SUSTAINABILITY IN FINANCE
Sustainability In Finance
Manuel Moreno
manuelmoreno@knights.ucf.edu
IDS 4934 – Interdisciplinary Studies Capstone Spring 2020
College of Undergraduate Studies
University of Central Florida
Is there a way for the discipline of finance to influence sustainability in the corporate and industrial world?
Introduction and Problem Statement
The world as we know it can no longer sustain growth by doing business using the ways of the past. In the past, traditional economies grew based on old school business practices that didn't take the environment into account. It is important to know that our society and economy would not have become as interconnected and complex as it is without that preliminary foundation, but it is time to rethink global business and to consider sustainability as one of the pillars for future economics. Time is running short for us to more fully implement necessary changes to support sustainability within industry, changes that have the power to favor all who embrace and implement them.
The disciplines involved in turning habits as a society towards a more sustainable path include ecology, environmental studies, and others, but these alone have not been able to drive the change fast enough for it to happen in timely way. Industry dictates growth and prosperity in a society, but if it comes at the expense of the environment, then the cost is too high. For this reason, it is essential to help people care more and force industry to assess proper solutions.
Industry accounts for most of the emissions and depletion of resources. An example is given by the Israel ministry of environmental protection: “Industrialization, while important for the economic growth and development of a society, can also be harmful to the environment. Amongst other things industrial process can cause climate change, pollution to air, water and soil, health issues, extinction of species, and more.” (n.d, Impact of Business and Industry on the Environment. 2015. para. 1) Finance, or the financial side of industry provides a way to shift harmful practices towards more beneficial ones. “Green finance is essential in financing renewable and green energy projects in order to reduce carbon emission and its negative health impacts, develop climate resilient infrastructure for cities and ensure environmental sustainability” (Taghizadeh-Hesary & Yoshino, 2019, p. 98). The adoption of green finance practices provides a path to target unconscious parts of our economy through the money-making engine that fuels them, and it can provide guidelines for ways to change practices and create a sustainable future.
Knowledge about the issues and impacts of sustainability efforts or lack of them is plentiful, but evidence of successful implementation in business practices is harder to find. Green finance and ways to implement it blurs the line between finance and sustainability, and is the key to strengthening the connections between industry and the world in which it operates.
The issue of sustainability as it was previously expressed is a very broad issue. It might even be possible to say that there are countless ways that a number of different disciplines can make a contribution towards it. The main point, however, is that finance as a discipline is a very powerful engine that can work in infinite ways towards increasing sustainability in industry.
“Finance is a broad term that describes activities associated with banking, leverage or debt, credit, capital markets, money, and investments. Basically, finance represents money management and the process of acquiring needed funds” (Kurt, 2020, para. 1). This brief definition highlights the fact that finance is a very broad discipline, and because of this it provides a many possibilities for action. It also clarifies that financial power is available through financial instruments that can be deployed towards a common goal.
“Sustainability focuses on meeting the needs of the present without compromising the ability of future generations to meet their needs. The concept of sustainability is composed of three pillars: economic, environmental, and social—also known informally as profits, planet, and people” (Grant, 2020, para.1). In other words, sustainability is focused on growth taking into account the future generations and the influence today’s decisions will have on them. The link between the finance and sustainability is evidenced in the connections between the economic and environmental pillars, and the way the social pillar, or our accountability and responsibility factor in with the ways in which these all work together to achieve common goals.
Sustainability cannot be tackled as an effort that is disconnected from other work. Science and its different disciplines have identified climate change as an issue, but at the same time, they lack the power to promote solutions to this. This is why finance is linked to sustainability and the solutions needed to achieve it.
Background/History
There is no specific thread or linear history that links the concepts of sustainability and finance. Instead, what can be seen and traced back is a series of efforts that demonstrate intentions and major goals designed to deal with sustainability, and the problems that these have brought. The main issue is that sustainability and the resulting climate change are a global problem, and that it impacts every area of work in every society. In this sense, every industry and discipline associated with it is responsible and accountable for the ways in which they contribute to improving sustainability efforts.
