Sustainable investments: some thoughts

The main goal of corporate finance is to generate value for its shareholders. Given that shareholders own the firm's stocks, their wealth is equal to the number of owned shares times the stock price. The fluctuations of the stock price (and therefore of shareholders 'wealth) are a consequence of the operating and financial strategies that the firm's management decide to undertake.
The creation of value, however, is not fully satisfied if the firm does not consider all the entities (stakeholders) rotating around the company: the employees, the managers, the customers, the environment: in a word, the company should not forget its social responsibility. Value creation is expressed not only in the various changes of the stock price, but also in all those actions that the firm performs to protect its customers, to maintain a good working environment for its employees, in protecting the environment with antipollution measures, etc. If the company generates value for its stakeholders then it will generate value for its shareholders (enterprise value vs. equity value). It is now widely recognized both in financial and in the corporate world that if a firm does not consider social responsibility then it will be difficult to grow "in a sustainable manner".
If we now move our attention to financial markets and to their generation of value, we will have to look to all those tools that the financial markets offer to firms to allow them to develop successfully. Financial markets and their main operators such as financial institutions, commercial banks, venture capitalists etc., allow the firm to get the right funds for its current needs so as to generate value for the firm and the bank too. It is very important to include social responsibility and sustainability in these activities as well.
The problem is twofold:
1.On one hand it is difficult for firms and for financial markets to understand how to correctly valuate environmental, social and governance factors (ESG),2.And on the other hand it is hared to understand how to use classic financial valuation together with those ESG valuations which are typically extra-financial.
During the 2003-2007 period, the sustainable investment market has grown 22% in terms of volume managed, respect to the 10% global growth of AUM (asset under management). From 2008, during the financial crises, while the value of global assets has shrunk, sustainable investment has had a different pattern. At the beginning of the crisis, sustainable investment benefited from its low exposure to the American real estate market, and with the worsening of the crisis the impact on sustainable investments has been considerable.
To reduce the crisis, the world's governments have decided to inject into the markets a large quantity of money; a considerable part of it has been destined to that part of sustainable investments that consider environmental issues (i.e. green building, waste management, etc.). In fact, G20 countries including Saudi and South Africa have announced a large fiscal incentive (2.1 million dollars) 20% of which is destined to environmental investments and 29% to social investments such as education, social housing public health etc. In addition to this, since 1999 when the GRI (Global Reporting Initiative) guidelines were defined, the numbers of firms that have published a "social"report other than a financial one have more than doubled.
Let's just evidence some relevant points regarding sustainable investments:
1.First of all, sustainable, socially responsible (SRI), environmental investments are all comprised in the more general concept of Corporate social responsibility (CSR): this concept includes all those investment strategies that generate financial and social benefits.2.The concept of sustainable investment has to be adapted to the realities of different firms and to differing customer profiles.3.The valuation of a sustainable investment is based on three different analyses: positive screening or best in class approach, negative screening, and personalized approaches.4.It is necessary to integrate traditional financial valuations tools with elements of sustainability to create a more efficient and complete idea of the management quality and the risk/return profile of a company.
To conclude, it is not easy trying to "reconcile" profit and cash flow generation with the adoption of sustainability criteria. For example, some investors could consider a good investment those firms that are focused on environmental issues, while others only firms that deal with human rights and work conditions. One thing, thus, is commonly shared by everyone: to get a better picture of a firm's potential growth, risk/return relation and corporate governance, sustainability criteria are a must. According to a 2009 McKinsey study on "valuing corporate social responsibility", two thirds of the CFO and three fourths of the managers interviewed have agreed that, in normal economic conditions, environmental, social and governance activities generate value for shareholders.