,BMME113 Sustainable Finance 2022 Laia Neira Quintanilla
TABLE OF CONTENTS
Chapter 1: Sustainability and the Transition Challenge.................................................................. 1
Chapter 2: Externalities-Internalization ........................................................................................ 12
Chapter 3: Governance and behaviour ......................................................................................... 17
Chapter 4: Coalitions for Sustainable Finance .............................................................................. 24
Chapter 5: Strategy and Intangibles-Changing Business Models ................................................. 27
Chapter 6: Integrated Reporting-Metrics and Data...................................................................... 32
Chapter 7: Investing for Long-Term Value Creation ..................................................................... 34
Chapter 8: Equity-Investing With an Ownership Stake ................................................................ 40
Chapter 9: Bonds-Investing Without Voting Power ..................................................................... 45
Chapter 10: Banking-New Forms of Lending ................................................................................ 48
Chapter 11: Insurance-Managing Long-Term Risk........................................................................ 53
Chapter 12: Transition Management and Integrated Thinking .................................................... 56
2
,BMME113 Sustainable Finance 2022 Laia Neira Quintanilla
CHAPTER 1: SUSTAINABILITY AND THE
TRANSITION CHALLENGE
1.1 WHY DOES SUSTAINABILITY MATTER?
Our economic models were developed in an empty world with an abundance of goods and services
produced by nature, labour and capital were the scarce production factors.
In the early 1970s the Club of Rome → Full world, the earth system could not support these rates
of economic and population growth.
They determined 5 basic factors that determine and limit growth on this planet:
1. Population Increase
2. Food Production
3. Non-renewable resource depletion
4. Industrial Output
5. Pollution Generation
Two possible world models on how population growing in a limited environment can approach the
ultimate carrying capacity of that environment:
Left panel → We can adjust smoothly to an equilibrium below the environmental limiting by means
of a gradual decrease in growth rate
Right panel → We can overshoot capacity by consuming some necessary non-renewable resource
or causing pollution
Thus, need for sustainable development → Development that meets the needs of the present
without compromising the ability of future generation to meet their own needs.
1
,BMME113 Sustainable Finance 2022 Laia Neira Quintanilla
1.2 SUSTAINABILITY CHALLENGES
1.2.1 ENVIRONMENTAL CHALLENGES
The aim is to keep the planet liveable for current and future generations.
Planetary boundaries framework → Safe operating space for humanity within the boundaries of 9
productive ecological capacities of the planet. These productive ecological capacities are
1. Climate change 6. Biochemical flows
2. Novel entities 7. Freshwater use
3. Stratospheric ozone depletion 8. Land-system change
4. Atmospheric aerosol loading 9. Biosphere integrity
5. Ocean acidification
Applying the precautionary principle, the planetary boundary itself lies at the intersection of
yellow and green zones. The planetary boundaries vary per region, and there are still of unknows
regarding measures and effects. E.g., we still don’t know how the planetary boundary for novel
entities and atmospheric aerosol loading.
Furthermore, planetary boundaries are interrelated. There are five direct drivers of
nature/biodiversity loss:
2
,BMME113 Sustainable Finance 2022 Laia Neira Quintanilla
1. Climate change, where a change in climate destabilises ecosystems
2. Invasive species, where animals or plants have been moved to places where they
damage existing ecosystems
3. Land use change, such as cutting down a forest to make way for agriculture
4. Overexploitation of natural resources, where a resource is used up faster than it can be
replaced (e.g., overfishing)
5. Pollution of air, land or water
The current linear production and consumption system is based on extraction of raw materials
(take), processing into products (make), consumption (use), and disposal (waste). Traditional
business models centred on a linear system assume the ongoing availability of unlimited and cheap
natural resources. This is increasingly risky because non-renewable resources, such as fossil fuels,
minerals, and metals are increasingly under pressure, while potentially renewable resources, such
as forests, rivers, and prairies , are declining in extent and regenerative capacity.
Moreover, the use of fossil fuels in the linear production and consumption system overburdens
the Earth system as natural sink (absorbing pollution). With this linear economic system, we are
crossing planetary boundaries beyond which human activities might destabilise the Earth system.
Example of human effect on two of the productive ecological capacities:
What is it? Causes Consequences
− Reduced resilience of land
−
Biosphere Integrity
Abundance of species. Affects Destroying habitants
and marine systems
functional diversity, which − Expanding urban land use
refers to the number of species − Sudden and irreversible
(population growth
changes to ecosystem
that fulfil different ecological − Land use change for
function in an ecosystem such functioning
agriculture/aquaculture
as pollination or recovery of − Damming rivers
nutrients. There has been a 68%
decline on it since 1970.
