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