Achieving Green Economic Growth through Sustainable Finance and ESG Sustainable Investing

Amiin Adam, Sona Analytics

The primary economic objective of many nations is growth. A nation that achieves economic growth will be better able to meet its citizens’ needs and solve socio-economic problems such as poverty, health disparities, low education levels and justice system inequalities.

So what is economic growth? Put simply, it is the change in production of economic goods and services from one period to another. Production, and therefore economic growth, can be measured by GDP. Any nation’s per capita national product naturally increases with time, as the growth rate of output will almost always exceed the growth rate of the population.

The call for sustainability is becoming more urgent as the limits to Earth’s natural resources may have negative impacts on economic growth. Economies around the world must consider their need to grow in a way that takes this into account, i.e. by green growth. But what is green growth, and how can we achieve it? And how do sustainable finance and an ESG sustainability credit score system fit in this equation?

Green growth involves growing the economy and developing society while maintaining the resources and environmental services that are essential to our well-being. A few engines for driving this growth may be unlocked by the following means:

  1. Achieving productivity goals by making natural resources more efficient, e.g. reducing waste and energy consumption, creating opportunities for innovation and allocating resources to the highest value uses;
  2. Gaining investor confidence by improving governmental handling of major environmental issues;
  3. Creating new market opportunities by encouraging the demand for green goods, services and technologies.

There is still a stigma around environmental initiatives in the business world, based on the perception that while they benefit the Earth and consumers, they may hurt businesses along the way. However, a growing body of evidence from companies around the world suggests that business and sustainability pursuits are not as competitive as many think; in fact, both can be advanced together when dealt with correctly.

Since the age of industrialisation, the environment has been negatively affected in correlation with the resulting economic growth, to the point that the survival of our planet is in jeopardy. It is therefore vital that discussions concerning the link between sustainability and company success become a rally to save our planet

Business leaders have long been preoccupied with strategies to maximise value for their shareholders without considering the socio-environmental cost. GDP is not the only metric whereby economic performance is assessed. Environmental, social and corporate governance (ESG) has been the key means of assessing a business’ economic performance for the past decade – and with good reason, since many studies have found a direct link between sustainable practices, stock prices and corporate performance.

According to a global survey conducted in 2018 by the index provider FTSE Russell, more than half of global asset owners are actively implementing or reviewing aspects of ESG in their investment strategies. Bank of America Merrill Lynch discovered, also in 2018, that companies with a superior ESG track record outperformed their peers in terms of three-year returns, were more likely to have high-quality equities, had fewer large price drops and were less likely to go bankrupt.

Given the gravity of the situation, firms must go beyond the bottom line and pursue a stakeholder-centric strategy which entails running their business with an emphasis on environmental, social and corporate governance (ESG) criteria. Popular conceptions of sustainability, such as recycling and reuse, must change, and all of us must rethink and re-imagine economic opportunities. Perhaps more systematic benchmarking and reporting are also required.

As a solution, the Sona Sustainability Credit Score System (SSCSS) could play a major role in making the economy greener, since the major goal of this new system is to incorporate sustainability into financial institutions.

Developed by Professor Rodrigo Zeidan of NYU Shanghai University and Seye Onabolu, Director of Sona Analytics, the SSCSS is a unique benchmarking tool based on a company’s sustainability practices, with account managers at banks and financial institutions determining where companies sit in relation to each other using various sustainability indicators. Such a credit scoring system will help companies drift towards more sustainable policies, ultimately creating a better, greener planet for the generations to come.

 

Keywords: sustainability; risk management; ESG; firm valuation; WACC; sustainable finance; scenarios; sustainability analytics; sustainability credit score system; Sustainable investing; sustainable analytics; analysing sustainability.