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Investment bank takes global warming stand

Goldman Sachs Group thinks it can battle global warming, not by hugging trees, but by doing what comes naturally to a Wall Street powerhouse: trading.
/ Source: Reuters

Goldman Sachs Group thinks it can battle global warming, not by hugging trees, but by doing what comes naturally to a Wall Street powerhouse: trading.

Goldman last month joined a growing list of investment banks, under pressure to withhold funds from projects that boost greenhouse gasses, that have promised to help protect forests and fend off global climate change.

Yet while advocates for the environment usually talk of curbing development, Goldman Sachs insists it can promote “green” policy through the capital markets and investments.

“The big part of our policy is the things we can do ourselves, which has to do with being at the center of capital markets, and finding market-based solutions to environmental problems,” Goldman Chief Executive Henry “Hank” Paulson told Reuters at the groundbreaking for the firm’s headquarters last month.

Amid a growing consensus that carbon dioxide and other greenhouse gasses lead to global warming, environmental activists turned up the heat on banks that fund logging, mining and other activities that pollute air and water.

$1 billion pledge
Goldman pledged to invest $1 billion in renewable energy projects, establish an environmental policy think tank and research the environment. But the firm’s biggest effort to date has been in expanding its carbon emissions trading business.

The European Union launched the first international emissions-trading program in January to cut carbon dioxide emissions in line with targets set under the Kyoto Protocol. Europe committed to an 8 percent reduction from 1990 levels by 2012.

The plan sets limits on carbon emissions from about 12,000 plants in power, steel and other energy-intensive industries. National governments give carbon credits, or pollution allowances, to the plants, setting a limit on total emissions.

A new business has arisen as companies and brokers trade these credits.

The volume traded in the European market has grown to over 300 million tons in 2005, Magid Shenouda, Goldman’s head of European power and gas trading in London, told Reuters. At an average price of about 20 euros per ton, that equates to a market of roughly $7 billion.

‘Massive’ trade in Europe
“What is clear is that it’s massive and it’s growing,” said Shenouda, who also oversees emissions trading. “The market was trading 100,000 tons a day, max, last year and it’s up to 1.5 million to 2.5 million a day more recently.

Over time it is likely that more sectors such as transportation -- aviation and shipping -- may be included in the EU trading program. Additionally, more countries may become subject to emissions targets under Kyoto, he said.

Shenouda also expects today’s small, local marketplaces to evolve into deeper, more integrated markets involving more investors and more countries.

“Right now liquidity in the market is highly fragmented. The market may see some consolidation at some stage,” Shenouda said. “There is already evidence of this taking place.”

PR stunt?
There are, to be sure, skeptics saying Goldman’s new policy is just a public relations ploy and critics asking whether an environmental agenda conflicts with making money.

“We think it promotes the concerns of environmentalists over shareholders and clients,” said Steve Milloy, an adjunct fellow at the Cato Institute and longtime critic of what he calls the “global warming alarmism” of green groups.

“It’s a feel-good thing to do now, but it will come back to haunt us,” said Milloy, who started a $5 million mutual fund able to submit shareholder proposals to companies.

Ilyse Hogue, who directs the global bank campaign for the environmental activist group Rainforest Action Network, said it remains to be seen if bank policies lead to real results.

“The most interesting result is the political significance of these banks, the architects of the global economic system, expressing these sorts of values,” Hogue said.

Bank cites risk management
Amy Davidsen, J.P. Morgan’s environmental affairs director, said clients need to be aware of the environmental implications of projects.

“It’s just one more part of risk management. Projects can be held up by demonstrations and legal actions, they can get blown up, and that costs money,” Davidsen said.

The bottom line, Goldman maintains, is that global capital markets, long blamed for fostering environmental destruction, can now be a force for environmental reconstruction.

“We believe Kyoto will play an important role in reducing greenhouse gasses,” Shenouda said. “Traders like to make money, but it’s quite clear the company wants us to do more than just make money: they want us to get involved in developing this market so it will succeed.”