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Financing sustainability: a market emerges

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Rod Lohin

For years, sustainability professionals — and the academics who study their work — have been answering some tough questions. Is there a business case? (Yes). Can we determine which social and environmental issues are most important to our business? (Yes). Is it possible to measure and report on sustainability practices credibly? (Yes). Can we deliver value to business and society? (Yes). Simply put, the evidence shows that companies generally perform better if they’re more sustainable.

However, despite this progress, many sustainability professionals still struggle to access budgets internally — in particular, long-term funding for big, multi-year projects. The fact is that they may know where they want to go, but they’re short on capital — the fuel needed to achieve greater social and environmental benefit.

In our research and consulting work at the Lee-Chin Institute and through our networks, we have seen a number of major corporations develop a bold sustainability strategy, map out breakthrough programming to support it, and gain support for the intent of the project and its initial costs — often from annual philanthropy, sponsorship or other expense budgets. However, when they pitch the longer-term capital requirements to access internal pools of capital, we have seen them thwarted time and time again by otherwise typical features of many socially-responsible investments: complexity, long-term payoff, and modest or moderate financial returns. In other words, these initiatives often fail the test for internal capital allocation.

Some companies simply do it anyway, typically with the leadership of key executives. For instance, Walmart’s leadership invested in a massive sustainable supply-chain management initiative that has had global reach and helped it manage risks and establish a new narrative with consumers; and under Paul Polman, Unilever repositioned itself as the sustainable living company and consistently outperformed its rivals in the public markets for more than 10 years.

But in the absence of such clear executive commitment, how can sustainability professionals get further down this road? How can we fund projects with long(er) time horizons and lower rates of return but also with important long-term payoffs for the company and the world? How can we better leverage the capital markets and the finance capabilities of our companies in support of social, environmental — and business — benefits?

Unilever, Apple and Toyota Finance have issued bonds worth billions for their own green projects.

The answer may be in the burgeoning market for sustainable and responsible investments (SRI). Worldwide, more and more investments have been made with regard for sustainability. In 2015, the market for all types of SRI offerings reached US$ 22.90 trillion (26.3 per cent of all global capital markets) according to the Global Sustainable Investment Alliance (GSIA). Specifically, two approaches may be the most relevant to sustainability practitioners within companies: green bonds and impact investments.

Green bonds

Green bonds (publicly or privately issued) raise and deploy funds for environment-beneficial projects (retrofits, clean energy, pollution mitigation, etc.), offering a safe and predictable rate of return for investors often at a rate slightly lower than more traditional bonds. Remarkably, green bond issuance grew more than 100 times between 2012 and 2017, from U.S.$3 billion to U.S.$389 billion (according to the Climate Bond Initiative).

For sustainability professionals and their companies, there is a clear opportunity here to get past the capital roadblock. The cost of capital of green bonds can sometimes be lower than that from other sources, even internal sources. In this case, external capital could be more attractive than internal capital. Companies that access funds through green bonds could potentially be able to allocate funds to their highest-potential capital projects and — at the same time — fund more activities with environmental benefits.

There are two principal ways for practitioners to use green bonds: raising your own funds by issuing a corporate green bond; or accessing green bonds raised by others. More and more companies are issuing their own green bonds. There are plenty of examples: Unilever, Apple and Toyota Finance have issued bonds worth billions for their own green projects. Best of all, companies issuing green bonds appear to be paying both environmental and financial dividends. Boston University Professor of Strategy Caroline Flammer recently noted that corporate green bonds “yield a positive stock market reaction, improvements in financial and environmental performance, an increase in green innovations, and an increase in stock ownership by long-term and green investors.”

Companies can also access funds raised by governments, municipalities and a range of private players through green bonds. Examples include green bonds worth more than U.S.$4.35 billion by Bank of America, and in Canada, the Canadian Pension Plan Investment Board (CPPIB) raised over $3 billion for investments.

However, there remains a risk that such funds are not consistently green. To overcome this, financiers appear to be increasingly making use of the Green Bond Principles (GBPs) or the Climate Bond Certification (CBCs), as well as third party verification.

Impact investments

Impact investing is another type of SRI investing that seeks both measurable social and environmental impact alongside financial returns. Between 2013 and 2017, the global impact investing market grew almost tenfold from U.S.$ 25.4 to U..S$ 228 billion. As the market continues to grow, more and more major financial institutions like BlackRock and UBS are joining pioneers like Bridges and Calvert.

With all of these funds seeking investments, sustainability professionals may be able to access external funds that align with their environmental and social benefit initiatives. This may be most compelling for companies that have a tangible environmental or social purpose — for example, renewable energy or education. However, even more traditional companies could potentially seek investments for specific projects.

Clearly, the type and the stage of an organization plays a role in determining how to access these markets. For start-ups or social enterprises (businesses with a specific social or environmental purpose), there are a range of fast-growing networks of angel or early-stage investors, including and F6S.

Another option for social enterprises is social impact bonds (SIBs), increasingly known as pay-for-performance contracts. This is a complex investment vehicle in which a principal (often a government funder) invests in an organization or program that is expected to have a social or environmental benefit. A third party is typically engaged to verify achievement of the benefits, which triggers payment to the principal. However, the benefits of SIBs may be outweighed by the complexities.

For more established companies, issuing a green bond is one possibility that could be targeted to impact investors with an interest in environmental benefit. But there are other ways to structure deals to support projects with environmental or social benefit.

Companies with advanced finance capabilities might consider more complex instruments like real options or special purpose vehicles. Real options allow an investor to participate in an investment in a tangible (real) asset. For example, a company could offer an investor greater access to a promising green or social benefit project for a small upfront investment with the right to choose to expand their involvement later, wait, or abandon the project.

There are also special purpose vehicles in which a parent company places an asset in a subsidiary and securitizes it or otherwise offers it to investors. This approach is already used to manage billions and possibly trillions in public-private partnerships involving governments, multilateral organizations and lenders/investment banks. However, in strictly private markets, this promising approach may have been destroyed by Enron, which made extensive use of them.

Sustainability professionals have come a long way in understanding how to manage risk and add value to their companies. At each stage, we have had to learn or otherwise access new capabilities, including making a stronger business case, understanding materiality, measurement and reporting and ultimately, how to deliver both business and social value.

These are all powerful advances. However, the better we get, the more it becomes apparent that we need more fuel — that is, more financial resources — for our sustainability initiatives than is easily accessible in internal pools of capital. To overcome this challenge, we can access new pools of external capital, but we will need to learn and engage in another set of capabilities: finance and investment.

In closing

Happily, the investment market is looking for good work to fund. Many of our companies — especially the larger, established, publically-traded ones — have strong finance capabilities that we have only tangentially leveraged.

Perhaps the time has come for us to reach out to our finance colleagues, connect our work with the capital markets, and potentially have a greater positive environmental and social impact than ever before.

This article originally appeared in the Spring 2019 issue of Rotman Management magazine.

Rod Lohin is executive director of the Michael Lee-Chin Family Institute for Corporate Citizenship at the Rotman School of Management. This essay was first published on the website for the Network for Business Sustainability (NBS), which is headquartered at the Ivey School of Business. For more on this and related topics, visit