October 05, 2005
Spreading SRI: Goldman Sachs Adds Its Own Twist in Social and Environmental Assessment
by William Baue
As socially responsible investment strategies migrate into the mainstream, mainstream analysts
apply social and environmental considerations in innovative ways.
Socially responsible investing (SRI) is showing signs of being memetic--in other words, spreading
like a cultural virus. Specifically, traditional "mainstream" investors are starting to integrate
social and environmental considerations into fundamental analysis of companies. Take, for example,
Goldman Sachs (ticker: GS), self-described as "one of the
oldest and largest investment banking firms," which recently issued a report to its clients
entitled Global Energy: Sustainable Investing in the Energy Sector. Judging from this
report, SRI strategies seem to be catching.
GS inaugurated its own assessment of issues
typically associated with SRI with its February 2004 launch of the Goldman Sachs Energy Environment
and Social (GSEES) Index, assessing 30 social and environmental criteria in the global energy
sector. It subsequently expanded coverage with its Environment, Social and Governance (ESG) Index,
increasing the number of criteria to 42 while adding a corporate governance category.
"We believe that this template will be applicable across most industries because it
captures the full spectrum of a company's interaction with the four key pillars: the economy; the
industry in which it operates; society, from employees to partners, consumers, and counterparties;
and the environment, in terms of resources consumed, emitted, and produced," state GS Analysts
Anthony Ling, Sarah Forrest, Andrew Baird, and Matthew Lanstone in the report. "We believe
excellence is a habit and that companies with superior environmental and social management are
likely to be more successful in operating projects in the new world."
164-page report demonstrates how GS applies its sustainable investing strategies to the global
energy sector. The report finds GSEES leaders financially outperforming their peers by 12 percent
since the index launch. It also finds strong financial performance by energy companies exposed to
so-called "new legacy assets"--the largest oil and gas fields as defined by reserves that will
drive the future of the industry over the next 20 years. Significantly, the report finds a strong
correlation between strong ESG performance, exposure to new legacy assets (GS identified the top 50
such projects in June 2003 and the top 100 in January 2005), and financial performance.
"Companies that screened as both GSEES leaders and Top 50 winners have outperformed their peers
by 24 percent on average since February 2004," the report states. "Laggards on both measures have
underperformed by an average of five percent."
Assessing the convergence of ESG
performance, exposure to new legacy assets, and financial performance, the GS report identifies six
leading companies: BG (BRG), BP (BP), ExxonMobil (XOM), Petrobras (PBR), Statoil (STO), and TOTAL (TOT). Up-and-coming companies with
"potential for improvement on a sustainability investing basis" include BHP Billiton (BHP), Chevron (CVX), ConocoPhillips
Companies that have shown "disappointing performance compared with their peers on either absolute
ESG scores or Top 100 performance, or on their momentum over the last two years" include Amerada
Hess (AHC), ENI
Occidental (OXY), and Shell (RD).
distinguishes GS's methodology in this report from typical SRI approaches is the additional
consideration of exposure to new legacy assets, while the ESG Index covers similar if not identical
territory to most SRI research. The ESG Index ranks companies (based on information from their own
disclosures) in five categories: environment, environmental and social management, social,
corporate governance, and investment for the future. Interestingly, new legacy assets are not
completely divorced from but rather intersect with ESG considerations.
For example, the
investment for the future category assesses community investment.
"Investment in local
communities is more important for the industry than it was ten years ago as companies develop
reserves in politically riskier countries," states the report. "We have categorized around 50
percent of the industry's new legacy assets in very high risk countries, where company investment
in education and health is a key part of the stability of the local economy."
GS's Top 100
Projects, which assesses exposure to new legacy assets, factors in political risk (as measured by
the Transparency International Corruption Perceptions
Index) in the countries where new reserves are located.
"As production in mature
fields has declined to be replaced by the newer, high-risk barrels, so the risk profile of the
industry's production looks set to return to levels not seen since the mid 1970s," the energy
report states. "Over 90 percent of companies in our coverage universe look set to see an increase
in the country risk of their production."
Corruption assessment circles back to the ESG
Index, which addresses it in the social category.
"Companies in the industry have moved to
eliminate corruption through their codes of business conduct, reporting corruption incidents among
employees, membership of EITI [the
Extractive Industries Transparency Initiative spearheaded by British Prime Minister Tony Blair],
and disclosing tax payments to individual governments," states the report. "We view this as crucial
to their long-run success and competitiveness."
The spreading of cultural viruses can
affect not only recipients but also transmitters, as notions and ideas mutate as they proliferate.
Just as the traditional investment community stands to gain from incorporating social and
environmental considerations into their analyses, so too does the SRI community stand to gain by
observing how the fundamental analyst community innovates as it integrates SRI.