The New Deal of ESG Capitalism
THERE IS A UNANIMOUS CALL FROM CITIZENS AND BUSINESS LEADERS IN FAVOR OF SUSTAINABLE CAPITALISM, THE ONLY KIND CAPABLE OF RESPONDING TO THE NEW RISKS TO WHICH SOCIETY AND THE PLANET ARE INCREASINGLY EXPOSED. TO RESPOND TO CLIMATE CHANGE, SOCIAL INEQUITY, HEALTH CRISIS AND THE DEPLETION OF NATURAL RESOURCES, INNOVATIVE SOLUTIONS ARE NEEDED. STARTING WITH A NEW MODEL OF CIRCULAR BUSINESS AND SUSTAINABLE FINANCEby Francesco Perrini, Full Professor of Economics and Business Management, CoDirector of the SDA Bocconi ESG Lab
Sustainability and ESG factors are increasingly at the center of the agenda of policy makers, managers and finance. The pandemic has only increased attention to sustainability: it is an acceleration of history, as the Israeli historian Yuval Harari defines it. Green, social and digital issues have become central elements on which to base the restart.
At the institutional level, a great deal has been said about EU and national funding that is needed to manage the gradual recovery from the crisis. A turning point has been implemented in Europe thanks to the concentration of the flow of funding available on the green new deal, with the approval of the 2019 Action Plan. This plan provides for an allocation of approximately 1,000 billion euros over a decade to transform the climate and environmental challenge into an opportunity, ensuring the development of a more just, prosperous and sustainable society. This trend was then accelerated with the agreement to finance the "Supporting the Green Transition to a Climate-Neutral Economy Via Funds from Next Generation EU" with 750 billion. Italy will be the largest beneficiary with around 210 billion euros. Finally, Biden's recent success in the American elections has revived the issue of combating climate change and sustainability, with the idea that these challenges could become the common pivot of the international political and economic agenda for the next decade. This raises hopes for global agreements at the next G20 in Italy and at COP26 organized in November in Glasgow by the UK in partnership with Italy.
At the institutional level, a great deal has been said about EU and national funding that is needed to manage the gradual recovery from the crisis. A turning point has been implemented in Europe thanks to the concentration of the flow of funding available on the green new deal, with the approval of the 2019 Action Plan. This plan provides for an allocation of approximately 1,000 billion euros over a decade to transform the climate and environmental challenge into an opportunity, ensuring the development of a more just, prosperous and sustainable society. This trend was then accelerated with the agreement to finance the "Supporting the Green Transition to a Climate-Neutral Economy Via Funds from Next Generation EU" with 750 billion. Italy will be the largest beneficiary with around 210 billion euros. Finally, Biden's recent success in the American elections has revived the issue of combating climate change and sustainability, with the idea that these challenges could become the common pivot of the international political and economic agenda for the next decade. This raises hopes for global agreements at the next G20 in Italy and at COP26 organized in November in Glasgow by the UK in partnership with Italy.
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On the business side, it is now clear that the global business community increasingly considers environmental and social issues. Also, under the pressure of stakeholders, companies have adopted some social causes, in many cases even before these requests were accepted by the individual countries or the legislation in force. In recent years, the international business community has increasingly perceived the seriousness of the negative impact of environmental and social risks on its activities. In 2019, the main US multinationals signed the "Statement on the Purpose of a Corporation", which highlights the centrality of stakeholders, adopting a long-term approach to value creation processes, according to which, alongside profit for shareholders, companies must "have a sustainable purpose for all stakeholders".
Today citizens and business leaders are calling for a change of mentality in favor of sustainable capitalism. In addition to traditional economic and financial risks, companies also face Environmental, Social and Governance (ESG) risks. New risks ranging from natural disasters to viral epidemics, price volatility and sudden shocks in demand can lead to an epochal crisis.
Innovative solutions are needed to combat the destruction of natural resources, climate change, inequality, social conflict, etc. (not to mention that the ongoing digitization consumes more energy). Among the many things needed today, it is essential to rethink doing business according to a new sustainable and circular model flanked by an ecological energy transition and infrastructures for sustainable mobility. To achieve all this, it is necessary to develop new managerial excellence capable of combining corporate growth with social and environmental concerns. By integrating sustainability into the logic of governance and innovation processes, business models and supply chains, we can promote he development of excellent sustainable businesses. Finally, a necessary condition is to align corporate sustainability and ESG Finance.
The concept of sustainable finance, or the meeting between financial activity and the growing need to make doing business sustainable, is armed with innovative tools, both in the market and within the European Union. Sustainable finance evaluates ESG factors when making investment decisions in the financial sector, leading to an increase in long-term investment in sustainable economic activities. A sustainable or responsible investment strategy (so-called Sustainable Responsible Investment, SRI) integrates financial analysis with analysis of environmental and social factors and good governance, in order to create "shared" value for the investor and for society as a whole. This framework also includes impact investing which is the private capital investment strategy that aims to create positive social impacts and, at the same time, economic returns.