The pathways by which − Putting excessive − Depleted oxygen levels in
elements like carbon, freshwater bodies and
phosphors and nitrogen on
Biochemical Flows
phosphorus, nitrogen, and coastal water (depleted
the land through fertilizers,
sulphur, or compounds like marine life, fisheries,
manures and pesticides
tourism)
water, flow between living − Inefficient uptake by plants
organisms and the environment and animals − Release of nitrous oxide
(one of the most potent
− Nitrification by soils and
GHG)
eutrophication
(enrichment) in the water
system
4
, BMME113 Sustainable Finance 2022 Laia Neira Quintanilla
1.2.2 SOCIAL FOUNDATIONS
Social foundations as the 12 top social priorities, grouped into three clusters, focused on enabling
people to be: (1) well: through food security, adequate income, improved water and sanitation,
housing and health care; (2) productive: through education, decent work, and modern energy
services; and (iii) empowered: through networks, gender equality, social equity, having a political
voice, and peace and justice.
With these social foundations only set out
the minimum for every human’s claims,
sustainable development envisions people
and communities prospering beyond this,
leading lives of creativity and fulfilment.
From a societal perspective, it is important
for business to respect these social
foundations and to ban underpayment, child
labour, and human right violations. Social
regulations forbidding these practices have
been introduced in developed (high- and
medium-income) countries, but these
practices are still happening in developing
(low-income) countries.
1.2.3 SUSTAINABLE DEVELOPMENT
Sustainable development combines planetary and social boundaries, but how to make it
operational? Through the SDGs.
To guide the transition towards a sustainable and
inclusive economy, the UN has developed the 2030
Agenda for Sustainable Development. The 17 UN SDGs
stimulate action over the 2015-2030 period in areas of
critical importance for humanity and the planet. These
SDGs are divided into economic goals, societal goals,
environmental goals, and an overall goal.
The UN SDGs address challenges at the level of the economy, society, and the environment
(biosphere). In that order of increasing importance. A liveable planet is a precondition for
5
TABLE OF CONTENTS
Chapter 1: Sustainability and the Transition Challenge.................................................................. 1
Chapter 2: Externalities-Internalization ........................................................................................ 12
Chapter 3: Governance and behaviour ......................................................................................... 17
Chapter 4: Coalitions for Sustainable Finance .............................................................................. 24
Chapter 5: Strategy and Intangibles-Changing Business Models ................................................. 27
Chapter 6: Integrated Reporting-Metrics and Data...................................................................... 32
Chapter 7: Investing for Long-Term Value Creation ..................................................................... 34
Chapter 8: Equity-Investing With an Ownership Stake ................................................................ 40
Chapter 9: Bonds-Investing Without Voting Power ..................................................................... 45
Chapter 10: Banking-New Forms of Lending ................................................................................ 48
Chapter 11: Insurance-Managing Long-Term Risk........................................................................ 53
Chapter 12: Transition Management and Integrated Thinking .................................................... 56
2
,BMME113 Sustainable Finance 2022 Laia Neira Quintanilla
CHAPTER 1: SUSTAINABILITY AND THE
TRANSITION CHALLENGE
1.1 WHY DOES SUSTAINABILITY MATTER?
Our economic models were developed in an empty world with an abundance of goods and services
produced by nature, labour and capital were the scarce production factors.
In the early 1970s the Club of Rome → Full world, the earth system could not support these rates
of economic and population growth.
They determined 5 basic factors that determine and limit growth on this planet:
1. Population Increase
2. Food Production
3. Non-renewable resource depletion
4. Industrial Output
5. Pollution Generation
Two possible world models on how population growing in a limited environment can approach the
ultimate carrying capacity of that environment:
Left panel → We can adjust smoothly to an equilibrium below the environmental limiting by means
of a gradual decrease in growth rate
Right panel → We can overshoot capacity by consuming some necessary non-renewable resource
or causing pollution
Thus, need for sustainable development → Development that meets the needs of the present
without compromising the ability of future generation to meet their own needs.
1
,BMME113 Sustainable Finance 2022 Laia Neira Quintanilla
1.2 SUSTAINABILITY CHALLENGES
1.2.1 ENVIRONMENTAL CHALLENGES
The aim is to keep the planet liveable for current and future generations.
