Despite occasional indications to the contrary, officers at most firms insist that their companies are upstanding corporate citizens. Now, some investment banks are looking to test the validity of those claims.
Over the past year or so, several marquee investment banks — including The Goldman Sachs Group Inc.; Citigroup Global Markets Inc.; and UBS — have added socially responsible investing (SRI) teams to their sell-side research departments. The aim? To integrate fundamental financial analysis with more mercurial measures like environmental sustainability and social liability.
Admittedly, critics may scoff at these fairly fuzzy metrics. But in a report on SRI published last year, UBS suggested that social risk is tantamount to business risk — and should therefore be duly considered when valuing a business. The report, Why Try to Quantify the Unquantifiable?, offers a framework for analyzing nine broad business sectors in terms of potential corporate social liabilities — things like carbon emissions, pollution, product safety, and human-rights violations. Such liabilities, says the report, "should be viewed as a potential claim on the business, and therefore can be incorporated into standard valuation models."
Michael Moran, a vice president in Goldman's U.S. Portfolio Strategy/Accounting Group, backs the approach. "Even if you're a fundamentals-based investor, you have to think about these issues," he argues. "There are actual hard dollars involved."
And dollars to be made. Management at General Electric Co., for one, hopes to reap the rewards of its recently launched green corporate initiative, a program dubbed "ecomagination." As part of that plan, GE is looking to double its R&D investment in cleaner technologies over the next five years, reduce its greenhouse-gas emissions, and improve its energy efficiency. "Environmental responsibility is not just a negative issue for some companies," notes Moran. "It's a positive one for those that can find ways to develop cleaner products or help other companies make their products cleaner."
Both Moran and Shirley Knott, a London-based director at UBS, say that interest from institutional investors, mutual funds, and hedge funds has fueled Wall Street's curiosity about SRI. Still, the two bankers admit that not everyone shares the same level of interest. Shortly after Goldman's August 2005 SRI report was issued, Moran had three meetings in a row with institutional clients. Their reaction? Recalls Moran: "One client was intrigued, one client was confused — and one client laughed at me."
Some social liabilities:
- Carbon emissions
- Product safety
- Human-rights violations
- Waste disposal
- Bribery and corruption
- Respect for privacy
- Copyright theft