Corporate Sustainability’s Impact on the Access to Company Capital
“I believe we’re on the edge of a fundamental reshaping of finance,” stated the CEO of Blackrock, Larry Fink, in his annual letter to his company on corporate sustainability. The declaration was made during an announcement stating that Blackrock would cut from its managed portfolio all the companies that derive more than a quarter of their revenue from coal. Furthermore, they’ll double the number of sustainability-focused exchange-traded funds and increase sustainable assets to 1 trillion dollars within a decade. Blackrock’s statement “reshaping of finance” involves the incorporation of sustainability parameters in the financial evaluation of companies. It implies that there is an interconnectedness of the three main pillars of sustainability: environmental, social, and economic.
“Companies that don’t adapt [to climate change] will go bankrupt without question,” concluded Mark Carney, governor of the Bank of England (BoE).
History has proved his point. For example, the Volkswagen diesel scandal, where the company was cheating emissions tests, their share value fell by 30% in one year. Opposite to Volkswagen, companies that actively focused on the environmental and social aspects of sustainability can positively influence their financial sustainability. For example, the Unilever case shows that their shares have been increasing by 18% each year by the stock price after winning the sustainability leadership award. These two examples represent the strict connection between sustainability and financial performance.
Methodologies for Impact Assessment
Financial institutions have started developing new methodologies to embed environmental and social parameters into their company assessment. There are several strategies to do that, but the two most common ones are negative and positive screening. The first method is to perform a negative screening and deny investment to companies, sectors, or activities that could imply risks on the environmental, social, or governance (ESG) dimensions.
The second option is positive screening in which the focus of investment is on companies that have high ESG metrics or are focused on improving more specific themes across the three dimensions (for example in terms of emission reductions, clean tech, positive social impact, etc).
The European Investment Bank (EIB) is applying negative screening by choosing to support only projects that meet high environmental and social principles and standards. Consequently, corporations with high carbon emissions won’t be able to access credit or will suffer from higher interest rates. On the other hand, it’s also applying positive screening allowing corporations with higher sustainability achievements to benefit from special funds such as the EIB €1 Trillion fund as part of the Green Deal Investment Plan. This has made EIB the world’s first “Climate Bank” to drive the transition toward net-zero by 2050.
Investor’s Developing Interest in Sustainability
Investors and banks are now more than ever before interested in your company’s sustainability performance. But why do investors and banks care about sustainability performance?
