposure.Ž However, both fund managers and ESG specialists in recent meetings expressed significant fears of having to defend to their investors stocks perceived to be misaligned with ESG goals. In particular, investors highlighted high-emitting sectors such as oil/gas and metals/mining though also other Greenablers like Semiconductors. This “Fear of Misaligned Exposure (FOME)” is particularly intense among fund managers running or considering running Sustainable Finance Disclosure Regulation Article 9 funds which require greater disclosure on sustainable investments. Taxonomy eligibility covers a number of high-emitting sectors, and as the EU Taxonomy and SFDR are further rolled out, we see Taxonomy alignment becoming a driving factor behind ESG strategy, especially as Taxonomy disclosures are required for ESG funds under SFDR. While the investable universe under Taxonomy-alignment is not limited to solar/wind/water, the strict guidelines of the technical screening criteria may limit ownership in stocks initially perceived to be misaligned with ESG goals, emphasizing the Divestment Dilemma highlighted in our recent work. Over time, we will likely see a pickup in ESG Improvers or Decarbonization funds, with goals/ownership expectations set up front in an attempt to mitigate FOME. This could be driven more significantly in the US before Europe, though the multiple energy reliability disruptions seen over the past year is driving a shift From Aspiration to Action among ESG investors and regulators. We have seen equity markets reward companies with attractive corporate returns vs. peers that have reinvested a high, rising or high+rising percentage of operating cash flow back into capex and R&D with revenue exposure to Green Capex-related Sustainable Development Goals. We believe over time we can see improved valuations for companies with strong fundamentals that are decarbonizing at a quicker pace vs. peers. Over time, the market is likely to reward companies for impact vs. automatically rewarding divestment. We believe lower corporate emissions intensity via divestment (or via acquisition) does not automatically advance broader decarbonization Sustainable Development Goals. The impact from M&A-driven changes in intensity are a function of whether the buyer of assets accelerates or decelerates the pace of decarbonization and whether the buyer runs the asset with greater environmental efficiency than the prior owner. It is for this reason that we believe investors are more likely to reward organic decarbonization — for electricity generators as an example, coal retirements and renewables growth vs. coal plant divestitures and renewables acquisitions.