Hugues Bouthinon-Dumas, Professor of Law at ESSEC Business School, shares the second of a masterclass series of articles on sustainable finance, how it fits into the notion of sustainable development and how the law can be used to promote it. This week: How finance can kingpin sustainable development.
What financial mechanisms can be used to serve the cause of sustainable development?
There are many mechanisms and often they can be combined and used with each other. The oldest mechanism is without doubt socially responsible investment (SRI) which can be spontaneous: investors seek only to place their money in companies they see as ethically fit. Historically, this led funds inspired by religious movements to exclude from their portfolios activities that they judged immoral – armaments, tobacco, alcohol, pornography, and so on. Today, some investors readily turn away from activities that they believe go against the values and actions of sustainable development – for example, coal-fired power stations – or even decide to invest as a priority in sectors that, on the contrary, seem respectful to the planet, such as organic agriculture.
SRI can also be encouraged by the law makers. As such, certain rules oblige investors to ask themselves the question of whether an investment will be respectful of the planet and its populations. Other regulations oblige those who manage and commercialize savings products such as UCITS, life insurance, and savings accounts to propose green or sustainable investments to their policy holders.
Speak up, speak out
Shareholder activism is another means of action. For investment funds motivated by the advocacy of a social or environmental cause, or even NGO, it means making use of resources offered by law and by corporate governance to influence how a company is run – for example, through the request for a resolution to appear on the agenda of the shareholders’ General Meeting in order to bring the company’s attention to focus on subjects related to its social or environmental policy or impact. As such, institutional investors with a right to vote in the GM are increasingly called upon to have a determined policy on this aspect, even if uninspired by a militant approach.
The incentive for companies, and in particular listed companies, to take action in the direction of sustainable development can also occur through the information they must communicate to the public on their policy, their efforts and their results in terms of social and environmental footprint. This incentive is founded on the underlying notion that companies have an interest in showing themselves as exemplary or that they seek to be more attractive in the eyes of stakeholders who hold these issues at heart – investors, but also employees, clients, local authorities, suppliers, and so on.
A variation of extra-financial reporting previously described consists in entrusting the responsibility of auditing initiatives and performance in the social and environmental fields to third-party organisations – which may be rating agencies, independent third-party bodies, or companies providing certification or quality/eco-labels. Here again, the concern to achieve a good rating, good audit, good ranking or to benefit from a distinctive label is supposed to lead companies to adopt an intrinsically ethical set of behaviours.
A slow but sure change towards business for the common good
Another method to incite corporates consists in redefining the mission of the company by rewording its social purpose. It is now a widespread that companies are invited to take into account the social and environmental consequences of their activity. What’s more, some of them can choose to set themselves a specific mission that exceeds the sole objective of achieving profit. The pursuit of social objectives – for example, the economic inclusion of certain populations – or environmental objectives – such as preserving biodiversity – can contribute to orienting company behaviours so that they act in favour of sustainable development. This possibility was brought about in France by the PACTE law following the Notat-Senard report. Equivalent initiatives have been undertaken in other countries, notably in support of B-corporations.
Other rules impacting corporate governance are also made to make companies become active in sustainable development. The opening up of company administrative and monitoring bodies to employee representatives, even other stakeholders, is a means of bringing companies around to being aware of the concerns of these players. Norms and standards determine the role and responsibility of corporate leaders and administrators and, as such, constitute a means to influence company strategy and policy, especially when these increasingly include extra-financial considerations – if only through social and environmental risk indicators.
Finally, we can see that a certain phenomenon is currently and considerably in development – that of green financing: the issuing of green bonds, green loans or even sophisticated financial products contain certain advantages for the benefactor company when it reaches its social or environmental objectives.
All of these mechanisms distinguish themselves from mandatory law – in particular, traditional labour law and environmental law – which exercise direct constraints on companies to force them to respect norms and standards. And it is because the regulation-based approach is limited in effectiveness that it is wise to call upon other types of mechanisms – more incentive-driven than coercive and founded as much on finance as on the law.
- View Prof. Bouthinon-Dumas’s academic profile
- Link up with Hugues Bouthinon-Dumas via LinkedIn
- Discover the Master in Finance programme at ESSEC Business School.
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