Is finance more profitable if it is sustainable?
- In the past, finance mainly considered risk/reward parameters when making investment choices.
- Now, finance is seeking to optimise its financial performance and social responsibility: this is known as sustainable finance.
- Anticipating the various controversies that could arise from certain activities helps to reduce the risks in an investment portfolio.
- Sustainable finance places great importance on “externalities”, which refer to all the non-financial repercussions that an investment may have.
- Today, a company's profitability and long-term viability depend on its ability to integrate sustainable development as a positive component.
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”.
A reputation based on the stock exchange
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.
The externalities of an investment
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.
A green(er) capitalism
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.