Business School

Clarity, Climate and Principles: Aligning Social and Economic Value Through Finance

July 6, 2022  • Ideas Worth Teaching

ESG, the shorthand for investing based on companies’ Environmental, Social, and Governance performance metrics, has seen a meteoric rise in public interest over recent years—and, in recent months, increasing questions about its impact. Some ask whether a company’s social and environmental impact are truly material to the bottom line, while others ask whether ESG can serve as a useful tool in combatting challenges as vast as climate change.

Swasti Gupta-Mukherjee

For Loyola University’s Swasti Gupta-Mukherjee, both questions can be answered in the affirmative—and both require insights often missing in business. In her scholarship and in her Aspen Institute Ideas Worth Teaching Award-winning course “Finance for a Sustainable World,” Gupta-Mukherjee stresses that 21st century finance can play a critical role in clarifying the environmental, social and economic stakes of the choices business leaders must make.

In the U.S., we’re seeing an increasing backlash to ESG, often framed as a distracting imposition on business. Why do you believe that environmental, social and governance issues are inseparable from business?

Recent years have seen a growing discussion of environmental, social and governance (ESG) issues in business. Nevertheless, in the decades preceding that, business practice was heavily influenced by the premise that ESG issues are either irrelevant for business, or a costly distraction. Ironically, this premise often becomes self-fulfilling because many business models spring from it, decision-making processes assume it, and performance evaluation metrics embed it. Moreover, ESG issues in business—as currently discussed in the popular press—are very nebulous, leaving the construction of metrics, prioritization of issues, and timeframe of achieving goals open to interpretation.

Regardless of the implementation challenges, ESG issues are fundamentally inseparable from business. First, business is a stakeholder in society, and vice versa. Business stakeholders are affected by societal and environmental well-being over the short and/or long term. To view business stakeholders as disconnected from the state of the environment and society is to frame human life and well-being too narrowly. Second, regulatory and other stakeholder pressures are increasingly making ESG risks more tangible for business (e.g. the Keystone XL pipeline cancellation), making it a fiduciary duty to incorporate them into the decision-making processes. Finally, ESG issues have long been viewed as irrelevant for business, or a downside risk to be managed, the latter usually preceded by an ESG-related crisis (e.g. BP’s oil spill). Yet, if we look around, great business opportunities can be found in trying to solve the greatest global challenges. Many 21st-century businesses are born from identifying challenges they can help solve, making societal value creation and economic value creation fundamentally intertwined in the business model. For example, a wave of innovation seeks to use blockchain technology to address the demand for traceability and transparency in the fashion industry supply chain, with the larger goal of holding companies accountable for their social and environmental impact.

You published a paper titled “Climate Action Is Too Big for ESG Mandates,” which concludes: “It should be much harder for businesses of all kinds to explain why they should not be environmentally responsible, as opposed to why they should. One way to do that is for E to distance itself from S&G in ESG mandates, to focus the narrative and action on climate change.” What would such a distance mean for practitioners? Are there examples of this in action today?

I wrote that article in 2020 when ESG popularity was gaining a great deal of momentum. Now we are seeing something of a backlash to ESG considerations in business and finance, which counters that momentum. One of my bigger motivations to write that article was a concern that making ESG issues a laundry-list of social and environmental factors—without careful, data-driven consideration to how each issue matters fundamentally for business—could be counterproductive. Lumping together more issues as ESG can make it harder to create rigorous metrics to measure ESG impact that hold up under scrutiny over time, it would also be easier to question the credibility of the confusing package of ESG mandates in business and finance. If the business impact of the aggregate ESG package is murky, even the scientific, data-driven ESG issues like climate risk could face added challenges in true integration into business models, making greenwashing more likely. To a large extent, this could be what we are seeing now in the backlash to ESG issues in business.

On the other hand, as my article suggested, by separating out the “E” from the nebulous package of ESG issues, we could be much clearer on the risks and opportunities that we already understand about climate change and the road to net-zero. Examples of this distancing of “E” in practice are the financial instruments focused on climate change, such as climate-focused funds, whereas the broader ESG-focused funds can vary a lot in what issues they prioritize and how those issues are material for business. Clarity in designing innovative financial instruments is crucial to setting reasonable goals and measuring performance in the context of those goals. This clarity goes a long way in making them sustainable and scalable instruments for financial and societal development.

The final assignment of your course is a group project on “Finance and Society: A Theory of Change.” Can you explain what this project entails, why it’s important for society, and how the course prepares students for this assignment?

The final group project in my course was designed with the goal of reimagining a better relationship between finance and society using the basic toolkit traditionally covered in the core finance curriculum. The project encourages students to brainstorm together on how to align the goals of business and societal well-being using the levers of finance.

I use this project to encourage students to balance pragmatism and idealism in (1) challenging the assumption that financial value creation is at odds with other notions of value creation by businesses, (2) appreciating the power of financial markets to impact society, and (3) understanding how various stakeholders with different degrees of direct power can impact business and financial markets. The project requires students to engage in a portfolio simulation where they gain investment experience in trading financial securities, while also thinking expansively about how specific businesses impact, or are impacted by, ESG issues and sustainable development. Throughout the course, students are guided to critically analyze how different stakeholders can engage with business, and vice versa, to align interests. Grounded in the first principles of modern corporate finance and investment theory, the project fosters a problem-solving mindset where the levers of finance can be used to create economic, social, and environmental value. Simply put, I envisioned this project as a step towards an aspirational but implementable win-win relationship between finance and society.

As alumni from your course go into leadership positions across industries and sectors, what is the one lesson that you hope will stick with them throughout their careers?

Be optimistic but realistic about the role of business in creating economic, social, and environmental value. Believe that everyone can be a change-maker in creating a win-win relationship between business and society.

Everyone is a stakeholder in society and the environment. Many also happen to be powerful stakeholders in business. As the old saying (made famous by the Spider-Man movies) goes, “With great power comes great responsibility”. Business leaders are undoubtedly among the most powerful stakeholders in society. Current and future business leaders should be bold in questioning the status quo and the assumptions in decision-making models when the outcomes are misaligned with a well-functioning, sustainable society which offers everyone the dignity of work and human life. While we can wish that many of the global problems we see today did not exist, it is important to develop an active problem-solving mindset, individually and collectively. The world is calling for more role models who prove the maxim of doing-well-by-doing-good. Answer the call.

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