Sustainable Finance
Investment firms that considers environmental, social and governance criteria (or “ESG”) of their portfolio companies, and whether these factors carry long lasting effects for both their clients, stakeholders and society at large, is often referred to as sustainable finance. For many investment funds, banks, private equity or venture capital firms, the idea of investing in companies with an ESG conscience is not a new concept but one that continues to attract attention as these firms try and balance return maximization whilst also making investments that are accretive environmentally, economically and socially.
Sustainable finance comes in many forms, across multiple asset classes. Sustainable funds, green bonds, impact investing, micro finance, active ownership and credits (think carbon) are but a few of the ways investors can invest sustainably. As eloquently put by Mark Hawkins, president and CFO of Salesforce, “A healthy society and environment must underpin our economies. The future of business, and our planet, depends on our ability to rethink and evolve our business models. Simply put, investing in sustainability makes good business sense.”
Looking at sustainable finance through the lens of a founder or business owner, benefits could include:
Reducing costs and improving efficiency - this might include reducing superfluous processes, cutting costs and reducing waste &/or inputs that can materially improve margins and a firm’s efficiency over time.
Improved Innovation - might include businesses who look at ways to build and manufacture goods and services with longer shelf lives which in turn are less likely to end of up in a landfill (or at least less often or in reduced quantities), using safer materials that are less harmful to both people and the environment and utilizing work-from-home or satellite offices supported by enhanced technology to reduce /eliminate employee commute times thereby lowering carbon emissions.
New competitive and revenue-generation opportunities - businesses may thrive as they look beyond their geographic borders, often looking globally, to partner, co-venture or merge with companies with a shared ethos of business growth with an ESG mindset. Operating synergies and efficiencies might be realized, and profits expanded, as firm’s jointly offer products that are better for society and the environment at large.
Improved employee development and retention - secondary to pay and benefits, many employees work instead to feel valued, to contribute and oftentimes to build and leave a legacy behind them after they retire. Businesses that align their values with those of all their stakeholders will be better served in meeting their ESG targets and responsibilities.
The Canadian economy is strong and diversified and thus has great potential to become a global center for green and sustainable finance. “Canada has the means and the opportunity to stand among global leaders as a decision-maker rather than a decision-taker in the global market for sustainable products, markets and growth,” said a report on Sustainable Finance by Canada’s Minister of Environment and Climate Change and Minister of Finance. Further “If Canada is to meet its long-term objectives, sustainable finance must become, simply, finance. In other words, climate change opportunity and risk management need to become business-as-usual in financial services, and embedded in everyday business decisions, products and services.” said the report.
In terms of M&A, the concept of ESG investing continues to attract attention from both acquirers and investors alike. While statistics vary widely, many note that less than 5% of Canadian businesses have formally implemented sustainable practices in their businesses, despite many either working on or working towards implementing an ESG mandate.
Many pundits believe that the true obstacles to greater market acceptance of ESG investing relates to data and disclosure. The more information investors are able to obtain and research about a businesses ESG mandate, how they intend to mitigate and reduce their environmental footprint (and how these claims will be measured) and how they’ve aligned stakeholders interest such that all parties are rewarded equally, the better.
In the coming years, sustainable finance and ESG are predicted to continue to surge and increase in popularity. As the Canadian government is steadily moving towards the goal of net zero emissions, it is going to be crucial for businesses and financial institutions to adapt to the changing landscape in order to compete and grow.
Stay safe and well.
Trevor Palmquist
Founder & Managing Director