Schoenmaker tells the story of a small bank in his native Netherlands that does things a little differently.
Before the bank even considers the business plan and financial viability of a project it is being asked to lend money to, it wants to know the project’s social and environmental impact.
Is it using renewable energy, for instance? What are the wages and working conditions of its workers like?
Only when the bank is satisfied about these factors will it proceed further.
The bank is stable – and no charity – making a profit of about six percent a year.
But, as Schoenmaker illustrated in a public lecture at Victoria, it is a long way from “the business of business is business” of free-market economist Milton Friedman and the “myopia” and “short-termism” of traditional finance textbooks that advocate for the highest possible profits to ensure maximum returns for shareholders.
In the ‘Framework for Sustainable Finance’ that was the subject of Schoenmaker’s lecture, the bank sits at the extreme end, under his 3.0 model, whereby the horizon-line is long term and the aim is to optimise social and environmental impact subject to, but not subsidiary to, financial value.
Even though more financial institutions, companies and investors are moving toward sustainability, Schoenmaker doubts many would be committed enough for 3.0.
For him, 2.0 is the more viable option to aim for: whereby the focus is medium term, with financial value and social and environmental impact weighed equally to calculate a total value that forms the basis of decision-making.
Your company may have made a big financial profit, but this is offset by the social and environmental marks against it, making for a lower total value than if assessed on profit alone.
Or the company’s financial profit may be down but it has reduced its social and environmental impact, thereby giving it a higher total value than if assessed on profit alone.
It is not simply about closing your bank account or selling your shares — that doesn’t solve the problem, it simply passes the burden of guilt on to someone else.
For all the movement toward sustainability, though, the reality is the world is mostly still short-termist “finance-as-usual” (i.e. financial value is the only factor taken into account) or in some cases has reached Schoenmaker’s 1.0 model. This is also short-termist, except with financial value the primary but not only factor, with social and environmental impact now having a minor influence too (e.g. no investment in companies producing tobacco or land mines).
To change practices requires customers and investors to play a more active and engaged role, Schoenmaker said.
It is not simply about closing your bank account or selling your shares — that doesn’t solve the problem, it simply passes the burden of guilt on to someone else.
In the Netherlands, said Schoenmaker, shareholder meetings have resolutions on sustainability issues.
And if you are a pension or insurance company owning 10 or 15 percent of a company, “you can assert influence on the company because you are a large shareholder”.
The technology and methodologies to track and evaluate companies’ social and environmental impact are available.
“The big question is are investors and companies asking for it?” said Schoenmaker.
“If you are an investor, you dig into a company, you see whether the company is preparing for the future. Is this oil company switching to renewable energy? Is this company paying living wages across the world in its supply chain? You can check that. Is this car company preparing to move from combustion engines to electric engines? You can check that.”
Companies are starting to integrate such issues into their reporting, he said.
But investors cannot simply follow ESG ratings and other share scoring systems to decide where to put their money.
They need different information, which requires more effort, although there are consultants who can help, he said.
And for companies that adopt the full 3.0 sustainability model, new performance measurements are needed to determine whether they are succeeding or not.
The FTSE 100 and other gauges will not capture the full picture if you want to assess your pension fund’s portfolio of such companies’ shares.
“How can we see if three or eight or minus three percent return on a portfolio is fair or they didn’t do the job very well?”
Sustainability “should be part of mainstream finance and not just a separate issue”, said Schoenmaker. “Whatever you do, you need to integrate it in policy making and in different fields.”
It should be “a joint effort of the finance sector, the company sector and the government”.
And if the finance sector forces companies to do it, “then it will happen”.
Dirk Schoenmaker is Professor of Banking and Finance at the Rotterdam School of Management, Erasmus University Rotterdam
