Is finance more profitable if it is sustainable ?

The world of finance has always incor­po­ra­ted “risk/reward” para­me­ters into its invest­ment choices. These para­me­ters make it pos­sible to assess the risks of an invest­ment to judge whe­ther its pro­fi­ta­bi­li­ty is worth taking on. Up until now, this approach has focu­sed sole­ly on the finan­cial aspect, but this is no lon­ger the case.

“Today, in its invest­ment choices, finance can inte­grate so-cal­led ESG (Envi­ron­men­tal, Social, Gover­nance) para­me­ters,” explains Nico­las Mot­tis, pro­fes­sor of inno­va­tion and entre­pre­neur­ship mana­ge­ment at École Poly­tech­nique (IP Paris). From then on, it is consi­de­red sus­tai­nable : it seeks to opti­mise both finan­cial and ESG per­for­mance. In sus­tai­nable finance, cor­po­rate social res­pon­si­bi­li­ty the­re­fore becomes an invest­ment cri­te­rion. “An inves­tor will be just as inter­es­ted in a com­pa­ny’s finan­cial pro­file as in its extra-finan­cial pro­file [its social res­pon­si­bi­li­ty],” adds Léa Dunand-Cha­tel­let, Mana­ging Direc­tor and Head of Res­pon­sible Invest­ment at DNCA. “They will the­re­fore inte­grate this notion into his ana­ly­sis, to get a more com­plete view of the eco­no­mic player”.

Inter­est in a com­pa­ny’s social res­pon­si­bi­li­ty is not limi­ted to the posi­tive image that the public – and the­re­fore inves­tors – have of it. For some time now, a company’s repu­ta­tion has become a finan­cial issue. Léa Dunand-Cha­tel­let admits : “You can be cri­ti­ci­sed for owning com­pa­nies whose bad prac­tices make the head­lines. Pre­vious­ly, this repu­ta­tio­nal issue had no real mate­rial impact, such as finan­cial. But over the last two or three years, the finan­cial impact has become real.”

Consi­de­ring the finan­cial impact of a com­pa­ny’s repu­ta­tion ulti­ma­te­ly pushes finance that fol­lows the para­me­ters of “risk/profitability” towards the prin­ciple of sus­tai­nable finance. “By cor­rect­ly anti­ci­pa­ting, for example, the envi­ron­men­tal risks asso­cia­ted with cer­tain indus­trial acti­vi­ties, and the­re­fore the various contro­ver­sies that could arise from them – due to pol­lu­tion, acci­dents, etc. – we reduce the risks in our busi­ness. By cor­rect­ly anti­ci­pa­ting the envi­ron­men­tal risks asso­cia­ted with cer­tain indus­trial acti­vi­ties, for example, and the­re­fore the various contro­ver­sies that could arise from them – due to pol­lu­tion, acci­dents, etc. – we reduce the risks in an invest­ment port­fo­lio,” notes Nico­las Mot­tis. In a clas­sic finance model [risk/reward], by redu­cing risk, the expec­ta­tion of gains is increa­sed. This vision converges with that of sus­tai­nable finance.

In the world of finance, the concept of exter­na­li­ties can be impor­tant : it refers to all the non-finan­cial reper­cus­sions that an invest­ment can have. They can be posi­tive or nega­tive. In this sense, sus­tai­nable finance could be defi­ned as taking these exter­na­li­ties into account, with a view to favou­ring the posi­tive conse­quences and redu­cing the nega­tive ones. “Exter­na­li­ties,” adds Léa Dunand-Cha­tel­let, “represent in par­ti­cu­lar the foot­prints that a com­pa­ny will have on its natu­ral envi­ron­ment : emis­sions of CO2 and other green­house gases, land use, water abs­trac­tion, etc.”

The impor­tant thing is to get com­pa­nies to start valuing their exter­na­li­ties. One solu­tion has been to put a price on them : “The intro­duc­tion of the car­bon mar­ket, for example, is a res­ponse to this,” she explains. By put­ting a price on this nega­tive exter­na­li­ty, it has been consi­de­red in finan­cial models and invest­ments”. As for posi­tive exter­na­li­ties, the UN has stan­dar­di­sed them through the Sus­tai­nable Deve­lop­ment Goals (SDGs), to iden­ti­fy the paths that com­pa­nies should fol­low. Esta­bli­shed in 2015, there are 17 by 2030. The SDGs are diverse and varied, ran­ging from access to health for disad­van­ta­ged people to sus­tai­nable infra­struc­ture and the pre­ser­va­tion of biodiversity.

Today’s socie­ty is facing a major chal­lenge with the increa­sin­gly alar­ming effects of cli­mate change. Clear tar­gets are gra­dual­ly being set to achieve the ener­gy tran­si­tion. “By com­mit­ting our­selves to sus­tai­nable finance, we can posi­tion our­selves in asset classes and types of invest­ment that will represent major growth dri­vers for the future,” explains Nico­las Mot­tis. “Rene­wable ener­gies are the clas­sic example, because we know that this is an eco­no­mic sec­tor that will have to grow consi­de­ra­bly”. So, any eco­no­mic player that decides to invest in rene­wable ener­gy will be able to make a very high return.

This vision shows that capi­ta­lism does not real­ly change with sus­tai­nable finance. “The only real change is that, today, a com­pa­ny’s pro­fi­ta­bi­li­ty, lon­ge­vi­ty and abi­li­ty to grow – in other words, to gain mar­ket share but also to address new mar­kets – depends on its abi­li­ty to inte­grate sus­tai­nable deve­lop­ment as a posi­tive com­ponent,” says Léa Dunand-Chatellet.

Pablo Andres