How green is Wall Street?

NEW YORK (Fortune) -- Merrill Lynch talks a good game when it comes to saving the earth.

"We are committed to a policy of environmental excellence," the Wall Street securities firm says on its Web site.

This raises a couple of questions.

Why, then, is Merrill a lead underwriter for a $10-billion plan to build 11 new coal-fired power plants in Texas that is strenuously opposed by just about every major environmental group in the United States?

And what do the environmental policies of the Wall Street investment banks mean - if, that is, they mean anything at all?

These questions arise because of a big battle over global warming that is unfolding in Texas. TXU (Charts), a Dallas-based energy company, wants to build the 11 coal-fired plants, which would emit about 78 million tons of carbon dioxide into the air. That's a lot - more than the greenhouse gas emissions of 21 U.S. states.

As part of their efforts to stop the plants, environmentalists, along with a coalition of institutional investors, have turned their attention to Merrill Lynch (Charts), Citigroup (Charts) and Morgan Stanley (Charts), the three lead arrangers of TXU's financing.

"We want banks to shift their investments away from dirty and dangerous technologies and towards funding the future," says Dana Clark, a global finance campaigner for the Rainforest Action Network, a San Francisco-based activist group. RAN has met with banks on the issue, and it recently launched a campaign against Merrill.

TXU defends its plan, saying the plants are needed because demand for electricity is growing rapidly in Texas and that it will deploy state of the art technology to curb regulated pollutants from the plants. Because greenhouse gases are not regulated in Texas or at the federal level, global warming is not likely to be an issue in the regulatory process. TXU says it is complying with all relevant laws and regulations, although two lawsuits have been filed against the plants.

But none of that explains how the big banks - given all their "green" rhetoric - can back a plan that troubles so many environmentalists.

Their environmental policies, it turns out, differ significantly, particularly around the issue of climate change.

Most Wall Street firms have promised to reduce their own emission of greenhouse gases. Merrill Lynch, for instance, says it will seek to reduce emissions by 2 percent a year. Citigroup says it will reduce its emissions by 10 percent from 2005 levels by 2010. This isn't trivial - the firm owns or rents 13,000 properties; it will reduce emissions by conserving energy or buying electricity from renewable sources.

Bank of America (Charts) has gone further. It is pledging not just to reduce its own emissions but also to cut back on the greenhouse gas emissions from its investments and loans to energy and utility companies by 7 percent. Anne Finucane, who chairs BofA's environmental council, says that "climate change and atmospheric pollution represent a risk to the ultimate stability and sustainability of our way of life."

Goldman Sachs (Charts) is calling for governments to set a markets-based policy to curb greenhouse gas emissions. "Voluntary action alone cannot solve the climate change problem," Goldman says. Neither Merrill not Citigroup has endorsed government regulation of carbon emissions.

Citigroup, Bank of America, J.P. Morgan Chase and Wachovia have all signed the Equator Principles, a set of guidelines aimed at minimizing the adverse environmental and social impacts of major loans - for oil and gas projects, mines, power plants and the like - in the developing world. Merrill Lynch and Morgan Stanley have not.

In an e-mail, a Merrill Lynch spokeswoman said: "We have a policy against discussing client relationships so will decline to comment here."

Morgan Stanley, another big supporter of the TXU coal plants, said it was revising its environmental policy, and couldn't comment.

Citigroup was more forthcoming. Pam Flaherty, senior VP of global community relations, said the bank's environmental policy puts projects in the developing world through rigorous screens. Environmental groups, including Friends of the Earth and RAN, have praised Citi's policy, as well as its willingness to collaborate with green groups.

But when it comes to lending in the U.S., Europe and Canada, Citi does not go beyond asking its clients to comply with all applicable laws. Flaherty told me that the bank does not believe that its role is to make global warming policy in democratic societies with the rule of law.

At J.P. Morgan Chase, Amy Davidsen said bankers are required "to have a conversation about carbon disclosure and mitigation with clients." She wouldn't comment on the TXU project, except to say that the company is not one of the lenders. Neither is Goldman, a spokesman said. Bank of America would not comment.

Merrill Lynch, Morgan Stanley and Citigroup are likely to feel some pressure from shareholders in the months ahead to justify their support for TXU's coal plants.

Dan Bakal, director of electric power programs for CERES, a coalition of environmental groups and institutional investors, told me: "We will be encouraging financial institutions to do extensive due diligence and risk assessment of any coal plant financing with respect to climate change."

Altogether, U.S. electric utilities have proposed about 150 new coal plants, the government says. David Hawkins, director of the climate center for the Natural Resources Defense Council, say that coal plants built today have a life span of 50 years or more. Among other things, they will make it harder for utilities to develop cleaner ways to generate electricity.

Hawkins puts it bluntly: "Banks that finance new coal plants cannot claim to be operating in a green fashion with their investments."