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November 30, 2005
A Light Bulb Turns On: Goldman Sachs First Investment Bank to Adopt Environmental Policy
    by William Baue

The policy matches the robustness of other such policies recently adopted by global financial institutions, but the status of Goldman Sachs as an investment bank brings added significance.

Last week, Goldman Sachs (ticker: GS) followed in the footsteps of global financial institutions Citigroup (C), Bank of America (BAC), and JP Morgan Chase (JPM) in adopting a comprehensive environmental policy. The policy combines important philosophical statements, for example acknowledging the reality of human-induced climate change, with practical commitments, such as the goal of reducing indirect greenhouse gas (GHG) emissions from leased and owned offices by seven percent by 2012.

"We believe that climate change is one of the most significant environmental challenges of the 21st century and is linked to other important issues such as economic growth and development, poverty alleviation, access to clean water, and adequate energy supplies," states the policy. "At the same time, we recognize that the climate change problem cannot be solved through voluntary action alone and will work to develop partnerships with other organizations to help identify and promote effective and efficient regulatory/policy approaches to reducing greenhouse gas emissions."

Setting the GS policy apart from other banks' policies is its commitment to the United Nations Millennium Ecosystem Assessment (MA), as well as its $5 million donation to establish the Center for Environmental Markets to study how the free-market system can solve environmental problems. What mostly sets the GS policy apart, though, is the type of bank it is.

"This policy does not break new ground when it comes to substantive environmental issues," said Michelle Chan-Fishel, head of the green investments program for Friends of the Earth (FoE), which has engaged with GS for a number of years on environmental issues. "However, it's signficant because Goldman Sachs is the first 'pure' investment bank to develop such a detailed environmental policy."

Ilyse Hogue, global finance campaigner for the Rainforest Action Network (RAN) that also engaged with GS on its environmental performance, echoes this sense of the importance that GS's actions send to the market.

"Goldman Sachs is a bell weather of what the marketplace considers valuable," Ms. Hogue told "Their application of sustainability principles to their research side allows investors to guide their decisions according to their values and according to long-term return on investment."

The United Nations Environment Programme Financial Initiative (UNEP FI) commissioned GS to conduct research on the materiality of environmental, social, and governance (ESG) issues in the oil and gas sector that resulted in a well-regarded report that served as an impetus for creating the policy, according to Ms. Chan-Fishel.

"The report found that indeed 'environmental and social issues count,'" Ms. Chan-Fishel points out. "After producing that report, a light bulb went off at Goldman Sachs, and it realized that ESG issues could be material for other sectors as well."

While the policy pledges to broaden the brokerage's equity research to cover to cover more sectors beyond the oil and gas sector, it does not extend ESG analysis across all equity research.

Also, while the policy gives "preference" to financing projects that secure free, prior informed consultation from affected indigenous peoples, it stops short of requiring it. Likewise, the policy "prefers" but does not "require" Forest Stewardship Council (FSC) certification, the only forest management certification recognized as sufficiently rigorous by many environmentalists.

"The 'preference' language mirrors that of other institutions who fear legal liability that could stem from making absolute statements," said Ms. Hogue. "While we would, of course, like to see a stated complete commitment to support only certified forestry projects, we believe that Goldman, like all companies, should be judged by their actions in aggressively implementing these commitments."

"There certainly is wiggle room in the policy, which raises some concern--for example, the policy says that a bank will make "up to $1 billion" in renewables investments," said Ms. Chan-Fishel. "What is the definition of 'renewables?'"

"I had advocated that GS leave out nuclear power and large dams, which do not comply with the World Commission on Dams standards--but to no avail!" she added.

While other banks with strong environmental policies such as Citigroup, Bank of America, and JP Morgan Chase have signed onto he Equator Principles (EPs), GS does not do significant project finance lending covered by the EPs.

"However, GS has borrowed some of the EP methodologies and has applied them to underwriting transactions--I think the EPs certainly offer a helpful reference point for them," said Ms. Chan-Fishel.

"The Equator Principles are far weaker than many of Goldman Sachs' policies, and we are far more interested in measuring against best practices than the base level of competency," Ms. Hogue points out. "The critical issue is that these firms use their financial leverage to make change quickly and effectively--whether this happens through Equator or not is of no significance."

Ms. Hogue adds two observations that are unique pieces of the Goldman Sachs puzzle.

"First, CEO Hank Paulson has been far more engaged in formulating and disseminating this policy than any CEO to date--we believe that the clear leadership from the top creates significant opportunity for aggressive implementation," she says. "Second, the language in the Goldman Sachs policy that calls for federal regulation on climate change is far stronger and adds value to the process begun by JP Morgan Chase--we believe the Wall Street consensus demanding that Washington step up the climate issue can force the necessary debate to make lasting and binding change."


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