The Modern World of Sustainable Finance

The world is full of buzzwords and catchphrases.  Sometimes these are counter-intuitive.  "Sustainability" brings to mind vision of socially meaningful behavior with long-term goals in mind.  In recent years, the word "finance" likely summons memories of a worldwide recession, Greece and Ireland teetering on the brink of total failure and the United Kingdom adopting austerity measures.  Specifically in the USA, "finance" can make a person think of bank fraud, a mortgage crisis, TARP, a high rate of unemployment in the USA and the emerging threat of a second recession.  Corporate Social Responsibility (CSR) can seem like an unattainable, unrealistic goal.

What is sustainable finance?  The operating definition used in a study by Strandberg Consulting is that sustainable finance is "the provision of financial capital and risk management products and services in ways that promote or do not harm economic prosperity, the ecology and community well-being." Rather than being perceived as epicenters of greed and the root cause of economic difficulties in industrial and post-industrial countries, financial asset companies and even the financial markets themselves can have a direct role in sustainable finance.

Corporate Social Responsibility, however, can be part of an overall successful, profit-driven business strategy.  Although non-governmental organizations and non-profit companies are certainly involved in sustainable financial projects, it does not mean that a company necessarily abandons the concept of profit or only uses resource to contribute to improvement in environmental or social factors.

So, what activities can institutions such as banks and other lenders practice to demonstrate a commitment to sustainable finance, while maintaining their proper relationship with shareholders?  After all, organizations such as Bank of America, Citibank are in the business of making money and delivering dividends and value to owners. (Disclaimer:  the author's former home mortgage was held by Bank of America and coverage of Bank of America here in no way endorses or indicates dissatisfaction with that experience.)  Citibank created a $40 million fund to finance rooftop photovoltaic arrays for residences.

Who wins?  Homeowners, Citibank and SolarCity (whose motto is "turning sunshine into savings"), the company that installs the arrays.  Bank of America received recognition at the 2011 Financial Times/International Financial Corporation Sustainable Finance Awards.  Between 2007 and 2010, BoA dedicated $8.4 billion (out of a planned $20 billion environmental commitment fund) to lending, services and internal activities oriented towards thwarting global climate change. There is a concerted financial effort on the part of BoA in the areas of solar power, wind power, financing research in biofuel and biomass and carbon market services.  Clearly, Bank of America expects a positive return on investment, but these activities should be noted as prosocial banking behavior.

What are the hallmarks of for-profit companies in terms of corporate social responsibility?  Incorporation of CSR into mission statements, adopting innovative measures to finance conservation, long-term financial planning, promoting programs designed for the long-term benefit of employees - including reasonable wages, and integration of sustainable financing into other areas of company interest.

My next article will examine a specific project dedicated to environmental conservation with an eye towards the financial programs supporting it.

Image courtesy of  The United States Federal Government at http://www.ssa.gov/history/wallst.html