Finance & Sustainability

Two ways for market operators to act based on sustainability factors: integration and outcomes

There are two basic ways for business and finance operators to act in connection with sustainability factors. Although not necessarily mutually exclusive, they can be represented diagrammatically as follows:

First, integration, on the right-hand side of the diagram: an operator can change its position to reflect the risks or opportunities created for it by sustainability factors. This is what is involved in much ESG activity. For example, where ESG factors create heightened risks for a company in which an investor has invested, the investor might reduce its holding to limit its exposure or, conversely, increase its holding where the company is managing its ESG risks better than others.  The investor responds to the outside world by integrating ESG factors in its decision-making but does not seek to change it.

Second, pursuing positive sustainability outcomes, on the left-hand side of the diagram: a business or finance operator can also seek to have a positive impact on a given sustainability factor that is relevant to its goals. For example, where declining sustainability of a given sort could threaten the operator’s future growth, it could take steps to seek to mitigate the risk by tackling its root causes, resulting in positive sustainability outcomes. Conversely, where enhanced sustainability of a given sort could assist the relevant operator in achieving its goals, it could take active steps to secure that outcome. In other words, the relevant operator would be acting on the outside world to change it, with the aim of bringing about positive sustainability outcomes.

Pursuing positive sustainability outcomes could involve a business or finance operator pulling whatever levers are available to it, changing its own behaviour or seeking to influence that of third parties. For investors, this would include the use of investment to influence or empower issuers, corporate engagement with investees to get them to change what they do and policy engagement to achieve greater policy alignment with relevant sustainability goals. For businesses more broadly, pursuing positive sustainability outcomes would be reflected primarily in the activities that the relevant business decides to pursue in its core business and on what basis.