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The library of essays of Proakatemia

CORPORATE SUSTAINABILITY- WITH A FOCUS ON ESG INVESTMENTS



Kirjoittanut: Seungyeon Shin - tiimistä SYNTRE.

Esseen tyyppi: Akateeminen essee / 3 esseepistettä.
Esseen arvioitu lukuaika on 11 minuuttia.

Written by Doneé Barendze and Seungyeon Shin

   1.INTRODUCTION

The essay began with curiosity about the relationship between sustainability and economic viability. In this essay you will learn what corporate sustainability is and why it is important. It also explains what ESG is and the relationship between ESG and responsible investment in a corporate setting.

 

   2.CORPORATE SUSTAINABILITY

 

2.1.SUSTAINABLE ENTREPRENEURSHIP IN PROAKATEMIA 

As sustainable entrepreneurship is one of Proakatemia’s key strategies, the Sustainable Business Team in Proakatemia has been trying to define what it means, create knowledge around the topic, and keep making noise. If we look at current Proakateamia’s Strategy, we can notice that the focus is heavily on financial sustainability.

 

    

Image 1: Sustainable Entrepreneurship as Proakatemia’s strategy

 

For the past two years, the team has focused on raising awareness about the fact that sustainability is not only about environmental sustainability but includes 3 aspects which are social, environmental, and financial. Kamil Wójcik, the founder of the Sustainable Business team, emphasizes the nature of sustainability means balance.

 

In this chapter, you will be able to learn how sustainability is shown in businesses from different organizations and regulations, how different aspects of sustainability are connected to each other, and why sustainability in business is inevitable.

 

2.2.WHAT IS SUSTAINABLE DEVELOPMENT? – ECOLOGICAL, SOCIAL AND ECONOMICAL DIMENSIONS. 

 

To begin with, what is sustainable development? Sustainable development is a development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”  (World Commission on Environment and Development, 1987, Ch.  2, IV, 1) Sustainable development has three dimensions: Ecological, Social, and Economic. Understanding the interrelationship between these three dimensions is very critical (Fischer et al., 2023, p.17).

 

Firstly, the Ecological dimension. It is about how to improve the environment’s resilience, and how to increase the environment’s productivity without harming it. Also, it is about considering how long it will take to regenerate resources before we consume it again. Secondly, the social dimension includes how to ensure that everyone gets an equal chance to contribute, how to reinforce social trust and mutual responsibility, and how to allocate resources and maintain the group’s stability and integrity. Thirdly, the economic dimension explains how to manage available resources to meet future needs, how much to invest to gain resources, and how to improve resilience while ensuring the group’s survival. (Fischer et al., 2023, p.18-19).e

 

Therefore, the three dimensions of sustainable development are connected to each other.

 

Figure 1: The three dimensions of Sustainable Development (Fischer et al., 2023, p.34)

 

 

2.3. WHAT IS RE100? – HOW ARE BIG COMPANIES ACTING TOWARDS SUSTAINABILITY?

 

Sustainability in business is an important issue and it has been visible in the corporate scene. RE100 is a global campaign through multinational companies committed to sourcing 100% of their electricity consumption from renewable sources, and more than 400 companies including some of the most influential companies such as Apple, Microsoft, Nokia, and Samsung joined. (The Climate Group, 2023) Jong-hee Han, the vice chairman and CEO of Samsung Electronics, said that the climate crisis is one of the greatest challenges of our time, and Samsung is responding to the threats with an inclusive plan that includes reducing emissions, new sustainability, and technologies that are better for the planet. The climate crisis has become a threat to many people across the world as Jong-hee said. But let’s think about it from the companies’ perspective.

 

What could be the reasons these several influential companies are joining the climate campaign? Kimmins explains that joining RE100 provides credibility and transparency to all members that they are all held to a common standard of 100% renewable electricity.

 

However, companies would not make progress in sustainable development unless it was economically viable (Fischer et al., 2023, p.35). Considering that, why for companies to be sustainable? Why is it a must?

 

2.4. WHY CORPORATE SUSTAINABILITY?

 

We have no choice but to learn about corporate sustainability for five reasons. Firstly, there is pressure on companies to do their own part in sustainable development, and it can be shown from different organizational levels (Fischer et al., 2023, p.35) For example, the European Green Deal is a package of policies that aims to make the EU greener and ultimately carbon neutral by 2050. All EU member states are committed to reducing at least 55% of emissions by 2030 to be the first climate neutral by 2050 (European Commission, 2021) As part of the European Green Deal, the CSR: Corporate Sustainability Reporting legislation came into effect on the 5th of January. All large companies and listed companies are required to present their impacts on people and the environment. CSR will be used by investors, consumers, and other stakeholders to assess the sustainability performance of companies (European Commission, n.d).

