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