Finance and Environmental, Societal and Governance Values
Ismail Ertürk, Director for Social Responsibility and Senior Lecturer in Banking, Alliance Manchester Business School
Larry Fink, the CEO of Blackrock, the largest asset management firm in the World with assets under management of nearly USD 6 trillion, sent a very strong message in his 2018 Letter to the CEOs. As an intermediary for millions of shareholders who invest through Blackrock in the world’s leading firms, he urged them to focus on long-term value creation and consider the consequences of their managerial decisions on global environmental and societal problems.
Legal and General, another big fund manager, is outspoken about its investment values that are driven by ESG -environmental, societal and governance principles- which is also known as impact finance. In this year’s ABIS -Academy of Business in Society- Colloquium in 9 November, that brings together Europe’s leading business schools and businesses with social responsibility agendas, sustainable finance was one the top three issues discussed. One of the biggest banks in Europe, Dutch ING, explained their pioneering model to contribute to the achievement of lower global warming through their lending decisions.
In finance it is not just fund managers who have increasingly societal and environmental values in their investment decisions it is also banks like ING who aim to steer their lending books towards more sustainable, greener and fairer world. Of course all these financial institutions aim financial return on their investments and do not throw money at unprofitable projects and companies. And the evidence so far suggests that such ESG investments are financially attractive in too.
In academic literature financial institutions’ role in governance has been studied in great length to assess how through their financing decisions they can influence competitiveness and innovativeness of firms. Now we are witnessing a new role in governance by providers of finance where long-term value creation through socially responsible investment decisions are encouraged.
Globally economies face some common problems like lack of investment in infrastructure, low levels of capital expenditure, regular financial bubbles, increasing inequality, low levels of wage growth and the consequent low economic growth. On top of these economic issues there are common risks in deteriorating environmental conditions which necessitates policies and actions on sustainability and renewable energies.
United Nation’s Sustainable Development Goals that are agreed by the countries in 2015 summon such concerns and encourage both financial and non-financial firms to contribute to achievement of these goals. Increasingly big financial firms like Blackrock publicly announce their expectations from the companies they invest in.
It looks like we might be entering a new world of finance where finance no longer wishes to be the cause of crises and instability but would genuinely involve in a new economic paradigm where the firms are not driven solely by short-term financial return but deliver value to their shareholders and financiers by investing for long term in companies with good governance and societal and environmental values.