Finance as a broad discipline contributes to solutions through the ways that financial incentives promote improved sustainable business practices. These efforts in the last 10 to 15 years have had a positive impact, but we can do better. While it is discouraging that there is still not a widespread effort, there are examples of the growth of green finance within industry and increasing corporate responsibility. For example, Goldman Sachs, a major investment banking corporation, built its headquarters in compliance with LEED sustainable standards. “While sustainability within building design and performance was deemed critical, the firm also acknowledged the necessity for behavior modification in the use of the facilities and the consumptions of services” (Keenan, 2016, p. 415). This is representative of the necessary shift by corporations and industry as they incorporate sustainability as a business practice through an important investment such as sustainable buildings and through the education of its employees in the way the buildings are used.
An Interdisciplinary Approach
Finance alone does not have the power to force adoption and implementation of sustainable business practices, but monetary incentives and power in combination with other disciplinary perspectives do lay the groundwork for such projects. An example is found in the call to developing countries for a budget assessment of what is required to bring them into compliance with global emission standards. Nations that need funding to achieve this goal also need proper financing available in order to make the necessary changes. It is a moment like this where working together using green finance could make these projects a reality. Green bonds are a part of finance that is used in order to attract investment. “Green bonds provide an opportunity for long-term and sustainable infrastructure financing. Previously carried out by multilateral development banks (MDBs), namely the World Bank and the European Investment Bank, green bond issuance has promptly spread to other traditional investors, such as institutional investors, commercial banks, municipalities, and some of the world's largest companies” (Banga, 2019, p.19). This approach has been used with success by bigger institutions in developed countries, and is one way to influence and fund sustainable business practice changes in industry. Increasing the use of this type of green or environmental bond to finance climate and environmental projects in industry provides investment opportunities for investors dedicated to positive environmental change.
Common ground is found when different financial institutions identify an opportunity to work towards achieving sustainability and environmental mitigation projects and goals. For example, big investment banking institutions and central government banks can work with developing economies and smaller businesses to support environmentally responsible practices.
“Climate change has possibly significant implications not only for the core operations of central banks but also poses the question of their broader role in addressing climate change-related risk and mitigation” (Dikau, & Volz, 2019, p. 2).This type of support includes a time frame of operation that denotes the importance of central banks and their role towards green finance policy.
Another aspect of this is the adaptability of projects, and the ways in which projects are approached. “It is not the aim … to set out a one-size-fits-all approach regarding how central banks can become “greener,” but rather to contribute to the fundamental understanding of how climate change relates to the operational frameworks of monetary institutions” (Dikau, & Volz, 2019, p. 3). This highlights the main goal of integrating sustainable practices not only in public institutions, but in the ones that handle both finance and monetary policy. Following this ideal, the biggest takeaway is that green finance and sustainability among the main priorities in the core policies of central banks.
Private firms that do business on a smaller scale than the ones previously discussed are also important to consider. They have “created an appetite among investors for investment products that can deliver superior returns while adhering to an environmentally friendly philosophy” (Ali, 2007, p. 351). This trend calling for investors to seek environmentally responsible investing alternatives that better suit sustainable initiatives is an opportunity that can be made more widely available to those interested in supporting environmentally responsible initiatives. When an increased demand for such investments is established, finance and sustainability can work together to further refine the projects and infrastructure supported by investors. It also showcases an opportunity encouraged by sustainability to make institutions like hedge funds to work and comply with greener investments.
Although the majority of the research and literature reported on the positive side of creating connections between sustainability and finance, it is also important to assess the conflict that might arise. Wang and Zhi (2016) wrote in their discussion about the role of green finance in environmental protection, “Two aspects of market mechanism and policies: There is no research on the linked development of the energy industry and financial industry and no specific analysis of the internal mechanism regarding connection, mutual penetration and mutual influence between the two industries.” (p. 312) The conflict is that there is no clear historical basis in the link between sustainability and finance, that there is not plentiful information available on the success or failure of these green finance initiatives.
