Sustainable Excellence by Zachary Karabell

Author:Zachary Karabell
Language: eng
Format: epub
Publisher: Potter/Ten Speed/Harmony/Rodale
Published: 2010-05-19T04:00:00+00:00

WHERE’S WALL STREET?

Where there are large sums of money, there is Wall Street. In the last decade, financial services firms and investment banks took note of the rising importance of sustainability—and the value it can deliver—and saw an opportunity.

The significance of this can’t be overstated. Just like in the old E. F. Hutton ad, when Wall Street (finally) talked about sustainability, people listened. In many ways, the entry into the field of heavyweights like investment bank Goldman Sachs and private equity titan KKR and trailblazing venture capital firm Kleiner Perkins Caufield and Byers validated the notion that sustainable excellence matters for business.

Financial institutions move money based on research. One clear sign that ESG investing had come of age was the rise of objective third-party research provided by groups such as Sustainable Asset Management in Europe and Innovest and KLD Research and Analytics in the United States. These groups were created to assess how companies measure up on sustainability criteria. While some of the larger institutional investors could do that research themselves, hiring multiple analysts is costly and, for some institutions, simply not where their expertise lies. And as more and ever larger institutions spoke of embedding sustainability at the core of their investment strategies, Wall Street firms that sell research started to create products to meet those needs.

The underlying premise of these efforts was the presumption that companies that screened better on a range of sustainability issues would also outperform in the marketplace. The various research shops developed proprietary screens to determine a company’s green, clean, transparency, and labor bona fides. Innovest worked to show that companies that screened better also saw their stock prices perform better, and much of the evidence did point in that direction. But with only a few years of data and then the financial crisis of 2008, it was difficult to present slam-dunk proof.

While these efforts were lauded within the relatively small community of people who focus on these issues 24/7, the actual market for the research remained limited. Both KLD and Innovest had followings, but not ones large enough to make it lucrative for them to expand significantly. Both were bought in 2009 by RiskMetrics (which itself was bought by MSCI in 2010), a larger firm that had the scale and the resources to market the research to a wider range of clients.

Even with limited revenue, however, the model was imitated, and major Wall Street firms have developed their own offerings. Goldman Sachs may have exhibited the opposite of sustainable excellence in its questionable derivatives dealings that were one element of the financial meltdown of 2008. But like a number of its Wall Street peers, it also has moved agressively to think about the business opportunities created by climate change. It carved out a research group, driven by then chairman and future Treasury secretary Henry Paulson (an ardent environmentalist) and supported by one-time tech guru Abby Joseph Cohen, to focus specifically on opportunities in the emerging field of green technology. In a related but broader initiative, Goldman developed a proprietary index called GS Sustain.

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