Accelerating the sustainability transition

Many corporations and asset managers now also report progress against material quantitative metrics, and some have joined collaborative efforts to tackle existential environmental or societal grand challenges. Considerable progress in defining metrics for materiality/sustainability and supporting them through increasingly relevant and better-quality data. These include the Global Reporting Initiative and Sustainability Accounting Standards Board (SASB) in corporate reporting and the regulatory push for Sustainable Finance Disclosure Regulation (SFDR) in sustainable finance are also positive signs.  

Together, these actions are encouraging as first steps in the transition towards sustainable business models. Nevertheless, we believe true transformation will only be possible once incentives shift to reward innovation and business activities that minimize negative externalities or maximize positive ones. This will require business leaders to embed societal value into products and services and reshape business ecosystems to support these initiatives. 

Mounting academic evidence asserts that firms who identify and respond to material ESG issues outperform benchmarks. With these potential benefits in mind, private investors increasingly have the appetite to finance sustainable business model transformations across the spectrum of capital, from financing startups via impact investing to the provision of debt and mezzanine capital to trillion dollar organizations such as Apple and Google.  

Embracing innovation 

Innovative applications of financial tools are emerging across the entire capital spectrum. Between traditional investing and traditional philanthropy there are a myriad of options to mobilize private capital for impact: from the reinvention of public contracting arrangements to increase efficiency and crowd-in private investors to the creation of financial products available to everyday retail banking customers. 

Instruments like corporate sustainability linked bond shift incentive structures by tying financial incentives to social or environmental objectives/outcomes. Other innovations call on also linking executive pay to sustainability objectives. This practice has already been adopted by corporates like Apple and Mastercard as well as many fund managers in impact investing, where funds target specific grand challenges to tackle. 

In addition to incentive structures, we believe that financial transactions with a social and environmental objective serve two additional purposes beyond the provision of capital. 

First, they send signals internally within the organization and generate KPIs for internal commitments. They can also change the culture within an organization, for instance by shifting the allocation of resources on internal projects or by creating project teams to explore sustainable growth opportunities.  

Second, they signal outside stakeholders that the firm is taking sustainability seriously. Sustainability initiatives provide public, concrete, and measurable promises on which to hold firms accountable.  

The overall societal context for business has changed. Companies will increasingly respond to the calls by investors and stakeholders for more disclosure and higher-quality, reliable environmental, social and governance (ESG) data and reporting. But reporting and disclosure should be a starting point, not an end-goal unto itself. Innovations that will drive a sustainable future will only occur once ESG criteria are embedded into decision making and the allocation of capital to drive business model transformation at scale. We believe that finance can be a powerful tool to shift incentives and accelerate the rate of change.