The issue of enforcing regulation and confirming that investments go to sustainable initiatives is another conflict related to green bonds. In the case of hedge funds used for sustainable finance, there is a call for enforced regulation and confirmation that those investments go to sustainable initiatives. As often happens, subjectivity can come into play with some investors differing in their opinion of the “right” use of such funds and at this point, a controversy that has the potential to damage the entire objective of the investment. Ali (2007) stated that “Investment entails the acquisition of assets capable of generating financial returns (within a level of risk acceptance for the particular fund). The use of the fund’s assets for non-investment purposes (such as the financing of an environmental campaign) is a clear violation of the prudent investor rule but so too is the selection of investments on a basis that gives priority to the environmental objectives or philosophy of the fund over the fund’s return objectives.” (p. 354)
It is important to take into account that like any other investment or any other monetary policy related to sustainability, it can be difficult to implement and can include differing perceptions among investors. At the same time there is the belief that with proper regulation, full transparency, and the right rules, such investments can be guided in the right direction.
The three main views on green finance are as follow:
1. Sustainable green finance can be achieved regardless of the institutions or the markets that implement them.
2. Sustainable green finance will offer opportunities for growth in the coming years that might be unmatched by any other investment opportunity.
3. Further research to more fully explain the links between finance and sustainability will contribute to the further growth of green finance.
The first of three points is supported by researchers including Dikau and Volz (2019) in their conclusion that “Only a few central banks operate under a mandate that explicitly includes the promotion of sustainable growth or development as an objective.” (p. 3) These few can grow to include many with some government institutions around the world already counting these types of sustainable finances among their properties. It is important to point out that there is even more growth and financial opportunity for the banks that have not yet passed the same policies.
In the case of the second point, Wang and Zhi (2016) detailed how sustainable finance serves as engine to drive the opportunity and reach sustainability goals, specifically in the field of sustainable energy. “The electricity cost of Renewable Energy Technologies is closely related to the cost of financing. Continued competitive electricity market will change the electricity power in the future and cause potential impact on renewable energy structure. It is believed that fierce competition can reduce the burden of the financing of renewable energy projects, thus achieving the goals already set for renewable energy” (p. 312).
Lastly, the third point encourages research and implementation to pave a clear path and understanding of the connection between sustainability and finance. In his text, Banga, (2019) concluded that “As innovative financial instruments, green bonds provide a historic opportunity to direct private finance towards low-carbon investments” (p. 28). Research and conclusions like these encourage more research and action towards continued growth in green finance.
Interdisciplinary Understanding/Solution
The main driver of sustainability in industry needs to be driven by the private and institutional sectors with green bonds, or climate bonds being more widely understood and included in investment portfolios. An interdisciplinary perspective created a solid connection among disciplines towards the common purpose of investments that encourage and support climate-related environmental projects, and have contributed to renewable energy, as an example, and use of wind energy (Wang & Zhi, 2016).
In conclusion, it is important to see that the goal of achieving sustainability is made possible only through integration of finance, specifically green finance and its climate bonds. This green finance market acts as the go-between and provides capital for the environmental movement towards sustainability and climate change. “…it adopts the way of serving to gather and allocate funds, and mandates the capital shortage of businesses and residents. In addition, the green finance market can improve productivity. Through financial institutions handling monetary funds, the currency funds movement promotes commodities trading according to the market demands, bonds various factors of production rapidly, and forms new productivity” (Wang & Zhi, 2016, p. 313). Once institutions and individuals more fully adopt green finance as a part of their investment plans, industry will have the funding needed to support sustainability in the corporate and industrial sectors. Finance and its fixed-income green bonds can fuel sustainability and drive growth for individuals, industry, and society, and it can do it in a socially and environmentally-responsible way.
References
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Banga, J. (2019). The green bond market: a potential source of climate finance for developing
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Dikau, S., & Volz, U. (2019). Central bank mandates, sustainability objectives and the promotion
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https://www.investopedia.com/ask/answers/what-is-finance/
Taghizadeh-Hesary, F., & Yoshino, N. (n.d.). The way to induce private participation in green
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