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green@work : Magazine : Back Issues : March/April 2006 : Cover Story

Cover Story

Why Wall Street is Turning Green
Goldman Sachs is leading the way in adopting more environmentally sound policies in the financial sector.

by Bruce Piasecki


Goldman Sachs became the first global investment bank to adopt a comprehensive environmental policy that acknowledges the value of “ecosystem services” in December. This firm, founded in 1869, is one of the oldest and most influential investment banking firms pushing brave new forms of corporate social responsibility.

Goldman Sachs boasts impressive profits, with its sales increasing 26 percent to almost $30 billion in 2004. And yet this major financial powerhouse is now signaling to the rest of the financial market leaders that issues such as global climate change are worthy of attention because they impact the collective net worth of our “global equity culture.” This culture now includes roughly a fifth of all Americans—more than 82 million investors—who currently own some piece of publicly held companies. And as multi-national corporations grow in size and reach beyond the wealth and power accumulated by national governments, the moves of financial market leaders such as Goldman Sachs cannot be ignored.

Nevertheless, with this groundbreaking initiative, Goldman Sachs is explicitly acknowledging the fact that we cannot achieve climate stabilization without government regulations to complement individual corporate actions. Today, virtually any company that voluntarily undertakes a transition to renewable energy and other non-carbon energy sources may put themselves at a competitive disadvantage within its industry. A number of oil and auto executives have said privately that they can make the transition to clean energy, but they need government to regulate them so they can make the change in lockstep with no loss of market share. Others are willing to move forward, sensing opportunity in being greener sooner.

Owner of more than a few fossil-fuel power plants, Goldman Sachs agreed to publicly report on its efforts to reduce air emissions contributing to global climate change while investing $1 billion in renewable energy and efficiency projects. Goldman Sachs will also fund a new “Center For Environmental Markets” while broadening the application of social and environmental factors into loaning and investment activities.

Why is Goldman Sachs so concerned about global climate change? Our global economy absorbed damages costing roughly $145 billion from climate-related disasters (primarily severe storms and hurricanes) last year. Of that figure, about $44 billion represented insured losses. Munich Reinsurance, the world’s largest reinsurance company, has projected that losses to climate impacts will approximate $300 billion per year over the next two decades.

Interestingly enough, Goldman Sachs is now pressing the Bush Administration to adopt new public policies to respond to the global climate change threat. “It is telling that the first major call for regulation to address the rapidly escalating impacts of climate change is coming from the finance sector,” commented Ross Gelbspan, author of The Heat Is On. “Seen in a larger context, it seems that their own strategic needs require banks, insurers and financial institutions to take a longer view of the health of the capitalist system. Most individual companies, by contrast, are obligated to respond to shorter-term concerns about their quarterly or annual earnings and losses. So it falls to the world’s financial institutions to protect the long-term viability of the economy.”

Given the intensifying impacts of an unstable climate, it is obvious to many financial leaders that the ultimate viability of the global economy depends on government intervention to promote the necessary changes in the world’s energy infrastructures. If government fails to intervene, insurance losses and defaulted business loans are the ultimate outcome, leading to a very damaging shrinkage of markets for goods and services, especially in developing countries.

Goldman Sachs is but one of many actors on Wall Street now recognizing that there is always opportunity where there is risk. Independent rating agencies such as Innovest have already developed risk profiles of multi-nationals based on the carbon content of their products, slowly shifting public and private investments from bad to good environmental corporate actors. Consider these other major developments driven by the growing and greening influence of Wall Street:

• HSBC has pledged to offset all carbon emissions by the end of next year.

• At Novo Nordisk, achievement of carbon reductions is a major factor in performance reviews of senior executives.

• BHP Billiton has developed specific carbon curtailment plans for each of its business units.

• JP Morgan is evaluating the impact of carbon risks on its loans to industries that are big polluters.

• Citigroup just announced in late January that it would trim its greenhouse gas emissions (GHGs) linked to climate change at its 13,000 worldwide facilities by 10 percent by 2011.

In addition, dozens of other companies have already voluntarily reduced their carbon risks dramatically, and saved billions of dollars in the process. Citigroup, for example, is a member of the federal Environmental Protection Agency’s “Climate Leaders” program, firms that include 79 companies that in aggregate represent eight percent of total U.S. GHGs. Among the companies voluntarily reducing their carbon risks are Xerox, Gap, DuPont, General Motors, BP, Bayer and Alcoa. Further proof that this trend toward corporate action on climate change is not a passing fad is that national pension funds in Sweden, Denmark, the Netherlands and France already apply so-called environmental and social screens on all of their investments.

When corporations differentiate themselves based on a social response to climate change—and can therefore prove they can manage risks better than competitors in their industrial sectors—then third-party credit agencies such as Innovest, Core Ratings and IRRC become key players in uncovering hidden value and hidden risk in investment portfolios. Instead of focusing on lagging indicators of wealth, more and more firms are focused on leading indicators: a company’s carbon footprint; treatment of labor force in the developing world; management of scarce water resources; and stellar corporate governance procedures.

Once former intangibles (a cleaner power supply portfolio) become indeed tangible, companies such as Goldman Sachs that embrace social values can then jump out ahead of their competitors, and green not only the planet, but their clients’ long-term financial returns. Firms such as Goldman Sachs are proving that it pays to pay attention to social issues when developing a prudent long-term business strategy. Instead of environmental concerns representing a drag on potential profits, today’s more sophisticated financial sector movers and shakers are discovering that being green is now the smart thing to do for any company betting on the near future of this planet earth of ours.

Yes, we need Washington to back up the social product innovators in order to institutionalize reforms to meet society’s need for a comprehensive solution to the challenge of global climate change. But in the meantime, it is a new class of credible third-party agencies that are helping financial markets sort through tomorrow’s winners and losers. In the process, they are shaping the fate of our planet in ways the White House may never be able to do.

Bruce Piasecki is founder and president of the AHC Group of Saratoga Springs, N.Y., a change-agent consulting firm that serves Fortune 500 and other companies. His books include In Search of Environmental Excellence (Simon & Schuster, 1990), co-authored with Peter Asmus, a corporate social responsibility specialist. This article is an excerpt from Piasecki’s forthcoming book, Better Products, Better World. Visit www.ahcgroup.com for more details.


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