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The Greening of Goldman Sachs

One of the world's leading investment banks concedes there are real financial costs to ignoring the environment -- and they don't intend to get stuck paying them.
 
 
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Last year the investment bank Goldman Sachs acquired a portfolio of mortgages in default that involved a remarkable piece of land in Tierra del Fuego, Chile. The wild, starkly beautiful island on the far tip of South America is a haven of biodiversity, home to old-growth beech forests and a unique network of peat bogs. So when the bank donated all 680,000 acres of the property -- an area about a third the size of Yellowstone -- to the Wildlife Conservation Society in trust to the people of Chile, it was a boon to ecological preservation.

It was also a source of perplexity in some quarters. While Goldman Sachs explained that it had simply acted on a "rare opportunity for the firm to benefit global conservation," many people found it hard to trust such a gesture of generosity from a financial institution.

But there is reason to think that skeptics can relax their vigilance on this one and maybe even entertain some hope. In November Goldman Sachs, a financial sector leader worth $60 billion, rolled out a new environmental policy that goes further, and is smarter, than any comparable policy in the corporate world.

The unveiling of the framework to address environmental degradation and climate change capped 18 months of consultations with environmental groups. Among them were Rainforest Action Network (RAN), Rainforest Alliance, World Resources Institute and Friends of the Earth.

Only eight pages long, the plan (PDF) contains some fairly typical stuff, such as a vow to use more recycled paper in Goldman's offices. But it also contains a promise to reject projects in environmental no-go zones, and to institute further changes in the way it does business--all with an eye on ethics and the environment.

According to the framework, Goldman Sachs will:

  • disclose the greenhouse gas emissions of all its operations;
  • make $1 billion available for investments in renewable energy;
  • set up a think tank to identify other lucrative green markets;
  • work on public policy measures relating to climate change;
  • conduct more rigorous assessments of its new projects' impacts on the environment and on indigenous people;
  • refuse to finance extractive projects in World Heritage sites or any projects that violate the environmental laws of the host country.

This is not a case of Goldman pretending its job is to save the world, or forsaking its primary mission to make money for its investors. Self-interest is in full effect here. Goldman Sachs is positioning itself to be a leader in the green energy sector.

It's also averting risk. The policy says so in so many strangulated, jargoney words: "We believe that companies' management of environmental and related social risks and opportunities may affect corporate performance."

Translation: there are real financial costs to ignoring the environment and the people who depend on it for their survival, and we don't intend to get stuck paying them.

Gold standard

If Goldman Sachs winds up doing well by doing good, that's fine with Ilyse Hogue, coordinator of Rainforest Action Network's Global Finance Campaign. To her, Goldman's new policy is genuine cause for excitement for three reasons, starting with the investment firm's reputation.

"It's largely regarded, in a way that I'm just coming to understand, as the gold standard in the market," Hogue says. "So simply by making the commitment to these values, Goldman sends strong signals through the marketplace that are heard in corners of the economic system that we've yet to reach."

Second, Goldman Sachs CEO Hank Paulson, who also chairs the board of The Nature Conservancy, showed an avid interest in the policy from the start of the process. In other successful corporate campaigns undertaken by RAN -- with JPMorgan Chase, Bank of America and Citigroup -- the boss's buy-in has been critical to follow-through. Hogue believes that Paulson's commitment bodes well for Goldman's putting its money where its mouth is in coming years.

Third is the policy itself. It's the first corporate environmental policy to hinge on the newly minted idea of "ecosystem services," which is a way of looking at the environment in terms of what it provides for humans. Ecosystem services might include the storm buffer provided by healthy mangrove forests lacing tropical coastlines, or the water filtration furnished by intact wetlands. A healthy forest provides multiple ecosystem services: It cleanses the air by providing a carbon sink, it produces clean water, it may contain habitat for spawning fish that in turn feed humans, and it provides the intangible service of recreation and spiritual renewal.

All of these "services" have value, and their disruption exacts a price. Deforestation in Haiti made the 2004 flooding and mudslides truly disastrous. The warming of Caribbean waters fueled Hurricane Katrina, and when the surge hit, the damaged Louisiana wetlands were unable to slow it.

