“It’s a matter of business, it’s a matter of economics, it’s a matter of growth…and it’s a matter of the health and wellbeing of all of our stakeholders, including our children and our grandchildren.” –Lloyd Blankfein, Nov 2, 2015 (1)
Goldman Sachs is one of the largest banks in the world, generating over $35 billion in revenue and providing a wide range of investment banking, securities and investment management services to its clients, who include corporations, governments, institutions and individuals.(2) Goldman Sachs’ prominent position on the global financial stage means that it plays a crucial role in allocating and providing capital to thousands of institutions in almost every region in the world. Whether it is short-term asset damage resulting from a violent storm, or determining the proper methodology to account for climate change in asset prices, environmental change presents a remarkable challenge to all banks, including Goldman Sachs.(3)
How will this play out?
The evidence for climate change is quite clear, with the past three decades each being warmer than any decade since 1850 and the level of greenhouse gas at its highest than at any other point during the past 800,000 years. The main driver of this change is emission from the combustion of fossil fuels such as coal and oil, which is only further accelerated by humans’ poor management of environmental resources. Most scientists agree that humans are likely the main contributor to climate change.(4) No single issue is more global than climate change.
Banks have become truly global institutions, allocating capital to institutions on every corner of the planet. Given the nature of their business, banks are tied to the fortunes of their clients in an intimate way. Putting some numbers to this scenario, we find that nearly 83% of the world’s Fortune 500 companies view climate change as a business risk.(4) The view is even more dim when looking on an industry by industry basis, where we observe the following:
- Many consumer goods retailers have started measuring the impact of climate change on their supply chains
- Raw material and agricultural companies are facing the risk of water scarcity
- Two thirds of utility companies believe extreme weather are a significant risk for their production
- Insurance premiums may rise exponentially in some regions where weather extremes are particularly severe and unpredictable (4)
Every business in the world, regardless of size, faces exposure to the weather and climate, either directly or indirectly. This exposure will translate directly into increased costs for businesses, which will reduce earnings and increase the risk that these businesses pose to their creditors and stakeholders. Climate change costs could manifest themselves in a variety of ways, for example a devastating weather event might lead to an abrupt bankruptcy or increased costs could reduce a business’ ability to repay interest on a loan.
Measuring the Risk
Examining the physical impact costs of climate change is one of the most practical methods to measure the near-term cost of environmental change. The chart listed below shows the cost as a percentage of regional GDP based on two scenarios (gray representing emissions reduction and green representing the current course of emissions growth). The data below shows the cumulative cost to changes to environment, food and health security, estimated to be in the range of $1.5 tr to $3.7 tr to 2030, representing $70 billion to $180 billion annually to 2030. (5)
Source: “Climate Change Scenarios – Implications for Strategic Asset Allocation”. Page 31.
What is Goldman Doing?
Faced with the scenario laid out above, Goldman Sachs has taken a strong stance to combat climate change that involves not only its internal operations but also how it interacts with clients. Specifically, Goldman has made several pledges and launched a number of initiatives, with a few examples of these programs listed below:
- Goldman has pledged to expand its clean energy target to $150 billion in financings and investments by 2025 to facilitate the transition to a low-carbon economy in addition to being active in the development of carbon markets
- Goldman is assisting clients in managing risks related to climate change by developing innovative capital market solutions, including weather-related catastrophe bonds
- Goldman will conduct a carbon footprint analysis within the Goldman Sachs Asset Management portfolio and work with clients to help them understand the impacts of their portfolios on the overall environment
- Goldman achieved carbon neutrality across its operations in 2015 and is targeting the use of 100% renewable energy to meet its global electricity requirements by 2020 (6)
Climate change is an issue that transcends beyond business into every community in the world and threatens to directly impact each person on our planet. All companies must take steps to reduce emissions and become better stewards of their environment — the global economy literally depends on it.
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- Goldman Sachs Website. Multimedia. Accessed November 2, 2016. http://www.goldmansachs.com/citizenship/environmental-stewardship/index.html
- Goldman Sacks Website. “At A Glance”. Accessed November 2, 2016. http://www.goldmansachs.com/who-we-are/at-a-glance/index.html
- “Are Banks Prepared For Climate Change?”. Boston Common Asset Management. 2015. Accessed November 2, 2016. https://bostoncommonasset.com/Membership/Apps/ICCMSViewReport_Input_App.ashx?IX_OB=None&IX_mId=18&IX_RD=Y&ObjectId=731308
- “Would you drive a motorcycle without a helmet?” Interview with Sabine Miltner. October 15, 2013. Accessed November 2, 2016. https://www.db.com/cr/en/concrete-the-impacts-and-risk-of-climate-change.htm
- “Climate Change Scenarios – Implications for Strategic Asset Allocation.” International Finance Corporation. Accessed November 2, 2016. Page 31. http://www.ifc.org/wps/wcm/connect/6b85a6804885569fba64fa6a6515bb18/ClimateChangeSurvey_Report.pdf?MOD=AJPERES
- Goldman Sachs Environmental Policy Framework. Accessed November 2, 2016. http://www.goldmansachs.com/s/environmental-policy-framework/index.html