With a focus on “The Path Forward,” the Yale Initiative on Sustainable Finance (YISF) is partnering with investment bank BNY Mellon to host its 4th symposium Oct. 29. A joint program between the Yale Center for Environmental Law and Policy (YCELP) and Yale Center for Business and the Environment (CBEY), the initiative explores the relationship between environmental, social and governance (ESG) reporting and how corporate sustainability performance affects financial results.
YISF Co-Director Todd Cort’s research focuses on the premise that businesses will voluntarily adopt metrics that can be shown to improve financial performance and that the proof must stem from scientific and economic analysis. Below, Cort, who is also faculty co-director of CBEY and a lecturer in sustainability at the Yale School of Management, addresses the progress that has been made in sustainable financing, as well as some of the ongoing challenges.
How does sustainable finance benefit businesses?
There's a lot of empirical data out there that shows that companies that consider and perform on environmental, social, and governance tend to do better financially. Sustainability and stakeholder engagement are inherently tied. ESG, or sustainability, forces companies to think about their contextual environment and how much they depend on natural systems, human capital and employees. The better you understand your exposure to risks on those things, the better you can run your company. If you take care of environment and social aspects, you can reduce your costs, liabilities, fines, and legal costs. Another theory is that companies that consider risks that are outside of the normal box like environmental, social, and governance risks are just better at managing their companies. They are thinking more contextually. They are connecting the dots.
What are the challenges to getting more companies on board with sustainable financing?
Data and metrics continue to be one of the major challenges in this space. Traditional fundamental financial metrics — how much profit companies have or how much capital they own — is straightforward. And the data that underlies those metrics is regulated. Everyone has to report it and it's validated by an auditor. If you step into this environmental, social governance space both those guardrails go away. Not everyone is reporting the same data, and not everyone is validating it because it's not required. Companies can pick and choose the data they want to report, and they can pick and choose the scope and boundary of that data. So, we have challenges with accuracy, and we have challenges with coverage.
And there’s also been a kind of nascent backlash. Some people have said this is growing so fast, but it is a trend, a fad, and there are flaws.
Are some sectors more advanced than others in this area?
Yes. Oil, gas, and mining have the biggest impact and because they’ve had these impacts, they were actually leaders in terms of assessing the risks and developing systems for compliance. Technology has had relatively little impact compared to say oil and gas, but where they’ve really been leading is on how do we use technology to facilitate solutions to these environmental and social challenges? So those are just a couple of examples of sectors that have taken leadership positions. Healthcare delivery organizations need to step up their game on sustainability. Healthcare is really bad at externalizing every impact of cost that it can.
What has changed in recent years?
There is a new lever in town — regulators — which is one big change. Now the conversation is about what is the best role for regulators to play. The other big change has been the role of banks and fixed-income holders. There are a lot of new financial vehicles banks are putting out that de-risk lending by asking people what they are doing on ESG, but also target lending towards solving ESG challenges.
What excites you about the future of sustainable financing?
It's great that the investors have gotten on board, and that has really driven the scaling. But we’re never going to solve the world’s problems through investment dollars because you always have to get maximum financial returns through traditional investments and that leaves a lot on the table. What gives me hope has been the rising interest of other agents of change such as regulators, nonprofits, and advocacy groups. We’d only get partway if investors were the only agents of change. And we as educators are stepping up and saying, sustainability is an important part of business education.
Published
October 26, 2021