 

The UN Global Compact is another example that operates in more than 160 countries and helps companies in their work on responsibility. Member companies of the Finnish UN Global Compact expressed an urgent need for the Finnish government to take the lead in promoting sustainable development (UN Global Compact, 2023).

 

A sustainability policy report from Business Finland clearly shows how sustainability plays a big role in their core strategy (Business Finland, 2023). Business Finland is a public-sector organization that is under the administration of the Ministry of Economic Affairs and Employment, and it helps companies in Finland to grow globally by accelerating companies’ sustainable growth. The report says, “Prosperity cannot be started without a focus on sustainability that enables long-term economic growth”.

 

This brings us to the ESG aspect, intended to combine all stakeholders of corporate sustainability. 

 

      3.WHAT IS ESG?

Environmental, social responsibility and governance (ESG) has been a term used more frequently on a global scale within corporate management strategies. It focuses on the non-finance related aspects related to social and environmental sustainability which companies are obligated to examine parallel to financial/economical aspects when it comes to investing. (Koh, Burnasheva & Go Suh) 

 

ESG can be considered as both the core and the initiation of Responsible Investing. The idea of ESG strategies is for stakeholders to incorporate environmental, social and governance into their investment judgments, aiming at better investment understanding when looking at risk management and sustainable returns (MSCI, 2018). 

 

CEO at  BlackRock (one of the world´s largest asset management companies), Larry Fink stated the importance of ESGs straightforwardly in his yearly written document to CEOs. In this written document, he highlighted the importance of company liability, their needed acts to include sustainability as a major deciding factor in their company statements. This has been a new standard set by BlackRock Corporate. Contrary to in the past where financial successes were the only factors stakeholders considered when making investment choices, ESG is becoming more and more relevant as a main factor of company investments focused on future returns. ESG has become a major management strategy and it can be defined as a crucial management sector that takes care of all activities within a company related to the environment, society and governance. Alongside the realization of the importance of ESG management and the assessment of a company’s investment value and sustainability based on the ESG management, it is beneficial to take a look at ways companies could enhance their reputation and customer loyalty through ESG management strategies.  (Koh, Burnasheva & Go Suh)

ESG AND INVESTMENTS 

3.1 FINANCIAL PERFORMANCE

Between the years 2015-2020 Rockefeller asset management and NYU Stern collaborated to research an in depth study about the correlation between ESG management and companies´ financial performance based on over 1000´s individual reports published during this timeframe. The research was based on certain topics that linked ESG with financial outcomes, for example: stock performances, cost capital, operational efficiencies, etc. They concluded 6 core takeaways, in this essay we will dive deeper into the following 4: (Whelan et al., 2021). 

 

3.1.1 Increased financial performance as a result of ESG becomes a main factor for long-term investments. 

During the study it was found that an intended long term investment relationship was joint together with positive results which were statistically shocking. The results concluded that: whilst every other factor stayed as a constant, an investment option with an intended long-term focal point had a 76% higher chance to cause a positive or neutral result. Hang et al. (2019) adopted a “meta-analysis (N=142)” in which it showed how sustainable environmental corporate investments had no impact on company financial outcomes in the near future, but resulted in positive outcomes over the long term. A comparative research study on companies with high ESG ratings showed returns up to 3.8% more per standard deviation of ESG in the near and far future (Dorfleitner et al., 2018). 

 

3.1.2 ESG investments can contribute to providing downside protection in cases like social or economical crisis

Investments related to ESG seem to have irregular benefits. Investor studies particularly display a fixed correlation between the two key concepts of lower risk due to sustainability and financial outcomes. Recent happenings have given researchers access to detailed sets of data. For example, while studying the financial recession between 2007-2009, Fernandez et al. (2019) concluded German green investment pools displayed risk-controlled returns marginally better than their competitors. Likewise, the FTSE4Good (which is a set of stock market benchmarks), accomplished their targets better and regained its value faster after the 2008 recession (Wu et al., 2017). Another good example where these results could transparently be measured was in the first semester of the COVID-19 decline, 24 out of 26 ESG index pools surpassed their traditional equivalents, which showed that ESG lead to more resiliency. At the end of the third semester, 45% of ESG related investment pools surpassed their index (Morningstar, 2020). Throughout these observations there has been only one outlier found which did not find ESG correlations (Demers et al., 2020). 

