Sustainable Finance: Friend or Foe in times of crisis?

Author: Peter-Jan Roose

All of us are currently mere participants in a global crisis … a world ruled by a health crisis. A virus, which quickly grew from a small ‘Chinese’ virus to a full-blown global pandemic, disrupting the entire economic system. While I am writing this article, the global cases are up to about 23 Mio and 800.000 deaths.

You might wonder if now is the right time to incorporate Sustainable Finance principles within your organization.


A global crisis does not only impact the economy.

One thing is becoming crystal clear, the way we are currently living our lives is not sustainable on the long-term. Yet there are some valuable lessons which will help us guide our response to the next crisis.


Connectivity between Economy, Society and Environment.

Jack Welch (former CEO of General Electric) talked about “Shareholder Value” Milton Friedman famously said, “the business of business is business”


For too long Financial Value (FV) has been the most important aspect of doing business. Completely disregarding our impact on society or environment, solely focusing on short-term financial gain, and making more profit year-on-year.


With Corporate Social Responsibility (CSR), Social Value (SV) was introduced to the boardroom. But Social Value goes much further than merely hiring people, paying them a "decent" salary, and paying taxes on the Financial Value we create. Most of the time Social Value is merely seen as a byproduct of Shareholder Value, as true purpose-driven companies are not yet abundant.


Finally, Peter Drucker said, “Profit is not the purpose of a business, rather the test of its validity.” In other words, a true purpose-driven company looks for creating Integrated Value (IV), which is the sum of Financial Value (FV), Social Value (SV) and Environmental Value (EV). For the mathematicians: IV = FV + SV + EV


The delicate balance between Economy, Society and Environment

Today we are starting to see the victors of this health crisis. Is it surprising that these are mostly companies, which have a clear purpose within their business model? In other words, looking for Integrated Value. This crisis has shown us that the equation of Integrated Value is very delicate, and that one dysfunctional element has significant and direct impact on the others.


When countries started going into lockdown, most companies focused on cash burn (i.e. their available pot of gold), but great companies looked after all their stakeholders (i.e. employees and families, suppliers, customers, etc.) in parallel. As long as the quest for a vaccine continues, most companies will remain in survival mode instead of preparing for the future.

How many companies do you know that are making considerable changes to their business model, becoming truly future proof?


Let us not be too pessimistic: the absence or limitation of the human footprint is showing the resilience of our environment. City skylines becoming clearer, return of marine life in our rivers … we have all seen the imagines in the news. Clearly the result of the economic activity slowing down. Nevertheless, the positive impact on the fight against climate change is clearly overstated! Accurately predicting the 2020 emissions drop is still very difficult, but the International Energy Agency puts it around 8 percent. If we could make this recurrent, we would be in great shape, but we cannot!


Just consider the full impact of this 8 percent reduction: 800.000 deaths and tens of millions unemployed – with possible millions more to come.


What if the next crisis is an environmental one?

If we do not start changing today, the world in 2060 will be 3°C warmer, water levels about a meter higher and the pollution will be detrimental for our health. The impact will be much greater than COVID-19 with no miracle vaccine or easy way back. Over time our world will become uninhabitable and the human species will be doomed to disappear.


The European Green Deal impacts us all

In July 2020, President of the European Council Charles Michel announced the new long-term budget, including a recovery package. For the first time in European history, its budget is directly linked to their climate object i.e. the European Green Deal.


The Green Deal tackles climate and environmental-related challenges. It is a growth strategy that aims to transform the EU into a fair and prosperous society, with a modern, resource-efficient and competitive economy where there are no net emissions of greenhouse gases in 2050 and where economic growth is decoupled from resource use. It also aims to protect, conserve, and enhance the EU's natural capital, and protect the health and well-being of citizens from environment-related risks and impacts.

If 27 member states, with each their own governments and regions, can come together on a budget which considers the long-term effect on the environment … well, what is stopping us from doing the same?

The current crisis triggered our global early warning system, creating awareness of our unsustainable way of living. It gives us the opportunity to learn and improve, so we can avert the consequences of inaction on the topic of climate change.

If we act now, we can save lives and prevent the worst possible outcome. Let us not waste this crisis and improve our response to the next one.


Time to introduce Environmental Value (EV) to your boardroom.

Introducing EV to your boardroom and company will improve your decision-making process, increase your business continuity, while decreasing business risk. Therefore, your company will have better access to the capital markets going forward. Essentially, reinventing your company and making it ready to face the future in the long-term.


We can start accounting for it now and introduce the right principles: e.g. internalizing externalities, switching to true pricing. Sustainable Finance looks at how finance interacts with economic (FV), social (SV) and environmental (EV) issues. It helps you to account for the broader picture in your decision making, shifting from short-term profit thinking towards long-term value creation.


Let us not wait for a global framework or Standard Operating Procedure (SOP). We need to start acting now. We can do it together!


Peter-Jan


“Do the difficult things while they are easy and do the great things while they are small. A journey of a thousand miles must begin with a single step.” Lao-Tzu, ancient Chinese philosopher, and writer

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