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Sustainability

Accelerating the sustainability transition

Published 1 June 2021 in Sustainability • 3 min read

Where to start and how to maintain the transition to sustainable business models 
 

Companies and asset managers are making substantial progress in the transition to sustainable business models. Most corporations have taken initial steps by crafting a statement of purpose and engaging with stakeholders to create a materiality map that translates stakeholder concerns into an agenda of action. Other visible actions might include becoming a signatory to the UN Global Compact or featuring commitments to science-based targets or aligning to the Sustainable Development Goals on corporate and investor websites.   

Many corporations and asset managers now also report progress against material quantitative metrics, and some have joined collaborative efforts to tackle existential environmental or societal grand challenges. Considerable progress in defining metrics for materiality/sustainability and supporting them through increasingly relevant and better-quality data. These include the Global Reporting Initiative and Sustainability Accounting Standards Board (SASB) in corporate reporting and the regulatory push for Sustainable Finance Disclosure Regulation (SFDR) in sustainable finance are also positive signs.  

Together, these actions are encouraging as first steps in the transition towards sustainable business models. Nevertheless, we believe true transformation will only be possible once incentives shift to reward innovation and business activities that minimize negative externalities or maximize positive ones. This will require business leaders to embed societal value into products and services and reshape business ecosystems to support these initiatives. 

Mounting academic evidence asserts that firms who identify and respond to material ESG issues outperform benchmarks. With these potential benefits in mind, private investors increasingly have the appetite to finance sustainable business model transformations across the spectrum of capital, from financing startups via impact investing to the provision of debt and mezzanine capital to trillion dollar organizations such as Apple and Google 

 

Embracing innovation 

Innovative applications of financial tools are emerging across the entire capital spectrum. Between traditional investing and traditional philanthropy there are a myriad of options to mobilize private capital for impact: from the reinvention of public contracting arrangements to increase efficiency and crowd-in private investors to the creation of financial products available to everyday retail banking customers. 

Instruments like corporate sustainability linked bond shift incentive structures by tying financial incentives to social or environmental objectives/outcomes. Other innovations call on also linking executive pay to sustainability objectives. This practice has already been adopted by corporates like Apple and Mastercard as well as many fund managers in impact investing, where funds target specific grand challenges to tackle. 

In addition to incentive structures, we believe that financial transactions with a social and environmental objective serve two additional purposes beyond the provision of capital. 

First, they send signals internally within the organization and generate KPIs for internal commitments. They can also change the culture within an organization, for instance by shifting the allocation of resources on internal projects or by creating project teams to explore sustainable growth opportunities.  

Second, they signal outside stakeholders that the firm is taking sustainability seriously. Sustainability initiatives provide public, concrete, and measurable promises on which to hold firms accountable.  

The overall societal context for business has changed. Companies will increasingly respond to the calls by investors and stakeholders for more disclosure and higher-quality, reliable environmental, social and governance (ESG) data and reporting. But reporting and disclosure should be a starting point, not an end-goal unto itself. Innovations that will drive a sustainable future will only occur once ESG criteria are embedded into decision making and the allocation of capital to drive business model transformation at scale. We believe that finance can be a powerful tool to shift incentives and accelerate the rate of change.

Authors

Vanina Farber - IMD Professor

Vanina Farber

elea Professor of Social Innovation, IMD

Vanina is an economist and political scientist specializing on social innovation, entrepreneurship and corporate social responsibility, with also almost twenty years of teaching, researching and consultancy experience, working with academic institutions, multinational corporations and international organizations. She is the holder of the elea Chair for Social Innovation.

Patrick Reichert

Research Fellow at the elea Chair for Social Innovation

Patrick conducts research at the intersection of entrepreneurship, finance and social impact, with a particular focus on the mechanisms and logics that investors use to seed investment in social organizations. He is a research fellow at the elea Chair for Social Innovation.

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