Emerging Markets…Brutal BRICs?! II/II

In the week that began with Citi [C] becoming the US government's latest shareholding, JPMorganChase [JPM] was pitching their core competency as a lender, and Goldman Sachs [GS] was looking to stretch their sustainability advantage branding their research and investment products. JPM was busy offering a full page advertisement in WSJ Eastern edition A5 Tues 25 Nov pitching to the WSJ readership on their commitment to lending [“Our Business Is Lending. And That’s Exactly What We’re Doing”], including “in a responsible way”. Yes, I can only imagine what my mate who taught me how to build a BS filter for company ESG claims, the KLD research director in Boston, will say about that one!

Goldman Sachs was taking the front foot in the FT Mon p.3 with the first above-the-line hardcopy advertisement I have seen for GS Sustain, a fair advertising budget commitment to go above-the-line. Of course GS hedged bets by burying the ESG lead in the body, the sub-title “innovative thinking finds innovative companies”, and one has to mine the paragraph further for “a unique global equity strategy that brings together ESG (environmental, social and governance) criteria, broad industry analysis and return on capital to identify long term investment opportunities”. But GS now fronts their homepage with GS Sustain. Clearly someone is taking a big bet, and perhaps with freefall markets, a good time to try something completely different.

GS Sustain has a colourful history. It's strong underpin is from the GS sell-side in London via the work dating back to 2003 of Anthony Ling in the Energy Equity Research team, and then taken forward by Sarah Forrest, Marc Fox and colleagues. Sarah is now an Executive Director for Global Investment Research. After finally establishing a coordinated framework in early 2007 – GS Sustain – which launched to plaudits from the usual UN Global Compact types and affiliates in Geneva last July, the GS Sustain brand has been slowly building. Like IBM, no presenter looks dumb when quoting GS – a false security to be sure – but expedient for now. Indeed, in my MBA865 seminar at Kenan-Flagler Business School, Sustainability in Investment Strategy at Chapel Hill last week, one of the most informed students referred to “it’s Goldman Sachs!” as the GS halo in the ESG space proves to light the way for less skeptical inquiry of how sustainability plays in. Clearly GS benefits from being one of the two last i-banks standing, [mostly!], and may push for competitive advantage on sustainability matters in the FT, the print daily which positions itself in US as more global than the WSJ or NYT Business Day as a major business daily. Companies, as they do with any positive third party assessment, but especially when it is a major i-Bank brand, are only to happy to tout their standing in any competitive assessment, such as BG Group [LON: BG] a natural gas company.

I was first alerted to the new GS Asset Management product built off the GS sell-side’s GS Sustain framework in Manhattan at the Sustainable Investing 2008, People. Plant. Profit. on September 23-24th, 2008 at The Harmonie Club, New York City. At that time the product was available offshore only, but now institutional US clients may access it. The conference was hosted by Financial Research Associates, LLC for the first time, as a new conference publisher entering the sustainability space, with assistance from SIF.

In the next two weeks I will be having a more solid look at GS Sustain GSAM product as forward planning for when it has run a year at least and we may start recommending the strategy from an informed understanding to the benefit of asset owners and multi-managers. I like that GS Sustain is in the game, for sure, but a close examination of some of the underlying criteria makes me cautious based on my past experience of ratings that are built on "box checking". The framework looks good, but underlying data, and assumptions like memberships of an initiative or international organization sending signals about sustainability, may be sub-optimal. I am cautiously positive, and our recommendation at Sinclair & Company to investors is to observe closely, and stress-test the ideas before becoming convinced. I have not reviewed the strategy in detail since hearing about it in late Sept, partly because the most impressive aspect of the Sustainable Investing 2008 event had me moving to other thinking. Other than Tim Smith’s usual excellent chairmanship [when not chairing SIF, he is in Boston as Senior Vice President at Walden Asset Management], was the compelling speech by Joe Keefe CEO of PAX over lunch, one of the best expositions on where ESG/sustainability investment is in 2008, and where it may go, an extract of which is here.

And of games, well, it just would not be right to cover emerging markets and London in the same story, and fail to mention Saturday's smashing game the Springboks played against England which CNN titled "Springboks Thrash England at Twickenham". Rugby, like life, rewards grit as well as grace, with patience a coaching watchword lately. So comprehensive, the Brits found time to boo their team. Yikes! The tackles, the tenacity and the touch South Africa showed against England in their backyard, racking up the Roses’ biggest ever loss at home, was a fresh reminder of the entrepreneurial and rugged nature of the boys from the bottom end of Africa.

Sarah is an Aussie, so she would have enjoyed it, and the headliner from The Australian "Springboks Outclass England at Twickenham". The boys from Goldman are credited with the BRIC moniker coined the term ‘BRIC’ in our Global Economics Paper, ‘Building Better Global Economic BRICs’, published on November 30, 2001. Maybe they had seen Bakkies [“bricks”] Botha make a tackle sometime before, like the try-saving one he made on Saturday? [sidenote: should every rugby player hope for a wikipaedia entry?!]. Yes, I know, South Africa has the ability to play sublimely one week [has Australia recovered from 50-odd thwack at Ellis Park, their biggest ever Test loss?] to the slack - only one Tri-Nations title in all these years. But as I pitched at the Paris UN PRI Board meeting in Nov 2007 - to the sullen looks from the Englishman directly after Springboks won in Paris [and a smile from the Frenchmen] - nice to see EM on top. A small smile for EM slips out when running through the scoreboard from Saturday: Emerging Markets 42 vs. Developed Markets 6.

The England coach called it “brutal” and “a lesson”. Pretty much sums up the financial meltdown for EM and the rest of the world too, and the bleak '09 outlook. Enough said.

SRIX.GS