Most everybody believes that mega-corporations not sharing their wealth is despicable. Likewise, many agree that banks and other financial management institutions are far more wealthy than their level of 'industry' should allow. We'll come back to the industry in a mo; for now, we have one more point most people agree on. The world is burning, people are hungry and those in power do nothing to stop it. Indeed, most think they cause it.
In this case, 'those in power' represent those with the most money, not governments. Governments cannot take unilateral, independent action even if such initiatives help their citizens. By contrast, corporations and financial institutions have much more leeway. Their list of obligations and mandates is far less constraining than governments. Furthermore, they get to decide how to allocate their funds:
- on environmental projects: for cleanup, remediation and sustainability initiatives
- on social projects: outreach and education, particularly in disadvantaged communities
- on research and development of everything from new energy sources to water conservation
- on employee relations and development
As well-intentioned as governments may be, they simply do not have the resources to address such issues. As concerned as the corporate world may be about dwindling resources and business ethics, they're constrained both by their budgets and obligations to their shareholders. And the finance industry... Let's start our discussion with them.
Finance Definition
Finance is the process of managing debt, credit, assets and investments. You may finance a purchase, which represents both credit and debt. Asset management means the use and allocation of money. Only one such use is investments which, in turn, are also managed. Usually by some entity in the finance industry - anyone from an agent to a bank or other financial institution.
Industry... That's a curious word to use in conjunction with finance. Collins Dictionary defines industry as the collecting of raw materials and turning them into consumer goods. Every other dictionary identifies 'industry' as the process of turning out products for consumption. The finance industry does not make consumer goods. Indeed, they do not produce goods of any kind.
It might be more apt to call the finance process wealth farming. A farm grows stuff. Banks, money management firms and other such institutions grow wealth. A farmer knows exactly what do to with their yield: send it to market. Finance entities have little to do but continue to grow wealth. Until now.
Finance ESG
"Yes, but what is it for?"
An avid reader, I can't tell you how many books that line features in. You might picture some up-and-comer showing off some new artwork or fancy gadget. The character treated to that display, usually older and pragmatic, puzzles over such an extravagant cash outlay. What good could either the spending or the object itself serve?
The finance industry has come to the same conclusion. Growing wealth for its own sake is unsustainable. It's pointless, too, especially when there is so much need. Surely they could continue to grow wealth but also engage in sustainable finance?
Sustainable financing entails seeking out projects that yield growth of a different kind and investing funds to make it happen. The 'different kind' in question addresses three distinct spheres: environmental, social and governance (ESG). The first two are easy to understand. Governance broadly represents how organisations have governed themselves (or been governed) in the past.
Reducing and/or eliminating bad business practices is one of ESG's mandates. How many of us have sputtered over high executive compensation while workers don't even get a cost-of-living raise? ESG's governance sphere takes such issues into consideration. Other aspects include everything from bribery and corruption to cybersecurity practices. And, of course, employee relations.
How does governance contribute to financial sustainability? Let's say a wealth management firm has social and sustainable capital to invest. Naturally, they want to back companies fully on board with ESG initiatives. They might pledge a sum for investment providing the company in question revises its internal policies. They may even recommend making changes. How do company executives take that sort of meddling?
Finance in Business Definition
Like leaders in the finance industry, the business community has come to the conclusion that the naked pursuit of profits is not sustainable. It's much harder to keep good workers if they don't feel valued. It's nearly impossible to promote your brand if what you're famous for is treading on the downtrodden. And just ask those fashion labels how their sales dropped off after consumers learned their garments were made in a sweatshop.
Around forty years ago, corporate culture changed its focus. Up to the 1980s, companies had practised a measure of social responsibility. They paid their employees well and cultivated community ties. They sponsored local sports leagues, contributed to the arts and gave scholarships to deserving students. And then, they were told that the point of corporations is to generate profits.
Civic involvement fell off the cliff. Scholarships and pensions went the way of the dinosaurs. Funding for employee development instead went to lobby groups to pressure governments to legislate in their favour. American Jack Welch, General Electric's chief executive officer at the time, spearheaded this 'all for profits, all else be damned' movement.
He adamantly opposed any environmental protection and fought legislation against toxic chemical dumping. He pressured employees to up their production numbers and work a gruelling number of hours per week. In his later years, he was one of the loudest voices speaking against climate change. His unethical practices harmed workers and caused irreparable environmental damage.
Despite that, he bragged his management practices would be vindicated as the company's value increased after his retirement. In fact, GE's value was less than half a mere 20 years after his retirement. Today, it no longer exists. One corporate leader's egregious practices destroyed a century-old company that had survived two world wars, the Great Depression and several economic downturns.
Nobody makes the case for corporate social responsibility (CSR) better than Jack Welch. Before, corporate heads tripped over themselves to follow his lead. Today, they look to GE as a case study on how not to lead.
Green Funds for Businesses
Let's not pretend that corporations had a 'come to God' moment. They haven't abandoned the pursuit of profits to embrace CSR's business ethics theory. They are still very much beholden to the shareholder theory which states that shareholders' profits are a corporation's only concern. It's just that, more and more, they're finding space, reasons and time to be good corporate citizens.
Corporate citizenship is another name for CSR. A good corporate citizen takes care of their stakeholders and considers them a part of the corporate process. Stakeholders are workers - both management and labour, as well as the corporations' clients and partners, and the wider community.
Companies that embrace their social and ethical responsibilities look for ways to reduce their negative environmental impacts. They also seek to promote sustainable development and contribute to socially beneficial initiatives. There's just one problem with that. Their shareholders may baulk at receiving lesser returns while the company spends money meant for their pockets. Where will corporations find the money to engage in CSR practices?
This is where sustainable finance comes in. Finance firms search for worthy projects to commit 'green funds' to. ESG investing, 'green funds' official name, is a sustainable strategy for investing in companies that meet the initiative's environmental, social and governance standards. Green fund critics aver that such investments are just so much greenwashing. They contend that, in the end, the finance companies earn profits, companies earn profits and little else happens.
That's not exactly true. Nobody, least of all businesses and financial institutions, has claimed that they can solve all of the world's complex problems. Indeed, it will take years - maybe decades to reverse some of the industry's most devastating impacts. And then, we have to consider the time it will take to research and develop new equipment and technology. And then, it has to be built and implemented...
But it all has to start somewhere. Corporations holding themselves accountable and reversing decades of poor management practices is a good start. Casting about for ways to reduce their environmental impact is commendable. Partnering with finance investors takes such initiatives from the boardroom to where they're needed the most. And taking care of employees and communities is as it should be. As it mostly was, only 40 years before.
The thing is all parties concerned benefit from CSR and ESG. Corporations can once again bask in name recognition unsullied by scandal. Socially responsible firms are more likely to garner high profits; thus, their shareholders will be rewarded for their investments. Finance institutions may reshape their image. They're working to change their alleged 'greed is good' ethos to 'goodness is good'.
And all levels of society will benefit. Imagine employees earning a living wage and looking forward to their pensions. Picture community sponsorship endeavours. Imagine all of the food-insecure populations around the world learning how to grow and harvest. Imagine not having to fear the next big storm.
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