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Sustainability and Financial Performance

October 06, 2015
In the United States and abroad, sustainability has become a buzzword in business, policy and economics. Firms both big and small and governments from the federal to local level have implemented sustainability actions and encouraged sustainability in their policies. Given the recent popularity of this concept, economists have analyzed the roots and results of sustainability, particularly in the field of international banking. Why do firms engage in sustainability and what is the effect of an improvement in environmental and social performance on a firm’s financial performance?

By Ben Nathan, M’16

Although for thousands of years humans have sought to live sustainably through resource management, technological advancements and social reforms, the modern concept of sustainable development has its roots in the environmental and social movements of the second half of the 20th Century. In 1987, the United Nations (UN) established-Brundtland Commission published the Report Our Common Future, which coined sustainable development as that which met “the needs of the present without compromising the ability of future generations to meet their own needs.” (UN, 1987) In 2005, the UN established sustainable development goals that included the three “pillars” of sustainability: economic development, social development and environmental protection. Out of the broader concept of sustainable development, corporate sustainability was established as a “business approach that creates long-term shareholder value by embracing opportunities and managing risks deriving from economic, environmental and social developments.” (Dow Jones)

Today’s challenges, including resource scarcity, demographic shifts and climate change are redefining the public’s expectations, policies and regulations and business strategies. According to the Dow Jones Sustainability Indices, “Such challenges create new opportunities and risks that companies must address today to remain competitive tomorrow. Companies that anticipate and manage current and future economic, environmental and social opportunities and risks by focusing on quality, innovation and productivity will emerge as leaders and are more likely to create a competitive advantage and long-term stakeholder value.” (Dow Jones)

In the last several decades, corporate sustainability has expanded dramatically. “In the early 1990’s, there were fewer than 30 companies producing a report with environmental or social data. Twenty years later, more than 6,000 companies in the world, or more than 50% of the world market capitalization, produced a sustainability report.” (Brookings, 2014) Companies like General Motors, General Electric and Nike have engaged in a variety of environmental and social sustainability actions, citing cost reductions, energy efficiency improvements, recycling and reuse and resource conservation as causes for their transformations.

According to an International Finance Corporation (IFC) study of sustainability in international banking, individual firms must devise their own unique business case for sustainable banking. (IFC, 2007) They must consider their business goals and sustainability trends and factors in the markets and sectors in which they operate. According to the study, compliance with government regulation is no longer the top driver of sustainability action. Reputation and branding is now the top reason for many banks to integrate sustainability considerations into management practices. (IFC, 2007) 64% of multinational commercial banks polled in the study listed investor demand as a critical factor in their decisions to implement sustainability initiatives. Banks also listed increased value to shareholders, lower risk and better returns and client demand as reasons to implement sustainability practices. Banks are reportedly also motivated to promote sustainability due to environmental issues, poverty alleviation and protection of human rights. They see local communities emerging as new regulators, and respond to these issues with more localized sustainability policies. (IFC, 2007)

Reasons Why Banks Consider Sustainability Issues 

It appears as if there is a strong positive correlation between a firm’s sustainability practices and its corporate management and financial rate of return. In the IFC study, 86% of banks polled reported positive changes as a result of sustainable environmental and social standards and 19% perceived these changes as significant. No banks polled reported negative changes as a result of sustainability actions. Banks cited improvements in the quality of their portfolios and a lowering of insurance liabilities and compensation claims. 74% of banks reported reduced risk, 48% of banks reported improved access to international financing, 39% of banks reported improved brand value and reputation and 26% reported improved community relations. (IFC, 2007)

Sustainable banking brings business benefits including new lines of business, new clients, greater access to financing, greater shareholder value, improved reputation and goodwill. Furthermore, it brings increased potential for lending in sustainable energy, cleaner production, biodiversity conservation and ensures good corporate governance. Banks surveyed reported that environmental projects consisted of 74% of their sustainable portfolios. 59% of banks polled reported access to new markets, 52% reported new business in sustainability-driven sectors and 44% reported new loans and advisory services for eco-efficiency and cleaner production ventures. (IFC, 2007)

The causes and effects of sustainability are becoming better understood and revealed through environmental, social and financial payoffs. Although corporate sustainability in banking has largely been driven by market forces, U.S. domestic economic policy needs to reflect the values of sustainability. The U.S. requires a national sustainability policy that enforces sustainability in the public and private sectors in order to address national concerns regarding social welfare, the environment, resource efficiency and economic strength.

Bibliography & Useful Links

  1.  Banking on Sustainbility.” IFC, 2007. Washington, DC. 
  2.  Confino, Jo. “Sustainable corporations perform better financially, report finds.” The Guardian. 2014. 
  3.  “Corporate Sustainability.” Dow Jones Sustainability Indices. 
  4.  Eccles, Robert G.; Ioannou, Ioannis, and Serafeim, George. “The Impact of Corporate Sustainability on Organizational Processes and Performance.” 
  5.  Haanaes, Knut, Michael, David, Jurgens, Jeremy and Rangan, Subramanian. “Making Sustainability Profitable.” Harvard Business Review, 2013. 
  6.  Nidumolu, Ram, Prahalad, C.K. and Rangaswami, M.R. “Why Sustainability Is Now the Key Driver of Innovation.” Harvard Business Review. 2009. 
  7.  “Report of the World Commission on Environment and Development: Our Common Future.” UN, 1987. 
  8.  Serafeim, George. “Turning a Profit While Doing Good: Aligning Sustainability with Corporate Performance” Center for Effective Public Management at Brookings, 2014. Washington, DC. 
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