February 3, 2007

Banking big on Renewable Energy

It is not always easy to be a cheerleader or evangelist for a new technology paradigm. You have to be ready to accept rejection by the saviest skeptics - particularly the big banks.

People promoting expensive biomass conversion technologies and waste management reforms have felt their share of skepticism. They have come to realize that if public demand is waning, the banks will be unenthusiastic about risking their funds.

That's why 2006 was such an important year. It started in November, 2005 when one of the world's biggest and most forward looking banks, Goldman Sachs, announced that it would invest over $1 Billion in alternative energy - solar, wind, and biofuels. It turns out they exceeded that number by half.

Not wanting to be outdone, other banks appear to be re-evaluating their conservative opinions about environmental markets. This bodes well for a sustained effort to shift to renewable fuels and infrastructure. Where the banks go, the politicians are sure to follow.

For Goldman Sachs, Long-Term Greed Means Going Green
by Christopher Wright on The Katoomba Group's Ecosystem Marketplace

In November 2005 Goldman Sachs surprised many people in the financial sector when it announced an ambitious new environmental policy framework. 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.

"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."

Due to strong demand and opportunity, it exceeded its original pledge to invest $1 billion in alternative energy by 50 percent.

Reflecting its appetite for innovation, Goldman also purchased a minority stake in Iogen Corporation, which is attempting to pioneer the conversion of agriculture materials like straw, corn stalks, and switchgrass into ethanol.

A notable finding of Goldman Sachs' research is that the impact of pressures from NGOs and SRI funds, or single pollution incidences, impacts shareholder value much less than government regulation. Accordingly, the investment bank has strongly come out in favor of regulation that creates long-term value for greenhouse gas emissions reductions and new technologies. Voluntary action, it reasons, is insufficient.

"We are not advocating for any specific federal regulatory policy," says Shah. "Rather, we want to inform decision-makers of good market-principles that they should think about."

Chapple agrees with this approach: "The best input into policy that investment banks can provide is to conduct and present research to government and stakeholders that identifies the obstacles they face in expanding their investments into alternative energy and clean technologies," she says. In turn, government should set clear policy targets and stick to them, thereby providing regulatory certainty for investors.

Based on its financial standing and reputation, Goldman Sachs is a bellwether for investors. When it speaks, Wall Street listens. So given its endorsement of the sustainability agenda, are we seeing the contours of a green arms race in the financial industry?

Well, perhaps. Last October Morgan Stanley tripled Goldman's $1bn commitment, announcing plans to invest roughly $3bn in carbon credits and energy projects to reduce greenhouse gas emissions during the next five years. In the long run, however, only effective and stable federal regulation can put a robust price on carbon.

Market analysts have called the U.S carbon market a "hibernating giant." With Goldman Sachs leading the way, the conservative wing of Wall Street seems to have woken up. And so the question is: when will lawmakers on Capitol Hill follow suit?

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Anonymous said...

Since neither Goldman Sachs nor Morgan Stanley are known for their early-stage investing, inquiring minds want to know how exactly money is supposed to get to early-stage biofuels companies. What is needed are venture capital companies investing in early-stage producers of bio fuels; don't see a lot of that yet.


Gary said...

Goldman Sachs has quite a booming private equity group and is poised to close its latest fund at over $19 billion