If it seems mercenary to make the case that nature should be protected so humans may be spared the cost of failed natural systems -- in lives, resources and dollars -- it's also true that the formula translates effortlessly into financespeak. This is something banks get.

It may result in better policy, too.

"It may seem like a little thing, but in terms of the way these policies are absorbed, it's actually very important," Hogue says. "What the banks are actually understanding with this breakthrough language is that you have to look beyond the forest to understand the value of the forest."

Nature's capital

The term "ecosystem services" burst on the scene last spring with the release of the United Nations-backed Millennium Ecosystem Assessment, a $24 million global health check that combined the expertise of 1,360 scientists in 95 countries.

The concept had been around -- in 1997 a group of economists and biologists had calculated that the earth's ecosystems provide $33 trillion worth of services each year -- but the Millennium Assessment was the first major report to be built around the idea. It did not attempt to assign dollar figures to ecosystem services, but it did present its findings in economic terms. Concluding that two-thirds of the earth's ecosystem services are being used up faster than they can replenish themselves, the report stated the finding thusly: Humans are running down nature's capital.

Walt Reid, who directed the seven-year project and now heads Stanford University's Institute for the Environment, says this is a matter of economic sense. "If you have $10,000 in the bank and you're spending it, you're living well and times are great -- but you're not replenishing it," he says. "If you factor in the real cost of changing systems, we're often making the wrong choices."

The report made front-page news around the world -- everywhere except in the United States, where it barely registered. In other countries, governments and businesses have been awakening to the idea that degraded environments inflict serious costs. Last March British finance minister Gordon Brown told a gathering of 20 of his international counterparts that climate change posed a major threat to economic growth. This is slowly dawning on U.S. companies too.

"I think the bean counters have come running to corporate leaders in a cold panting sweat saying, 'This is how much global warming is gonna cost you,'" says RAN spokesman Paul West. "We've been saying that [it's good business to factor in environmental costs] for a long time, but they just didn't want to hear it from environmentalists."

Weasel words or lawyerspeak?

It remains to be seen how Goldman balances its stated convictions with its commitment to its shareholders. Its new policy states very clearly that it "will not stray from [its] central business objective of creating long-term value" for shareholders and clients. But is Goldman prepared to take some financial hits in the short term to stand behind its promises?

It's hard to tell by reading the framework. The document is stuffed with weak verbs like "prefer" and "encourage." Example: "We will encourage clients conducting industrial and agricultural activity in environmentally sensitive areas to do so with the appropriate safeguards."

Hogue says that's what happens after lawyers get a hold of a document, that it doesn't necessarily mean Goldman is backing toward the door. Lucas van Praag, spokesman for Goldman Sachs, says that "if your view is world-weary and very cynical, then you might say, 'Well, these are weasel words and they haven't said anything substantive at all.' But I can tell you from our perspective these are taken very seriously indeed."

Van Praag is candid when pressed. "Does that mean we would never do business with a company that has been accused of engaging in illegal logging? No, it doesn't. What it does mean is we would hope to do business with that company on the basis of encouraging them to change."

Hogue agrees. "There are steps in between," she says, "like saying to these high-impact clients, 'We want to do business with you but you need to do A, B and C.' That actually moves industrial sectors."

Ultimately it comes down to enlightened self-interest, as it must in order to work for business. Says van Praag : "What we say about our business is that it's composed of three elements -- people, capital and reputation. And of the three the one that's most difficult to repair or replace if it's damaged is reputation. So we don't want to do things that are going to affect our reputation, because that speaks directly to our license to operate."

So there it is. If environmental responsibility is good for Goldman Sachs' reputation, it's good for the long-term bottom line. Maybe someday corporate reverence for nature will be unsullied by filthy lucre, but for now it may be appropriate to stop and gratefully reflect on a minor miracle that has taken place: a leader in the financial world has begun to consider that what is in the interest of the environment is in the interest of business.

"For so long when you thought about any of these banks, you never would have thought they would change their lending practices around these criteria," says RAN's West. "What we're seeing is the race to the top may be underway, for a change."

Traci Hukill is a freelance journalist based in Monterey, Calif.