Sustainable Finance Blog #1

I’m Stefan, am 33 years of age and living in Frankfurt together with my girlfriend. My sustainable finance journey started back in 2018, with me being noisy about “the new thing” in Finance, which is rather unique for an old-fashioned industry with little ground-breaking innovations over last decades. Long story short, I trained myself on the topic and inhaled any information I could get hold of, finished a post-graduate diploma in sustainable finance, owned the topic within my organisation and turned it fully into my profession - being responsible for all sustainable finance activities within ABN AMRO Asset Based Finance. I live for this topic and have the ambition to spread my knowledge and leverage on my position as best as possible.

First Blog Entry

When reading about how to write a blog that sticks, one piece of advice is “the first sentence is the most important one”. So, I’ve got a big one coming for you:

During my studies on sustainable finance, I conducted several interviews with Corporate Treasurers / CFOs on their perception on sustainable finance and sustainability in a business context. All agreed on sustainability being a game changer in the long run for their businesses. But, a not to be despised number, outlined similar statements like above and expressed doubts on how impactful sustainability is for their businesses today.

I would like to outline an alternative view by making three statements on sustainability and expressing why I believe it will be much more expensive in the case that one might not accept sustainability as a game changer in a business context. Given most corporations are assessing meaningfulness mainly via monetary criteria, I will stick to this narrative, although I believe in business value being much broader and oftentimes not being adequately measurable in monetary terms (but I leave that for now and share my views on that with you in a future issue).

Statement 1: many corporations are lacking a 360° view on their corporate environment

TRUST YOUR EYES, there is a movement coming your way:

• politicians (finally) adopting the European directive for Supply Chain Act,

• EU Taxonomy for defining green and social activities / businesses becoming regulation for real economy (in a first step only eligible for large corporates / capital market-oriented companies, but be sure plans for tutioenlarging scope towards SME is already in policymakers back pocket) and financial instins,

• legislation ruling on climate misconducts by countries, financial institutions and corporates,

• and most importantly basically all client conversations at some point ending up on sustainability.

Most business deciders might have come across “Porter’s five forces”, “BCG matrix” or other metrics to assess their market positioning. Shareholder value theory is widespread and (surprisingly still) commonly accepted, although especially Stakeholder Value theory in Europe, is thriving more and more as a result of new generations hitting labour markets and entering management positions. The key differentiator is that Stakeholder value proposition is much wider in scope, focusing on a wider group of stakeholders in a more balanced approach, whereas Shareholder Value Theory accepts shareholders as essential stakeholders of corporations. The increasing relevance of the stakeholder value theory means that the holistic business environment and thus the serious sustainable needs of all stakeholders are increasingly coming to the fore.

Statement 2: humans tend to overvalue short term risks, while undervaluing long term risks  

Researchers found four bias types being highly relevant for corporate decision makers when it comes to Sustainability, more precisely Climate Change. Those are:

Framing Bias: language is crucialHow information is presented is highly relevant when it comes to decision making. Framing the issue as “Climate Change” vs. “Global Warming” disguises the urgency of taking actions.

Optimism Bias: technology and innovation are needed but individual behavior is essential

We tend to overestimate the probability of positive events and underestimate the probability of negative events.

Relevance Bias: knowledge is crucial for making sound decisions

Human understanding is subjective and always based on what we know or think we know. Accordingly, we are already primed to ignore it if it is not anchored properly.

Volition Biases: act like the responsibility for change was yours, and yours alone

Statement 3: stagnation means regression

Sorry to be blunt, but being transparent on topics also requires honesty, so an uncomfortable truth is:

Corporate decision makers are reluctant to make crucial decisions in regards to sustainability mainly due to lack of expert knowledge.

Climate Change and social justice are non-arguably the major issues humanity has to solve in the 21st century. And yet, a recent survey shows that globally only 17% of Board of Directors serving on sustainability committees have sustainability expertise. Hence, while we’re waiting for corporate decision makers to get their sustainability literacy up to speed and at a level comparable to their financial literacy: by trying to maintain the status quo major corporates have lost control over their own destiny in the past, as they simply missed the boat. Don’t step in this trap like so many before and understand sustainability as an opportunity to succeed further or develop a competitive edge for your business.

Still not buying it? Simply ask yourself where all that regulation is heading? Yes, you’re right! Sooner than later sustainable transition might lead to shaping and shaped corporations. Funds are channeled, taxation schemes are adopted, consumer behaviors are changing and talents are looking for purpose in their working life. All of this is already happening in Europe and change is happening fast these days.

For those of you already feeling quite familiar with what I am saying, congrats, you are probably shaping your environment in a sustainable way. In case you feel triggered by my statements and are curious on more of the kind, simply stay tuned as there is good news for you: now is the time for transitioning and putting your business on a sound fundament while giving your corporation a higher purpose. I can already see engagement of your workforce hitting the roof!

Yours, Stefan

Sustainability

At ABN AMRO, sustainability is more than just a buzzword. We actively look to support businesses with a sustainable focus. We provide a broad range of flexible funding solutions that support your shift to sustainability. We're in it together, helping to create a stable economy and a sustainable society. Find out more now

Master thesis subject: “Sustainable Financing Products - A European Corporate View”

See Mazutis, D. and Eckardt, A. (2017) “Sleepwalking into Catastrophe: Cognitive Biases and Corporate Climate Change Inertia”, California Management Review, 59(3), pp. 74–108. doi: 10.1177/0008125617707974.

See The Sustainability Board Report Ltd. (2020), “The Sustainability Board Report 2020”, p. 12. Accessible at Download PDF.