Sustainable Finance is an emerging field. Hopefully we help in the efforts to build an area in which financial markets can work in tandem with companies to improve environmental performance. Below there are three articles with an unifying theme – the idea that market solutions may bring forth change in financial system regarding sustainability. The first was published in the Harvard Business Review and proposes a methodology to quantify the costs and benefits associated with sustainability issues in the beef industry. The second was published in the Journal of Business Ethics. I and my co-authors develop a ratings system based on sustainability criteria. Banks can use it to improve their loans and their credit-risk models. The third article shows how to change valuation models to incorporate sustainability criteria. If this concept is spread out market forces will lead to firms searching for sustainability opportunities to maximize shareholder value, creating a positive feedback that could improve the allocation of capital towards companies that are better managed regarding their sustainability indicators. Finally, I am bridging my economics and sustainability interests by investigating, with colleagues, the political economy of energy markets and how we can improve the use of renewables. My first research on the topic has been published in Energy Economics and the following in Nature Sustainability, the most prestigious journal in the world.
Renewables inputs’ tariffs reduction and impact on European decarbonization – Nature Sustainability, with Svetlana Fedoseeva (2018).
Climate action is an integral part of the Sustainable Development Goals (SDGs) agreed by all 193 UN member states. We show that lifting EU import tariffs on some inputs used to produce renewable energy could lessen Europe’s carbon footprint, improving the likelihood that the region meets the targets of the Paris agreement and the SDGs. The results of a panel regression analysis with detailed product-level data indicates that eliminating the tariffs on 11 intermediate inputs may help to offset fossil fuel consumption driven by growth in economic activity. Abolishing the tariff on a single product — cylindrical roller bearings, used in the manufacturing of wind turbines — would likely bring the most benefit, canceling out the expansion in demand for fossil fuels otherwise expected from 1-4% of European GDP growth (46 – 236 thousand TOE, tonnes of oil equivalent, per member state).
Energy imports are crucial for European countries, yet little is known about determinants of their import demand. We update long-outdated estimates of import demand elasticities using recent data for crude and derived energy products and contribute to the debate on the asymmetry of import demand by using recent developments in econometric modelling. Our results have important implications for the geopolitics of energy markets in Europe. (Asymmetric) Income seems to be the most relevant determinant of import demand; Economic growth and fossil fuel consumption are correlated, even in the context of the European agenda towards renewables. Our results suggest that European economic recovery may derail the drive for lower fossil consumption, and that changes in the natural gas market may further complicate this drive, especially regarding Russia as the primary supplier to the Eurozone.
Environmental governance in China: Interactions between the state and “nonstate actors” – Journal of Environmental Governance (with Dan Guttman, Oran Young, and many other co-authors). (2018)
China’s efforts to address environmental issues reflect institutionalized governance processes that differ from parallel western processes in ways that have major consequences for domestic environmental governance practices and the governance of China “going abroad.” China’s governance processes blur the distinction between the state and other actors; the “shadow of the state” is a major factor in all efforts to address environmental issues. The space occupied by nonstate actors in western systems is occupied by shiye danwei (“public service units”), she hui tuanti(“social associations”) and e-platforms, all of which have close links to the state. Meanwhile, international NGOs and multinational corporations are also significant players in China. As a result, the mechanisms of influence that produce effects in China differ in important ways from mechanisms familiar from the western experience. This conclusion has far-reaching implications for those seeking to address global environmental concerns, given the importance of China’s growing economy and burgeoning network of trade relationships.
How to Quantify Sustainability’s Impact on Your Bottom Line – Harvard Business Review with Tensie Whelan and Bruno Zappa (2017)
The application of the methodology to the beef industry in Brazil found that embedded sustainability does improve financial performance through mediating factors such as innovation, operational efficiency, risk reduction, employee recruitment, engagement and retention, customer and supplier loyalty, competitive advantage, reduced cost of capital, and improved marketing and sales.
Within the banking community, the argument about sustainability and profitability tends to be inversely
related. Our research suggests this does not need to be strictly the case. We present a credit score system based on sustainability issues, which is used as criteria to improve financial institutions’ lending policies. The Sustainability Credit Score System (SCSS) is based on the analytic hierarchy process methodology. Its first implementation is on the agricultural industry in Brazil. Three different firm development paths are identified: business as usual, sustainable business, and future sustainable business. The following six dimensions are present in the SCSS: economic growth, environmental protection, social progress, socio-economic development, eco-efficiency, and socio-environmental development. The results suggest that sustainability is not inversely related to profit either from a short- or long-term perspective. The SCSS is related to the Equator Principles, but its application is not driven to project financing. It also deals with short- and long-term risks and opportunities, instead of short-term sustainability impacts.
We present the Sustainability Delta model as an improvement over existing Environmental, Social and Governance (ESG) methodologies used in firm valuation. Starting from the question how banks should integrate sustainability criteria into their valuation methods, we find that ESG methodologies currently do not consider the potential to generate higher future revenues due to sustainable innovations and also lack the consideration of different scenarios such as higher standards in legislation or consumer demand. To address these shortcomings the Sustainability Delta model is developed. Simulation results on the sugar manufacturing industry in Brazil demonstrate by using the Sustainability Delta we estimate an improved firm value of 1.24%. The Sustainability Delta would allow for a more accurate valuation of firms as well as for the more effective allocation of capital for investors, which should bring market pressure to improve sustainability practices and thus contribute to sustainable development.