 

3.1.3 Sustainable ambition seems to increase financial performance as a result of better risk management and open innovation

Sustainable implementations on corporate level can assist better financial outcomes via mediating variables – in other words, the sustainability catalysts of better financial outcomes, such as: increased innovations, operational efficiency, risk management, etc., as explained in the ROSI (Return on sustainable Investment) framework (Atz et al., 2019). The research has shown that through these mediating variables, the most frequent topics that stood out were stakeholder relations, risk, operational efficiency and innovation. As an example, Viswanathan et al. (2019) assessed 344 analyses and recognized four main mediating variables which drive financial outcomes: 1. boosting company image, 2. enhancing stakeholder engagement, 3. Limiting corporate risk and 4. boosting innovation capability. 

 

The “regressive analysis” assessed 17 studies which all included some factor of innovation within the analysis, all of which had positive results related to financial outcomes. Nonetheless, some of the 17 studies did not have innovation as the focal point, therefore distinctive results were a challenge to divide.  Additionally, the limited sample size decreased the confidence level, therefore there is a lot of space for in depth future research. Regarding operational efficiency, 59% of the 22 studies resulted in a positive connection between operational efficiency and financial outcomes, only 3 out of the 22 resulted in a negative conclusion. 

 

In relation to the risk factors, investor analyses which excluded risk as a determining factor, only had a 27% chance of finding a positive connection to financial outcomes, while in the meantime the 48% of the analyses which included risk as a determining factor, observed more positive results. Regarding risk related to climate change, 51% of the analyses displayed a positive relationship between increased financial outcomes and management aimed at improved physical and transformative risk related to climate change. 

 

 

 

3.1.4 Research shows that driving for a lower carbon future enhances financial performance 

In-depth studies on minimizing climate change via carbon reduction methods are quite recent, however it shows clear evidence for increased financial outcomes for all stakeholders. Based on 59 research studies which were released within the past 5 years, based on the correlation between minor carbon methods and financial outcomes, the results were mainly revealed positively. Cheema-Fox et al. (2019) specifically found methods which were focused on minimizing carbon emissions, automatically generating better outcomes. Monk (2019) analyzed 736 public American firms throughout 2005-2015 and concluded that a method of focusing long term on carbon efficient investments and cutting carbon inefficient investments could on an annual basis earn an exceptional return of 3.5%-5.4%. These analyses demonstrate that carbon efficient investments could be profitable even with no governmental interference. It has been proven that ambiguous firms have intentions of making investments in green companies who take a stance against climate change or who provide greener solutions. It is very likely that global warming will cause massive changes to economies and markets via changing protocols and consumerism patterns, primarily to the next generation and technological evolution. (Globner, 2018)

 

3.2 RESPONSIBLE INVESTING 

 

Responsible investment refers to the whole investment spectrum where the main factors include people & society, the environment & nature and financial outcomes. Some examples of this could be: divesting from firms with unethical human right protocols, analyzing and choosing company investment portfolios based on their overall ESG inclusion. Responsible investing is becoming more and more relevant, because it connects investors with their client’s values and ethics, it also minimizes risks and results in strong financial returns in the long term. (RIAA)

 

3.2.1 Responsible Investing Strategies

ESG in itself is not a new notion, however, investors’ new approaches to diverse strategies are constantly new in a way that they are continuously growing and transforming. Investor’s use their own sense of judgment and belief system when choosing potential investments. There is no clear framework for investing responsibly, therefore investors tend to use their own judgments to create individual investment strategies. In theory, Scholtens, 2024 states that the European Sustainable and Responsible Investment Forum indicates 7 possible strategies to build a foundation on. The global recession in 2008, has resulted in a higher growth rate of these 7 strategies than the wider EU asset management market. In this essay we will explore 3 of them: Negative Screening, Positive Screening and ESG integration. 

 

3.2.1.1 NEGATIVE SCREENING

“Exclusion of Holdings from investment Universe” is the number one strategy used by Responsible ESG investors and portfolio managers. It is presumed that this strategy is the most straightforward and practical way to continue an already existing investment framework (JP Morgan, 2016). 

 

With this Exclusion strategy, the investor early on eliminates from the investment universe of a portfolio, certain aspects of firms or even areas which are speculated to have unethical practices involved. Firms who are suspected to contain these aspects based on their prior turnover statements are excluded as well. (Renneboog, Ter Host and Zhang, 2008)

 

Good examples of what products are included in this sector is: alcohol, tobacco and gambling (Berry and Junks, 2013). Others include more serious threats such as weapon manufacturing and nuclear power suppliers. Investors themselves mostly objectively observe companies behavior and in the negative screening strategy, investors avoid investing into companies who have breached ethical morals and religious expectations. 

 

3.2.1.2 POSITIVE SCREENING

This strategy is implemented when the investor plans to merge businesses with responsible ways of doing business and good ESG implementation into their investment portfolios. This extends to businesses who have potential because of their product’s positive affect on a societal or environmental level. (Renneboog, Ter and Host, Zang, 2008b). 

