Sustainable Finance Blog 3 – The Other Side of Sustainable Finance

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When people are talking about sustainable finance, there are two main things they should consider in both sustainability and financial return. Many academic papers or investment institutions demonstrated the advantages of sustainable finance, such as better financial performance (Ortas, et al., 2015; Lee, et al., 2016; Yadav, et al., 2016) and risk reduction (Jansson & Biel, 2011; Morgan Stanley, 2019). While Lean & Nguyen (2014) and Cunha et al. (2020) argue that in the period of crisis, sustainable finance present a inferior return and risk performance. These researches express positive signs to investors, sustainable finance not only has better financial performance but also could achieve self-value of investors. But form the perspective of investment institutions, sustainable finance means they have to hire more sophisticate and cost more in human capital for meeting both the criteria of financial return and social return at the same time.

Note: European Union Action Plan on Sustainable Finance. Sources from if irish funds: ESG Newsletter 2019

Meanwhile, Juravle & Lewis (2009) emphasis that sustainable finance belong to long-term investment, so short-termism investor and manager are hard to achieve expected returns or short-term goals. Even majority of investors and managers show their believe is sustainability performance matters more, social return usually compromise when it is conflict with financial return: for bad financial performance sustainable finance, half investors would not accept it, 60% of managers are willing to divest it (Unruh, et al., 2016). The core of sustainable finance seems to have shifted from 'focus on sustainability' to 'focus on a profitable sustainability'. Varying definition of sustainable finance allow investors and managers to set or alter their particular 'sustainability'. If cannot bring expected financial return, they can lower the weighted of 'sustainability' and increase the proportion of conventional investment in portfolio. Or, they could even through green-washing, legalize those non-sustainable investment projects. For social return, it is a difficult factor to quantify. Dumas & Louche (2016) and Unruh, et al. (2016) believe for showing the value of sustainable finance more directly, more analytics and sophisticated modeling are required, then allow investors to estimate whether a sustainable project can meet their expectations.

References

Cunha, F. A. F. d. S. et al., 2020. Can sustainable investments outperform traditional benchmarks? Evidence from global stock markets. Business Strategy and the Environment, 29(2), p. 682–697.

Dumas, C. & Louche, C., 2016. Collective Beliefs on Responsible Investment. Business & Society, 55(3), p. 427–457.

Jansson, M. & Biel, A., 2011. Motives to engage in sustainable investment: A comparison between institutional and private investors. Sustainable Development, 19(2), pp. 135-142.

Juravle, C. & Lewis, A., 2009. The role of championship in the mainstreaming of Sustainable Investment (SI) what can we learn from SI pioneers in the United Kingdom. Organization & Environment, 22(1), pp. 75-98.

Lean, H. H. & Nguyen, D. K., 2014. Policy uncertainty and performance characteristics of sustainable investments across regions around the global financial crisis. Applied Financial Economics, 24(21), pp. 1367-1373.

Lee, K.-H., Cin, B. C. & Lee, E. Y., 2016. Environmental Responsibility and Firm Performance: The Application of an Environmental, Social and Governance Model. Business Strategy and the Environment, 25(1), pp. 40-53.

Morgan Stanley, 2019. Sustainable Reality, s.l.: Morgan Stanley.

Ortas, E., Álvarez, I. & Garayar, A., 2015. The Environmental, Social, Governance, and Financial Performance Effects on Companies that Adopt the United Nations Global Compact. Sustainability, 7(2), pp. 1932-1956.

Unruh, G. et al., 2016. Investing for a sustainable future: Investors care more about sustainability than many executives believe. MIT Sloan Management Review, 57(4).

Yadav, P. L., Han, S. H. & Rho, J. J., 2016. Impact of Environmental Performance on Firm Value for Sustainable Investment: Evidence from Large US Firms. Business Strategy and the Environment, 25(6), pp. 402-420.

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