Tuesday, November 10, 2009

The New Business of Business is Sustainability

New and old financial players invest time and resources to manage broader risks and meet new opportunities.

Today’s business leaders are rejecting Milton Friedman’s famous theory that “the business of business is business.” As corporate responsibility becomes a leading global business trend, it is clear that sustainability is a strategic, long-term investment necessary for survival in an increasingly volatile global economy. Financial markets and the financial services industry are key to sustainability as they raise, allocate and price capital, and provide risk coverage, influencing access to financing and risk protection. Therefore, engaging in sustainable finance means that these firms are providing financial capital and risk management products and services in ways that shore up economic prosperity, environmental preservation, and community development. There are many financial institutions and organizations worldwide that are investing time and resources to meet these goals and create an economy that values a broader range of inputs such as natural resources and human capital.

Non-governmental organizations are emerging to hold the finance industry accountable to the public and increase awareness on the importance of responsible lending. The World Business Council for Sustainable Development, a coalition of 175 international companies, has developed the business case for sustainability in the finance sector. The council asserts that by taking into account social and environmental aspects, investors minimize risk, further improving the bottom line and creating long term value for stakeholders. International Finance Corporation (IFC) has taken the field a step further by requiring its clients to develop and implement a Social and Environmental Management System (SEMS) as a convenant of any loan/investment agreement. The SEMS is a systematic framework which integrates social and environmental considerations into an organization’s business processes. IFC believes that integrating these concerns into decision making facilitates improved risk management and higher return on investment.

Financial firms are not only effectively managing risks presented by social and environmental concerns, but also taking advantage of opportunities in this arena. Tsing Capital, a Beijing-based cleantech venture capital management firm, is leading the charge from China. Worth over US $200bn in environmental protection and renewable energy, the Chinese market has the world’s highest growth rates in environmental spending. The Fund invests in businesses with economic drivers that provide sustainable revenue streams as well as demonstrable environmental and social return. Tsing Capital has an exemplary track record of generating excellent financial returns while surpassing environmental and social targets.

With new public and private players around the world using a plethora of valuation instruments, the market is ripe for a set of standards that will benchmark these investments across industries and economies. However, the concern here is that the more broadly one tool is applied, the more diluted or less meaningful the metrics will become. It remains to be seen if one player or index will rise above the rest. For now, it is important to monitor the financial, environmental, and social returns of these sustainable funds to gauge their long-term performance and impact on business, society, and the environment.

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