There is also a commitment by larger investment funds to integrate their investment strategies with ESG factors. Among them, BlackRock, whose CEO Larry Fink has long stated that a company cannot make long-term profits without pursuing a purpose and without considering the needs of a wide range of stakeholders. The growth of sustainable investments once again demonstrates the transformation that the global economy is experiencing: ESG investments that amounted to approximately 31 trillion USD at the end of 2019, up 34% compared to the previous two years, would have reached a third of the total, according to the latest estimates updated at the end of 2020. In addition, some of the largest institutional investors globally have committed to transform their investment portfolios, with the aim of achieving net greenhouse gas emissions of zero by 2050, in line with a maximum temperature increase of 1.5° C compared to pre-industrial levels.
The dimensional growth of ESG finance is, however, limited by a general lack of knowledge of what sustainable investments are and the benefits they can bring. Greater knowledge of the subject can help not only to affirm sustainable practices in the financial sector, but also support the transition to production, consumption and investment models that are more compatible with the achievement of the SDGs of the UN 2030 Agenda on sustainable development. For a radical change in the world of finance, the real result will be obtained if a convergence of existing corporate non-financial disclosure frameworks is promoted for companies to create a globally accepted and shared set of standards for non-financial sustainability reporting, while setting "sustainable capitalism ”as an overarching perspective. And if investors have an approach that not only delves into the corporate dimension of sustainability but also and above all the financing channels of sustainability and the issues that make it true and impactful through standards of identification and verification of investability. Only in this way can investors channel resources in a virtuous way towards industries that really change the planet (circular economy, agribusiness, energy transition, smart mobility, etc.).
The idea of ESG finance must not be speculative, it must serve as a lever for the real economy. Portfolio returns on performance are a consequence, not a priority.
Today citizens and business leaders are calling for a change of mentality in favor of sustainable capitalism. In addition to traditional economic and financial risks, companies also face Environmental, Social and Governance (ESG) risks. New risks ranging from natural disasters to viral epidemics, price volatility and sudden shocks in demand can lead to an epochal crisis.
Innovative solutions are needed to combat the destruction of natural resources, climate change, inequality, social conflict, etc. (not to mention that the ongoing digitization consumes more energy). Among the many things needed today, it is essential to rethink doing business according to a new sustainable and circular model flanked by an ecological energy transition and infrastructures for sustainable mobility. To achieve all this, it is necessary to develop new managerial excellence capable of combining corporate growth with social and environmental concerns. By integrating sustainability into the logic of governance and innovation processes, business models and supply chains, we can promote he development of excellent sustainable businesses. Finally, a necessary condition is to align corporate sustainability and ESG Finance.
The concept of sustainable finance, or the meeting between financial activity and the growing need to make doing business sustainable, is armed with innovative tools, both in the market and within the European Union. Sustainable finance evaluates ESG factors when making investment decisions in the financial sector, leading to an increase in long-term investment in sustainable economic activities. A sustainable or responsible investment strategy (so-called Sustainable Responsible Investment, SRI) integrates financial analysis with analysis of environmental and social factors and good governance, in order to create "shared" value for the investor and for society as a whole. This framework also includes impact investing which is the private capital investment strategy that aims to create positive social impacts and, at the same time, economic returns.
There is also a commitment by larger investment funds to integrate their investment strategies with ESG factors. Among them, BlackRock, whose CEO Larry Fink has long stated that a company cannot make long-term profits without pursuing a purpose and without considering the needs of a wide range of stakeholders. The growth of sustainable investments once again demonstrates the transformation that the global economy is experiencing: ESG investments that amounted to approximately 31 trillion USD at the end of 2019, up 34% compared to the previous two years, would have reached a third of the total, according to the latest estimates updated at the end of 2020. In addition, some of the largest institutional investors globally have committed to transform their investment portfolios, with the aim of achieving net greenhouse gas emissions of zero by 2050, in line with a maximum temperature increase of 1.5° C compared to pre-industrial levels.
The dimensional growth of ESG finance is, however, limited by a general lack of knowledge of what sustainable investments are and the benefits they can bring. Greater knowledge of the subject can help not only to affirm sustainable practices in the financial sector, but also support the transition to production, consumption and investment models that are more compatible with the achievement of the SDGs of the UN 2030 Agenda on sustainable development. For a radical change in the world of finance, the real result will be obtained if a convergence of existing corporate non-financial disclosure frameworks is promoted for companies to create a globally accepted and shared set of standards for non-financial sustainability reporting, while setting "sustainable capitalism ”as an overarching perspective. And if investors have an approach that not only delves into the corporate dimension of sustainability but also and above all the financing channels of sustainability and the issues that make it true and impactful through standards of identification and verification of investability. Only in this way can investors channel resources in a virtuous way towards industries that really change the planet (circular economy, agribusiness, energy transition, smart mobility, etc.).
The idea of ESG finance must not be speculative, it must serve as a lever for the real economy. Portfolio returns on performance are a consequence, not a priority.
