Sustainability and Finance: Teaching the Real Value of Good Corporate Stewardship

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Corporations are not driven to sustainable development by an overwhelming desire to be altruistic, but rather by their fiduciary responsibility to create shareholder value. In other words, sustainable development is good business. - Brian Schofield and Blair Feltmate, Sustainable Investment Group, Toronto

INTRODUCTION

Limited liability, which has been so instrumental in spurring investment and thereby growth in living standards, is not well suited to the sustainability of those standards: the truncation of private costs of adverse outcomes of business decisions at zero places no weight on highly negative events because the financial fallout from such events is avoided. The challenge facing business instructors in finance is to instill in students the conviction that not only should they place considerable importance on extreme adverse events which threaten sustainability through depletion of "natural capital", but to teach them that it is in their best interest. Furthermore, it is in the interest of managers to factor in all consequences of their actions for sustainability, whether these consequences be large or small, likely or only remotely possible.

As we shall argue in what follows, customers, employees, shareholders and governments will reward companies that attend to sustainability issues. Managers who ignore the views of these interest groups do so at their own peril. Good sustainability practice shows up in the bottom line: in Canada, for example, an Index of Sustainable Development Companies constructed by Brian Schofield and Blair Feltmate, who are quoted at the top of this paper, outperformed the TSE100 by an average annual compound rate of 6.9 percent per annum over the period of their comparison, August 1995 to February 1999. Indeed, with an annual average return of 18.1 percent over the period, the Index of Sustainable Development Companies outperformed the Ethical Growth Fund Index, with an annual average return of 10.9 percent, and even the Desjardins Environment Fund, which returned 11.4 percent compounded over the same period. [1]

As Schofield and Feltmate (1999) argue, the superior share-price performance of companies that have applied sustainable development concepts has not solely been a consequence of their being regarded as "good corporate citizens," even though this has played a role. Rather, companies committed to sustainable development think long-term, and this pays dividends broadly through productivity gains from training and investment, from market development, from expanded financing options and so on. This "selfish" motive for sustainable development is easy to include at any stage in a finance course, and is likely to leave a lasting impression. However, it probably fits best in the discussion of managerial objectives. In this way, sustainability can be related to maximization of shareholder value.

Most business students are primed to understand the issue of short-term managerial horizons, having been exposed to the consequences of wholesale cost-cutting to meet profit objectives: human-resource and general business courses generally deal with the issue of corporate shortsightedness as it relates to human resource management. Where the finance instructor can push in new directions which support long-term objectives and sustainable development is in highlighting the many ways that far sightedness adds value. Let us see how this can be done in the three major subdivisions of modern finance courses: corporate finance, asset pricing, and international finance. (The third of these might not universally be called a finance subdivision, and indeed, this author has argued elsewhere that international finance should be integrated in the other two subdivisions. [2] However, the fact is that international finance is usually dealt with separately, often at the end of finance courses.)

In what follows we shall explain under what topic headings sustainability can enter finance courses. …