Sustainable Social Finance & ESG investing

The role of the Sustainable Development Goals in pursing sustainability on the part of all stakeholders has made urgent the codification and relative measurement of ESG criteria in a holistic vision of investments and finance. The considerable diversity of the ratings of the main international agencies risks confusing companies and investors, hindering the pursuit of actions aimed at reaching sustainability. The work of the European Commission on the definition of the taxonomy is more advanced for the “E-Environmental” dimension, with the goal of completing and finalizing it with the “S-Social” dimension by the end of 2022. The hypothesis of an official classification of the impact of our activities with a holistic vision of the environment, society, and the economy, removes an excuse and makes everyone face their responsibilities. The work that has been done is important, but the most difficult process will be the exploration of the dimension of social sustainability.

Sustainability, environmental capital, and social capital

Sustainability is a broad concept (improving our well-being without reducing that of subsequent generations), which everyone talks about, but often with different meanings. Each of us would like to leave something different, particular, and unique to our children. So it is useful to start by recalling what economic theory tells us, that has placed sustainability at the center of attention since the 1970s, when there was a realization that GDP is insufficient to measure economic progress, and the question began to be posed of how to create an indicator of economic activity more aligned with changes in well-being. The response is very general, but it highlights the path to reach operational instruments: first of all, we must identify all of the forms of capital that are directly and indirectly useful for well-being; second, we must observe its dynamics through relevant indicators, and if possible set a price and measure its contribution to gross domestic product. At this moment, we are in the middle of these two phases, halfway through a process that, when it is completed, will revolutionize our way of reading economic data and thus modify the choices of consumers and producers.

The environmental taxonomy

The attention for environmental capital has expanded over time, starting from the observation of the harm caused by economic activity. The list has gradually expanded: pollution, dispersion of plastic, reduction of biodiversity, harm to the ozone, and CO₂ emissions. The solution to reduce the list is to highlight which activities are harmful to the environment. What emits more CO₂? How is pollution created? A long series of questions leads us to identifying which of our economic activities (and consumption habits) are harmful. The taxonomy is thus the official representation of our state of knowledge. A public taxonomy in competition with private ones makes sense, as opposed to the issuance of a public credit rating. Such ratings are equivalent to providing a report card to oneself. The environmental taxonomy implies a report card on our ability not to damage a silent and defenseless stakeholder (but only up to a certain point, according to the Gaia hypothesis of the 1970s).

The social taxonomy

It is much more difficult to create a ranking of impact on social capital. First of all, the research on what social capital means is much less developed than that on environmental capital. Second, the variety of individual preferences has always been one of the main obstacles to identifying the most useful public policies for society. Third, it is generally ambiguous to determine the relationship between economic and financial activity and social capital. Everyone agrees on the fact that it is necessary to develop the economy to allow people to be active on the labor market, to have economic independence, and a sense of satisfaction and belonging. Thus everyone agrees on the importance of businesses as a legally organized unit able to create value and above all work. But we agree much less on how to set constraints on business activity in order to define it as “socially viable.” Taking positive actions is more difficult than imposing prohibitions, especially when there is a lack of total agreement on where to go. The European Union has circulated a draft taxonomy on social aspects proceeding on two dimensions:

• a vertical dimension, aimed at promoting adequate product and service standards for people’s basic needs (housing, food, education, etc.) and the implementation of basic infrastructure (transport, telecommunications, financial inclusion, etc.). The economic initiatives that make these products and services more widespread and accessible and do so without harming other social objectives, can be considered “socially sustainable”;
• a horizontal dimension, intended as the measurement of the impact of economic initiatives on the different groups of people who are involved in them (workers, users, community).

How is it possible to measure dignified work, respect for rules, transparency, the creation of human capital, and impact on physical and mental health? This is a great opportunity to bring the economy back to the center of the debate, and to carve out a central role for businesses in determining the rules of functioning for the coming decades.

Investments, finance, and social taxonomy

The international financial community can also not watch this debate passively, for both ethical reasons (being good global citizens means above all participating in important debates) and for reasons that are entirely egoistic. Like the protagonist of David Bowie’s famous song about life of Mars, we have seen the film at least 10 times: the great debate leads to setting goals that bring actions that become regulations and obligations for businesses. Enterprises, banks, insurance companies, and asset managers become the guardians of the environment, and in five years, they risk becoming the guardians of social life. This is why finance will never die: it is the essential drive belt for the functioning of our society, from the exchange of shells in primitive society, to the exchange of bitcoins today.

Sustainable and Responsible Investment (SRI) in the holistic vision of finance

In the definition of Sustainable and Responsible Investment (SRI) it is underscored that “business activity and sustainable investment aim to create value for the investor and society as a whole through a medium to long-term investment approach that, in the evaluation of enterprises and institutions, integrates financial analysis with environmental, social and governance factors.” There are thus three fundamental elements: economic sustainability (to create economic and financial value guaranteeing the returns expected by investors in respect for the interests of all stakeholders); ESG compliant; and duration, i.e. the medium to long term.

The parameters for social, environmental and governance measurement and analysis are pillars that must be integrated in economic-financial analysis as a critical success factor for the creation of collective well-being. Sustainable Social Finance & ESG Investing is the core theme of analysis and reflection of the Executive Master in Finance 2022 at the SDA Bocconi, that will seek to contribute to the great debate on social finance with a holistic vision of sustainability, framing it from the multiple different angles of the teaching project and specialization tracks: from Corporate Finance & Control to Banking, from Asset/Wealth Management to Real Estate.

Andrea Beltratti is a Professor in the Department of Finance of the Bocconi University, where he teaches Economics of the Securities Market and Equity Portfolio Management, and Academic Director of the Executive Master in Finance (EMF) at the SDA Bocconi School of Management.

Alessia Bezzecchi is Associate Professor of Practice in Corporate Finance & Real Estate at the SDA Bocconi School of Management, where she is Program Director of the Executive Master in Finance (EMF) and of the Executive Program in Real Estate Finance and Real Estate (EPFIRE).