Principles of sustainable finance

video & audio recordings

summary

This event revolved around the topics tackled in the book Principles of Sustainable Finance by Dirk Schoenmaker and Willem Schramade. A presentation by Schoenmaker was followed by a discussion between Schoenmaker, Visiting Fellow Rebecca Christie, European Commissioner Mario Nava, and Pascal Coret from Caisse des dépôts Group.

Finance is widely seen as an obstacle to creating a better world. In this book, authors explain how the financial sector can be mobilized to counter this. Using finance as a means to achieve social goals we could divert the planet and the global economy from their current path, and towards a more sustainable world.

Schoenmaker discussed the importance of creating a more integrated approach to finance and investment. He argued that the traditional evaluation of financial investments only considers the entity’s ability to make profits. Schoenmaker asserted that this strategy was no longer sustainable and a more integrated approach is necessary in today’s economy. Such integration should involve the perspectives of not only economists but of social activists and scientists as well. In order to make any substantive change towards sustainable development, it is necessary to integrate these three elements.

Schoenmaker illuminated several benefits that would accrue for corporations that looked towards sustainable finance. Firstly, this strategy would allow these companies to anticipate and prepare for taxation schemes geared towards sustainability. Second, this shift would give companies a greater reputation as much of public opinion is leaning towards sustainable solutions. Finally, moving towards these goals would allow companies to be more marketable in a future where the SDG goals have been achieved and would satisfy the demands of moral corporate responsibility.

Although there are many reasons suggesting corporations should pursue sustainable development, a question that is often raised is how. Schoenmaker gave many recommendations regarding this dilemma. Sustainable finance involves long-term solutions and a shift from a profit-value to an integrated-value approach. Corporations should be examined and evaluated in terms of how prepared they are for a sustainable future. Schoenmaker also advocates for a shift away from the typical diversified portfolio towards one that is more concentrated in order to enhance company engagement. In this way, investors can have a dialogue with companies centralized around mutual support and movement towards sustainability. Finally, Schoenmaker highlights that much of finance is about anticipating events and pricing them today. As we move towards a more sustainable world, companies should anticipate the impacts that these changes will have and make financial decisions accordingly.

The discussion that followed Schoenmaker’s presentation brought up ideas about how sustainable finance is being promoted by the European Commission and how it is being approached in the financial market itself.

Commissioner Mario Nava emphasized the necessity of private investment to achieve the goals outlined in the Paris Agreement. As many financial institutions are still functioning according to a profit-driven mantra, it is important to provide profit-related incentives that advocate for sustainable financial investment. Some of these strategies include highlighting the potential risks associated with no sustainable investment and looking for ways to create expected value for these institutions. A central goal of the Commission’s recent legislation regarding this issue has been to reorient behavior in order to reorient capital flows. This demands increasing disclosures and transparency, moving from short-term to long-term strategies, and asking companies to share how they are responding to recent market pressures around sustainability. The Commission has been very active in pursuing legislation in support of these goals. Nava highlighted how this legislation has come to fruition at an incredibly fast speed, suggesting that these objectives are of high importance and are receiving considerable support from all sides.

Pascal Coret commented on how corporations and investors were responding to incentives towards sustainable finance at the market level. In order to get people on board with sustainable finance, it is necessary to redefine the traditional definitions of economic and financial ideas such as rationality, market efficiency, portfolio theory, and the utility function. Moving towards sustainable finance will involve persuading people of the merits of sustainable finance over traditional profit maximization. Part of this could be achieved through highlighting the risks associated with pursuing financial strategies that don’t take SDGs into account and increasing company disclosures. Coret emphasized the need to put a financial value on the social and environmental items that are associated with Schoenmaker’s integrated approach. Additionally, he advocated for absolute return targets that would give people a better idea of what return on investment the economy could actually provide in these areas.

Throughout this discussion, it was clear that finance is a powerful tool that can be used to achieve social goals as well as move the current economy towards a more sustainable future.

Event summary by Rachel Campbell-Baier

materials

Presentation by Dirk Schoenmaker