Planetary boundaries framework → Safe operating space for humanity within the boundaries of 9
productive ecological capacities of the planet. These productive ecological capacities are
1. Climate change 6. Biochemical flows
2. Novel entities 7. Freshwater use
3. Stratospheric ozone depletion 8. Land-system change
4. Atmospheric aerosol loading 9. Biosphere integrity
5. Ocean acidification
Applying the precautionary principle, the planetary boundary itself lies at the intersection of
yellow and green zones. The planetary boundaries vary per region, and there are still of unknows
regarding measures and effects. E.g., we still don’t know how the planetary boundary for novel
entities and atmospheric aerosol loading.
Furthermore, planetary boundaries are interrelated. There are five direct drivers of
nature/biodiversity loss:
2
,BMME113 Sustainable Finance 2022 Laia Neira Quintanilla
1. Climate change, where a change in climate destabilises ecosystems
2. Invasive species, where animals or plants have been moved to places where they
damage existing ecosystems
3. Land use change, such as cutting down a forest to make way for agriculture
4. Overexploitation of natural resources, where a resource is used up faster than it can be
replaced (e.g., overfishing)
5. Pollution of air, land or water
The current linear production and consumption system is based on extraction of raw materials
(take), processing into products (make), consumption (use), and disposal (waste). Traditional
business models centred on a linear system assume the ongoing availability of unlimited and cheap
natural resources. This is increasingly risky because non-renewable resources, such as fossil fuels,
minerals, and metals are increasingly under pressure, while potentially renewable resources, such
as forests, rivers, and prairies , are declining in extent and regenerative capacity.
Moreover, the use of fossil fuels in the linear production and consumption system overburdens
the Earth system as natural sink (absorbing pollution). With this linear economic system, we are
crossing planetary boundaries beyond which human activities might destabilise the Earth system.
Example of human effect on two of the productive ecological capacities:
What is it? Causes Consequences
− Reduced resilience of land
−
Biosphere Integrity
Abundance of species. Affects Destroying habitants
and marine systems
functional diversity, which − Expanding urban land use
refers to the number of species − Sudden and irreversible
(population growth
changes to ecosystem
that fulfil different ecological − Land use change for
function in an ecosystem such functioning
agriculture/aquaculture
as pollination or recovery of − Damming rivers
nutrients. There has been a 68%
decline on it since 1970.
The pathways by which − Putting excessive − Depleted oxygen levels in
elements like carbon, freshwater bodies and
phosphors and nitrogen on
Biochemical Flows
phosphorus, nitrogen, and coastal water (depleted
the land through fertilizers,
sulphur, or compounds like marine life, fisheries,
manures and pesticides
tourism)
water, flow between living − Inefficient uptake by plants
organisms and the environment and animals − Release of nitrous oxide
(one of the most potent
− Nitrification by soils and
GHG)
eutrophication
(enrichment) in the water
system
4
, BMME113 Sustainable Finance 2022 Laia Neira Quintanilla
1.2.2 SOCIAL FOUNDATIONS
Social foundations as the 12 top social priorities, grouped into three clusters, focused on enabling
people to be: (1) well: through food security, adequate income, improved water and sanitation,
housing and health care; (2) productive: through education, decent work, and modern energy
services; and (iii) empowered: through networks, gender equality, social equity, having a political
voice, and peace and justice.
With these social foundations only set out
the minimum for every human’s claims,
sustainable development envisions people
and communities prospering beyond this,
leading lives of creativity and fulfilment.
From a societal perspective, it is important
for business to respect these social
foundations and to ban underpayment, child
labour, and human right violations. Social
regulations forbidding these practices have
been introduced in developed (high- and
medium-income) countries, but these
practices are still happening in developing
(low-income) countries.
1.2.3 SUSTAINABLE DEVELOPMENT
Sustainable development combines planetary and social boundaries, but how to make it
operational? Through the SDGs.
To guide the transition towards a sustainable and
inclusive economy, the UN has developed the 2030
Agenda for Sustainable Development. The 17 UN SDGs
stimulate action over the 2015-2030 period in areas of
critical importance for humanity and the planet. These
SDGs are divided into economic goals, societal goals,
environmental goals, and an overall goal.
The UN SDGs address challenges at the level of the economy, society, and the environment
(biosphere). In that order of increasing importance. A liveable planet is a precondition for
5
