Sustainable Finance

In recent years, Unilever, the British consumer-products giant, made a very showy effort to align its product portfolio with the company’s stated environmental and social principles. Brand managers were directed to reduce packaging, use healthier ingredients and even tweak their marketing to promote climate change awareness. “Brands with a purpose” is how a company spokesperson described such initiatives.

So when the Associated Press in 2021 revealed that poorly paid Indonesian women toiling on Unilever’s palm oil production plantations were the victims of unsafe working conditions and brutal treatment at the hands of their supervisors, the story laid bare the hollowness at the core of the company’s ESG program.

The ensuing PR campaigns by labour groups set in motion a familiar narrative, with some investors insisting that Unilever not be distracted by social issues and others arguing that the firm has wider obligations. Coca-Cola faced a similar showdown in Mexico. “How could the organizations and their stakeholders determine a way forward?” asked business professors Olivia Aronson and Irene Henriques in a newly published paper in the Journal of Business Ethics.

Big institutions, like pension funds and banks, have been really driving the growth of responsible investing or incorporating ESG factors into investment decisions. They’re not doing it to try to save the world. That’s not their job.

Henriques, a professor of sustainability and economics at York’s Schulich School of Business, says Unilever didn’t run from the controversy. “They actually partnered with Oxfam and then they shared information,” she says. “They listened to each other and found out what was going on, because sometimes you’re managing, but you’re not on the shop floor.”

Unilever’s experience is by no means unique; other examples include the 2013 collapse of a Bangladeshi factory where underpaid piece workers were making clothes for Canadian retailer Joe Fresh, and, recently, lawsuits alleging murder and torture at a Barrick Gold-owned mine in Tanzania. The exposure can lead to consumer boycotts, huge lawsuits, tougher regulations and hard-to-remove stains on corporate reputations.

Such incidents also spook corporate boards, especially in a period when companies are increasingly expected, by regulators and the public alike, to do more than just generate returns for shareholders. Most large firms now have corporate social responsibility initiatives, ESG reports, diversity, equity and inclusion (DEI) programs, and they also go to some effort to show that these issues are being considered as part of an overall business strategy.

One particular audience, of course, is the global investment community. “Big institutions, like pension funds and banks, have been really driving the growth of responsible investing or incorporating ESG factors into investment decisions,” says Dustyn Lanz (BA ’12), senior advisor with ESG Global Advisors Inc. “They’re not doing it to try to save the world. That’s not their job.”

Rather, he notes, a company’s approach to ESG can have material impacts on financial returns. Lanz cites the example of BP’s Deepwater Horizon disaster in 2010. Subsequent investigations showed that the company’s equipment had been cited hundreds of times for health and safety violations. “That was actually a catalytic event for the growth of responsible investing.”

According to a 2021 United Nations estimate, the value of “sustainability-themed investment products” soared by 80 per cent during the pandemic, hitting $3.2 trillion in 2020 alone. The total includes sustainable funds, green bonds and social bonds.

In Canada, the federal government in 2018 launched a $755 million social finance fund, and followed up in 2022 by issuing $5 billion in green bonds. Major foundations have established “impact investing” strategies, while a growing number of universities, including Waterloo and Concordia, have directed the managers of their endowment funds to sell off fossil fuel holdings. A 2020 survey by HSBC Canada also found that all but two per cent of Canadian issuers were incorporating sustainability in their operations.

The Schulich School of Business last year announced a $1.25 million partnership with CIBC to endow a research chair in sustainable finance. The chair will also help bridge the gap between academia and industry in areas such as green energy transition, the low carbon economy, and the political and governance challenges of a sustainable financial system. (The winning candidate will be announced in early 2023.)

Outsourcing ethics is built on the belief that there exists a consultancy that has, if not all, at least most of the answers required to make corporate ethical pursuits easier. This just isn’t the case.

The torrent of investment dollars chasing ESG funds or sustainable finance opportunities poses a host of important academic questions.

One of the most salient, according to Charles Cho, professor of sustainability accounting, has to do with whether companies and fund managers can convincingly demonstrate that what they’re doing is, in fact, sustainable. “ESG is not the same as sustainability,” he points out. Over the past two decades, a sprawling industry has grown up around the demand for metrics that demonstrate to investors how companies are doing when it comes to issues such as emissions reduction or health and safety records.

Numerous global organizations, including international accounting bodies, have attempted to develop voluntary standards for quantifying and disclosing this kind of information. Meanwhile, giant fund companies, such as Black Rock, have pledged to use ESG ratings to drive their investment decisions. But, Cho says, there’s plenty of evidence to show that much of this disclosure is more about impressing investors than altering the underlying behaviour of companies. “It is all about narratives,” he says, noting the proliferation of jargon associated with ESG investing. In fact, Cho cautions that a potential consequence of excessive “reputation management” is that governments will relax their regulatory oversight.

There’s also an irony at play. Cho last year co-authored a research study in the Journal of Management and Governance showing that companies that are more forthright in the disclosure of what he calls “CSR-related bad news” may actually be rewarded by investors who prefer frank assessments of a firm’s track record rather than slick, PR-driven storylines.

As well, he notes, some companies are able to generate impressive ESG scores, but their core business is fundamentally unsustainable. Cho does point to another approach that is driving some sustainable finance and corporate management, which is the use of the UN’s 17 Sustainable Development Goals (SDG) to align a company’s activities with these widely accepted principles. “I do find them useful,” he says, “but there’s no reporting or accounting authority.” (York uses the UN SDGs to drive its 2020-2025 University Academic Plan.)

Ultimately, the bottom-line question about sustainable finance is how individuals who want to make responsible investment choices navigate the profusion of jargon, metrics and spin. Lanz points out that there are positive and negative approaches: investors can apply filters and select fund companies that avoid, for example, firearms or defence contractors. Alternatively, they can apply positive criteria, such as putting their money into firms that build renewable energy projects or affordable housing.

Henriques says that her own strategy is to focus on individual companies, because she can then make more focused assessments about what these firms do and how they do it. “I don’t try to get a package [i.e., a mutual fund] because the companies change all the time.”

David Weitzner (MBA ’98; PhD ’06) is an assistant professor of management at York’s School of Administrative Studies. He offers up this insight about sustainable investing: avoid firms that seem to lean too heavily on external affirmation of their corporate conduct. “Outsourcing ethics is built on the belief that there exists a consultancy that has, if not all, at least most of the answers required to make corporate ethical pursuits easier,” he wrote in a recent essay in the MIT Sloan Management Review. “This just isn’t the case.”

A better approach, Weitzner says, is to build a strong relationship with a trustworthy investment advisor who knows your goals and can use their expertise to find firms or fund companies that do operate sustainably. “You can’t be completely cynical,” he says. “If you can’t trust your investment advisor, then you have a problem.”

Weitzner offers one other important insight about the dynamics of sustainable finance – one that is often overlooked in all the talk about whether or not ESG is producing better corporate behaviour. He cites surveys showing that Millennials and Gen Z have noticeably different outlooks than their parents’ generations, not just when it comes to investing, but also how companies conduct themselves. “They are more committed to an ethical worldview and are prepared to act on it,” he observes. “The next generation of customers and leaders are demanding better. The impetus for change will come from within the work force.” ■