Source: Ecosystem Marketplace

In November 2005 Goldman Sachs surprised many people in the financial sector when it announced an ambitious new environmental policy framework. [PDF] The slew of green measures included commitments to consider the environmental and social impacts of investments, encourage the development of environmental markets, and reduce the investment bank’s overall climate footprint.

Now a little over a year later (and on the back of soaring profits) the investment giant is taking stock of its efforts. On January 21, 2007, it quietly released its year-end environmental report, [PDF] demonstrating that environmental commitments are indeed in line with Goldman’s raison d’etre: making money.

"Goldman Sachs really pushed the envelope with [its] policy framework," says Jon Sohn, a senior associate at the World Resources Institute. "They are sending a message that valuing the environment can go hand in hand with wealth creation."

In particular, Goldman Sachs chose to focus its efforts on the renewable energy sector in 2006, where it thinks profits may just be blowing in the wind. Due to strong demand and opportunity, it exceeded its original pledge to invest $1 billion in alternative energy by 50 percent. In addition to betting on wind, Goldman Sachs kicked in support for companies in the solar, biodiesel and ethanol businesses.

Of course, environmental advocacy groups are quick to point out that upping investment levels in alternative energy addresses just one side of the climate change problem facing the current economy. Sohn argues, for instance, that Goldman’s year-end report did not say enough about the nature and number of transactions it screened when making project investments in environmentally-sensitive industries.

"Investment banks need to carefully evaluate who they’re doing business with, and the environmental and social impacts of the full range of financial services that they provide," says Dana Clark, global finance campaigner for the Rainforest Action Network. "They need to reduce their involvement with the dirtiest industries, and find ways to reduce the carbon intensity of their investments."

Goldman admits that controversies about project finance decisions may become more commonplace in the future, but argues it is difficult to turn down such investments in light of the growing demand for energy, and the current inability of alternative sources to meet it. According to Sonal Shah, vice president of corporate citizenship at Goldman Sachs, investing in alternative energy and technology is not without its own problems. For example, wind farms sometimes face local not-in-my-backyard opposition, and there are still some unresolved questions with regards to the implementation of certain technologies.

So instead of an abrupt shift from fossil-fuel based to alternative energy, Goldman Sachs envisions a phased approach in which different sectors of the economy gradually become less and less dependent on coal and oil. In this context, Shah says Goldman Sachs will continue to make investments in proven alternative energy sources and will help develop the carbon market.

"Money is already flowing to alternative energy sources," says Sohn. "But with this policy, Goldman Sachs recognizes that markets have to be enhanced to significantly increase these flows globally and reduce our reliance on fossil fuels."

Last year, Goldman became a partner of ASSET4, a provider of non-financial data on corporations worldwide that incorporates environmental, social and governance (ESG) data into its investment research. The aim is to understand the relationship between ESG performance and share prices. "We have done a lot of research on this and we feel we will become better investors," says Shah. "We are really trying to get to our clients and the investing audience out there, and demonstrate why these issues are important to think about."