Tuesday, November 22, 2005

Greenman Sachs

Goldman' Sachs new environmental initiative, while not the first among investment banks, is groundbreaking for its comprehensiveness, its outright acknowledgement of the gravity of global climate change and recognizing its responsibility as gatekeepers of the capital markets and its calling to ensure that environmental externalities are properly priced into the marketplace.

Apart from binding itself to concrete greenhouse gas targets, the Goldman Sachs seeks to:

  • Become a leading U.S. developer of wind energy through its subsidiary Horizon Wind Energy;
  • Invest $1 billion in renewable energy and energy efficiency projects;
  • Support the need for a national policies capping greenhouse gas emissions;
  • Educate the investment community on the environmental and social risks of companies and industries through its research activities (it hopes to expand on a report on the environmental and social drivers of the oil and gas industry that it recently authored);
  • Establish the business case for sustainable development;
  • Establish and fund a Center for Environmental Markets to undertake independent research with partners in the academic and NGO community to develop public policy solutions for establishing effective markets around climate change, biodiversity conservation and ecosystem services;
  • Adopt the Equator Principles as a framework in managing environmental risk in project financing;
  • Influence its clients and potential clients to adopt best environmental practices, and screen its private equity investments under environmental criteria.
What distinguishes Goldman's environmental policy from that of other corporations is not only the integration of sustainability analysis into its core business activities (e.g. screening investments and influencing clients) but also Goldman's unique position in Wall Street as a gatekeeper for thousands of companies to the capital markets, and perhaps the most prestigious one at that. While other investment banks such as JPMorgan Chase have adopted corporate environmnental policies, Goldman's plan has set the gold standard for comprehensivness and proactiveness. Goldman's willingness to cross the boundaries of the "business of business" to explore and develop public policy in collaboration with other stakeholders (bold added to distinguish from lobbying) is, as far as I am aware, unprecedented.

It is not entirely surprising that Goldman Sachs has taken this bold step. Recent history has hinted at Goldman's green streak. It was one of the first financial institutions to recognize the financial risks of climate change, establishing a weather derivatives desk in 2001. It has also been active in the insurance and reinsurance markets; through its whollly-owned Arrow Re, it has provided insurance and reinsurance coverage for its clients for natural catastrophes such as hurricanes, and hedged against those risks through a variety of innovative financial products such as catastrophe bonds and options. It is also already a market maker in SO2 emissions trading. (For a closer look into Goldman Sach's weather-risk hedging strategies, or for that matter, a survey of a vast variety of financial institutions and products with an environmental nexus, Environmental Finance by Sonia Labatt and Rodney R. White is a must-read.) Its CEO, Hank Paulson (pictured above), is also Chairman of the Board of Directors of The Nature Conservancy, the biggest envoronmental NGO by assets.

Last year in a high profile move, David Blood, then CEO of Goldman Sachs Asset Management, left with two of his colleagues to form Generation Investment Management. With former U.S. Vice President Al Gore as its chair, Generation is an investment firm that focuses on long term investment in companies with sustainable business practices.

Goldman Sachs' main legal counsel, Sullivan & Cromwell, after playing a role in shaping the Chicago Climate Exchange, Chicago Climate Futures Exchange, and European Climate Exchange, became the first law firm to be an associate member in the Chicago Climate Exchange, committing itself to purchase carbon credits or offsets sufficient to match the greenhouse gases from the energy usage of its lawyers and staff.

With Goldman Sachs' new initiative, coupled with the GE Ecomagination program and Wal-Mart's newfound green ambitions, corporate sustainability has be thrust into the mainstream. A spawn of new business courses and textbooks is sure to follow.

Related: NY Times, Goldman to Encourage Solutions to Environmental Issues

Corporate Sustainability Comes of Age?

I think we have reached an inflection point in the corporate sustainability movement. Today, Wall Street's most prestigious investment bank, Goldman Sachs, became the first invesment to adopt a comprehensive environmental policy. This milestone comes quick on the heels of the world's biggest company and retailer (Wal-Mart) and the world's biggest conglomerate of industrial technology innovation (General Electric) pronouncing ground-breaking environmental initiatives of their own. What is happening here?

Today's New York Times (Saving the Planet, an Earnings Report at a Time) observes that environmental factors are becoming primary drivers in the business decisions of America's biggest corporations. While corporate environmental activism by stakeholders is nothing new, what has recently spurred more corporate boardrooms to take action is the competitive advantage of using clean technologies, rather than simply stakeholder pressure, altruistic corporate citizenship, or the need for good publicity. With energy prices at a high, petroleum-based inputs to production are cutting into profit margins. As the article accounts, companies like Kimberly-Clark is substituting vegetable oil for petroleum derivatives in its shampoos while Dupont is replacing petrochemicals with corn.

This trend undermines the hackneyed excuse that the sole business of business is business and that addressing environmental concerns takes money out of shareholders' pockets. To be sure, the environmental benefits may merely be incidental to the economic considerations. Maybe these companies are solely concerned about the costs of inputs, rather than the associated emissions of greenhouse gases by additional fossil fuels. Yet, corporations have not shied away from trumpeting the ecological implications of such economic decisions. The proliferation of corporatsustainablety reporting is testament to this. Going green thus takes on dual shades, an environmental and monetary one.

The various initiatives that the article covers includes: Cargill's greener packaging; Eastman Chemical Company promoting cleaner coal use; Air Products & Chemical, Inc. selling refinery hydrogen that is used to remove sulfur from oil; GE's Ecomagination products that enhance energy efficiency; Chevron Energy Solutions promoting energy conservation; and Wal-Mart's new environmental policies.

Can Wal-Mart Green the Dragon?

The significance of Wal-Mart hopping onto the green bandwagon (apart from negative accusations that it is trying to create a distraction from its heavily critcized labor practices) is not only the sheer number of consumers it reaches, it is ability to control it thousands of suppliers whose operations are based in China. As Clyde Prestowitz accounts in his book, Three Billion New Capitalists: The Great Shift of Wealth and Power to the East, if Wal-Mart were a country, it would rank ahead the likes of Germany and Britain for volume of imports from China, amounting to some $15 billion in 2003. Should Wal-Mart begin demanding that its suppliers not only meet its expectations of "Everyday Low Prices" but also a minimum standard of environmental quality, its impact on the sustainable development of the world's fastest growing economy could be enormous.

But perhaps the most profound development is Goldman Sach's new environmental initiative, which is so rich in detail and bold in promises that it deserves a post by itself.