“Too much and for too long, we seemed to have surrendered personal excellence and community values in the mere accumulation of material things. […] It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl. […] Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play”
-Robert Kennedy, “Speech on GNP”, University of Kansas, March 18, 1968
In 1968, speaking to the students of University of Kansas, Robert Kennedy was defining an innovative approach to think about global economics. The GNP, historically used as the perfect parameter of national welfare is exhibited within its limited dimension: able to catch material needs of human kind but totally unable to express those values that make life really worthwhile.
For a long time, business and profit have been considered as travelling on a single-track, parallel and non intersectable with social values, and finance, together with them, a science driven by the solely rhythm of consumerism.
However, times have changed. The spread of a greater awareness towards human and civil rights altered the market rule of demand and supply. Customers became more careful about the qualitative standards met by products they buy. Also businesses, negatively affected by climate changes and social crises, began to pursue long-term policies resulting from the mixture of profit and non-profit purposes.
In this framework, the concept of financial sustainability steps into the business game! It concerns all investments used as an instrument of social change and sustainable development, arising from the combination of economic logic and civic commitment.
Useful guidelines for financial sustainable actions are represented by the 2030 Agenda, a program adopted by the United Nations, which identifies the 17 goals that the international community undertook to achieve by the year 2030, with the aim to end poverty, fight inequality and stop climate change: the 17 Sustainable Development Goals (SDGs).
Under this perspective, financial sustainability is crucial to support food security. FAO estimated that by 2050, due to the expected high population growth, agricultural production shall increase of 70% but only the 10% of this amount will be covered by the availability of new land. As a consequence the 90% of growing food demand shall be compensated by a production intensification, which will require massive long-term responsible investment into agribusiness and food security.
The foundations of financial sustainability are made by responsible investments. This means to channel capital into the real economy pursuing a long-term strategy able to generate sustainable returns.
Responsible investments integrate the analysis of financial parameters with Environmental, Social and Governance (ESG) factors, which lead the whole responsible investments approach. “Environmental factors” concern all decisions in the energetic field, the commitment against climate change and the use of natural resources. “Social factors” include decent labour conditions and good relationship with locals. Under “governance” there are corporate practices inspired by transparency and equality.
Benefits driving companies towards responsible investments are numerous.
First, they contribute to the improvement of the company’s image and reputation. This will attract more investors and consumers, deepening the general level of trust toward company’s businesses. Especially transparency may be particularly satisfactory considering that beneficiaries tend to be more and more careful about the way their capital is being invested. Second, they provide competitive advantages to the company. Nowadays diversification is a key element to success. Furthermore, responsible investments play an effective role in risk management. A greater attention to the environmental and social implications of their activities help companies to prevent problems while a sound corporate governance promote a fair business activity.
Not all responsible investments pursue the same approach. On this point, Eurosif (European Sustainable Investment Forum) has identified the seven most common responsible investment strategies: best-in-class, supporting companies with the highest ESG compliance level; engagement & voting, participating actively in the company’s managerial decisions about environment, society and governance; ESG integration in financial analysis; exclusions form the investment portfolio of less-ethical sectors such as weapons or tobacco (this is the strategy most used); impact investing, investment aiming to generate simultaneously profit and a positive environmental or social impacts; norms-based screening supporting companies with the highest compliance level with international standards and norms; and sustainability-themed, investing exclusively into specific sectors such as renewable energies, eco-efficiencies or health.
Another topic falling within financial sustainability is the ethical rating.
The Sustainability Rating Agency assess companies’ abilities to manage environmental, social and governance issues. In this perspective, a “good rating” is achieved when a company is compliant with the OECD, UN and EU agendas on sustainability and corporate governance.
The assessment procedure considers different criteria. Every rating agency may choose to use different standards or give different weight to the same parameter. Considering the difficulties of assessment of ethical behaviours, rating agencies tend to focus on companies actions falling within specific areas such as environment, community relationships, human rights, stakeholders’ role in companies. Rating procedures may also take into consideration companies’ ability to react to a reputational shock, or to prevent it, for example if companies try to repair damages after an environmental disaster or if adequate measures have been adopted to prevent a damage to the local community.
Usually, rating agencies try to consider a large number of factors under the same evaluation process but give a different weigh to each of them: environment 15%, community relation 10 %, etc.
However, some rating agencies may focus on specific topics, such as respect of environment, and give a higher score to companies that demonstrate a better environmental sustainability of their production.
Companies with a better ethical rating react faster and smarter to the business changes connected with the introduction of a new legislation framework. These companies also attract the highly-skilled human resources because they are able to offer better working conditions than others.
Companies that respect the environment and use low-carbon-production methods benefit of technological advantages, which contributes to the increase of long-term profit. At the same time, good labour conditions and community relationships may be good indicators of performance and productivity within the long-term. For all of these reasons, ethics and sustainability rating may be an important factor in evaluating the opportunity of investing in a company.
For any information, written contribution or clarification please contact our partner Mario Di Giulio
The contents of this publication is for informational purposes only. It is not intended to provide legal or other professional advice or opinions on specific facts or matters. Pavia e Ansaldo assumes no liability in connection with the use of this publication.