 

For a positive screening practice to be efficient, transparency is a core factor. Investors dig information about a company’s non-finance related information before considering the financial outcomes. (Robins and Krosinsky, 2008). This strategy differs from the exclusion strategy in a sense that it does not filter through company sectors, investors do their own research on how a company regulates their impact, therefore it is up to the company to provide transparency and thorough information. An example of how a company can improve their ESG score is by creating proper working environments for their labor or making a conscious effort of minimizing their carbon footprint. A leading company which provides transparent information about companies´ ESG criteria indexes is STOXX Global ESG Leaders (Barclays, 2016). 

 

Another positive screening strategy, known as a “best in class” strategy, refers to when an investor narrows their investments down to a certain sector or industry, without exceptions and ensures that the final portfolio is equal between different industries (Kempf and Osthoff, 2007). Using this strategy, investors can minimize their investment platform by investing within limits, for example: investing in the top 10% of the industry based on ESG scores (Scholtens, 2014). 

 

3.2.1.3 ESG INTEGRATION

Thirdly, we come to a mainstream investment strategy that has grown immensely over the last decade: Incorporation of ESG aspects in financial analysis. It can be thought of as an autonomous Responsible Investing strategy. Scholtens, 2014, explained this as “The explicit inclusion by asset managers of ESG risks and opportunities into traditional financial analysis and investment decisions such as asset allocation and individual asset selection based on systematic process and research sources”. 

 

  1. Conclusion

Corporate sustainability, ESG  and Responsible Investing hold hand in hand in more ways than one. It is easily misunderstood that sustainability is all about protecting the environment, when many times finances and economical aspects are completely overlooked. The purpose of this essay was to inform the reader more about the economical side of corporate sustainability and give transparent knowledge about the financial aspects of sustainability. It is time for us as stakeholders of sustainability to be well informed about the depth of the topic before making any decisions, especially decisions related to individual investments, whether that is time, energy or money. 

 

REFERENCES 

 

Business Finland. 2023. Sustainability Policy. https://www.businessfinland.fi/498cb9/globalassets/finnish-customers/news/news/2023/bf_sustainabilitypolicy_2023.pdf

 

Business Finland. A path to global markets. https://www.businessfinland.fi/en/for-finnish-customers/about-us/in-brief

 

Corporate sustainability reporting. N.d. Read on 2.10.2023. https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_en

 

European Commission. Delivering the European Green Deal. Published in 14.7.2021. Read on 2.10.2023. https://commission.europa.eu/strategy-and-policy/priorities-2019-2024/european-green-deal/delivering-european-green-deal_en

 

Fischer, M., Foord, D., Frecè, J., Hillebrand, K., Kissling-Näf, I., Meili, R., … & Stucki, T. (2023). Sustainable Business: Managing the Challenges of the 21st Century (p. 142). Springer Nature. 

 

Global Compact Network Finland. Suomalaisten UN Global Compact jäsenyritysten kannanotto YK:n yleiskokousviikolla (UNGA78). Published in 18.9.2023. Read on 27.9.2023. https://www.globalcompact.fi/uutiset/suomalaisten-un-global-compact-jasenyritysten-kannanotto-ykn-yleiskokousviikolla-unga78

 

Samsung Newsroom. Samsung Electronics Announces New Environmental Strategy. Published 15.9.2022.Read on 27.9.2023 https://news.samsung.com/global/samsung-electronics-announces-new-environmental-strategy

 

Serafeim, G & Amel-Zadeh, Amir. 2017. Why and How Investors Use ESG Information: Evidence from a Global Survey. Read on 28.9.2023. https://deliverypdf.ssrn.com/delivery.php?ID=497104031021107087086096022120098004003044057035002028109092100094001124081102109007024026006007024061114115069124018067028023049061090039081008102113085077113124025019016097111086082098113098087119001098091122015095026070029067124003072102113075127&EXT=pdf&INDEX=TRUE 

 

 

Sousa Cardoso, Fransisco. 2019. TThe Growing Role of ESG in Investment Decisions Investors’ Preference. Read on 1.10.2023. https://research-api.cbs.dk/ws/portalfiles/portal/59750983/688418_The_Growing_Role_of_ESG_in_Investment_Decisions_Investors_Preference.final.pdf  

 

The Climate Group. 2023. What is RE100. Published in 3.7.2023 https://www.youtube.com/watch?v=34Sc3F_7zfI&t=97s

 

Whelan, Tensie et al. 2015-2020. Uncovering the Relationship by Aggregating Evidence from 1,000 Plus Studies Published between 2015-2020. Read on 29.9.2023.https://www.stern.nyu.edu/sites/default/files/assets/documents/NYU-RAM_ESG-Paper_2021%20Rev_0.pdf

 

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