Corporate sustainability and responsibility has historically been regarded as a controversial topic both among the academic world and practicing professionals. As early as in 1970, the free market advocate Milton Friedman put forward a view that any sustainability-related actions are likely to destroy shareholder value. He argues that the sole responsibility of management is to increase shareholder value, and that it is impossible to reach optimal values by trying to maximize more than one variable at a time.
Nowadays, the reality of rapid depletion of resources as well as accelerating global warming drives an increasing number of stakeholders to promote an opposite view of the sustainability impact on enterprise value. Those sharing it argue that sustainability-driven change of a business model could not only diminish the adverse effects of the company on the environment, but create more value, as it may entail more efficient use of the resources and signal better reputational risk-management.
Despite largely polar views among the practicing professionals and researchers, the regulators are influencing the industry to take a positive view on sustainability. This is reflected in recent advancements within the regulatory environment. For example, as early as in 2014 the European Union issued an Amending Directive (2014/95/EU)) leading to altering of Swedish law, making the CSR reporting mandatory for large companies (Annual Accounts Act, Section 10, Chapter 6) from 2018. Now the European Commission issues the action plan (Action Plan: Financing Sustainable Growth) altering the operations of financial advisors. A new framework directs the amendments to MiFiD II & IDD, encouraging the asset managers to take into account sustainability issues while providing the advice to clients. The Commission shall also invite the European Securities Markets Authority (ESMA) to include provisions on sustainability preferences in its guidelines on the suitability assessment to be updated by Q4 2018. Are there any opportunities for an industry, already heavily burdened by regulations?
Surprisingly for some, the opportunities are there. The recent survey in Borglund T. et al., (2017) suggests that 95% of Swedish respondents would prefer their pensions to be invested in sustainable funds given the same profitability. Moreover, 48% of this population would prefer sustainable funds to non-sustainable alternatives even if they were yielding lower profitability. Therefore, it is safe to claim that there is a thriving demand for responsible investments in Swedish market.
Furthermore, corporate sustainability and responsibility efforts are oftentimes viewed as an integral part of reputational risk-management strategy of a strong long-term oriented business. The logic is as follows: the better the company manages the CSR-related issues, the less the probability of any scandal occurrence within social, environmental or governance dimensions. Thus, incorporating the sustainability dimension into developing financial advice industry may positively reflect on the quality and security of the given advice and higher customer satisfaction.
All in all, the exacerbating environmental situation has driven the regulators to take action and force the European financial industry to abandon traditional “Friedmanist” views on sustainable investments. The new regulatory environment will require a change in product ranking practices, risk models and sustainability reporting analysis, but it shall introduce the industry incumbents to a large client base and a potential to leverage the quality of the advice product. Thus, whether you are aiming to preserve the industry leadership or strengthen your position in competitive environment, ensuring that sustainability efforts of investment products are gauged correctly and efficiently is one of the necessary conditions for success.
Communication from The Commission to The European Parliament, The European Council, The Council, The European Central Bank, The European Economic and Social Committee and The Committee of The Regions. Action Plan: Financing Sustainable Growth