It’s commonly accepted that action on sustainability, climate change or gender equity comes with a cost. Today, more and more companies look at this cost as an investment and long-term growth strategy that can deliver more value over time. Leaders who can see these opportunities opening can steer their organization to success as the world transitions to sustainable growth. Sustainability is changing more than just the products we purchase or the ads we absorb. It is transforming the fundamentals of finance.
Consider the billions that IKEA has invested in forests and Mars has invested in cocoa farmers over the past few years. IKEA invests in forests to ensure responsible management and secure the company’s long-term financial viability. Mars is building durable and resilient supply chains in line with climate regulations and increasing the income of cocoa farmers. These examples show the bottom-line benefits of investing in sustainability. And they are part of a larger push towards ESG in finance. Investors that consider ESG – environmental issues, social issues and corporate governance – in decisions can minimise risk and maxmise returns in today’s market.
Since 2018, the Hoffmann Global Institute for Business and Society has worked with professors in the Finance academic area to integrate sustainability into their work. It is important for every INSEAD graduate to understand the need for ESG considerations and sustainability in finance.
This latest edition in the Lessons in Sustainability series explore how the Finance area brings sustainability into academics. The series highlights sustainability in all nine of the INSEAD academic areas.
Finance is Foundational
Finance is the foundation of the global economy, encompassing money, markets and capital assets. From banking and credit to investment and financial flows, finance explores how money is managed and moved in the economy. At INSEAD, the Finance area focuses on theoretical and empirical research, high-quality teaching and entrepreneurial spirit integrated into teaching programmes. Recent publications focus on market confidence and liquidity, trading and financial performance. Sustainability in investments, marketing and banking is required for truly sustainable development.
Sustainable finance is increasingly important in the global economy and as a way to achieve global goals. Renewable energy investments provide the least expensive power generation and stable returns for investors. Green bonds grew at record pace in 2023. ESG investment slowed as transparency came into focus. Transparent and standardized reporting is needed for investor confidence and to make markets more effective at driving the sustainability transition.
The INSEAD Finance academic area is comprised of innovative faculty who bring diverse perspectives to the study of finance. Many examine sustainability in the future of finance as they perform research and develop high-quality teaching materials. This in turn can inform seminars, webinars and alumni learning that engage peers and business leaders.
A Chat with the Chair
To gain more insight into how sustainability features in finance academics at INSEAD, we sat down with Area Chair Professor Joel Peress for a conversation on the latest thinking.
Why is it important for future business leaders to learn about sustainable development practices?
Professor Peress: Sustainability, or a focus on environmental and social issues, is increasingly important for businesses, affecting everything from corporate strategy and operations to reporting and financing. Motivations for integrating sustainability vary widely. Business may be impact-driven or focused on sustainability to enhance value creation through improved operating or financial performance. Or both. Businesses also often respond to pressure or demands around environmental and social issues from stakeholders, including consumers, employees, investors and regulators.
Sustainability is becoming an essential or integral part of business. Success requires a solid understanding of sustainability and the right tools or frameworks to integrate it into business.
What does sustainability mean to you in the context of business education?
Professor Peress: We look at sustainability to better equip leaders to integrate it into business frameworks. There are certain bodies of knowledge, for example around the science of climate change, that now need to be part of any standard business curriculum.
Today, many roles in the financial sector require a basic knowledge of sustainability and sustainable finance concepts. It is also important for students who end up working in the non-financial sector to understand how developments in sustainable finance affect real economy businesses, for example, a company’s access to capital or cost of capital.
How do you teach sustainability in your academic area and what are the main topics?
Professor Peress: Finance offers a framework and a set of tools for evaluating projects with transparency and rigor. They allow leaders to account for two critical aspects of any investment, namely the time value of money and risks. Applying those wisely leads to more efficient deployment of resources and producing more with less.
Delivering a clear framework is particularly important given that, more often than not, doing good is at odds with making money. This is suggested by the underperformance of green firms relative to ‘brown’ firms in recent years. This shouldn’t come as a surprise. If those goals were well aligned, then profit-driven managers would have integrated societal benefits into their strategies long ago. It’s therefore important to be clear about the trade-off between ‘doing good’ and ‘doing well’.
Finance in Focus
Professors Pierre Hillion, Pierre Mabille and Lin Shen teach Financial Markets and Valuation as an MBA and MIM core course. The class encourages students to think about sustainability as a non-traditional finance question. Discussion revolves around how ESG can penalize ‘bad’ firms by increasing cost of capital, short vs. long-run objectives for shareholders and stakeholders, and how lower returns represent a cost that investors might be willing to bear to do good.
The Energy Transition Finance elective taught by Pierre Hillion focuses on investments in renewable projects – wind, solar, green hydrogen and storage – and divestment from carbon-intensive coal and gas. This discussion centres on assessment of whether these projects yield a positive net present value. The answer is typically ‘no’ without subsidies, raising the issue of who should pay and what happens when subsidies are scaled back.
The Sustainable Finance elective taught by Professor Lucie Tepla looks at how capital providers such as asset owners, asset managers and banks integrate sustainability into investment and lending decisions. The elective explores how companies manage environmental and social issues in terms of financial risk and opportunity. Through capital allocation decisions and other actions, providers of capital and other financial services play an important role in net zero transitions, sustainability action and ESG performance.
Professor Pat Akey lectures about political activity around climate policy in the Politics of Finance mini-elective. The MBA elective on Investments and Asset Management delivered by Professor Frederico Belo discusses ESG from an asset management perspective. This explores the risk and return characteristics of strategies that use ESG as a signal for investment and the current discourse on ESG ratings.
Professors bring many of these concepts into executive education. Professor Lucie Tepla co-directs the Sustainability Leadership for Senior Executives online programme and teaches sustainable finance as part of open programmes and company-specific learning. Dean of Research Lily Fang discusses sustainability in conjunction with leadership and company performance in almost all her EDP programmes. She teaches that business should integrate sustainability into value creation and focus on long-term value. Innovation is key and so is the leadership's desire and ability to truly integrate business success with sustainability rather than pursue sustainability as a separate goal or box-checking exercise.
The Future of Finance
Finance is changing as the world moves to more sustainable business models and government policy. These changes include a radical rethink in how we power growth and new financial products that see solid returns. Leaders and analysts who identify opportunity in this evolving market can deliver value by investing in companies and projects that deliver public good.
In areas from emerging markets to innovative financing models, INSEAD Finance professors equip leaders to consider business and society outcomes in decisions and capture positive returns with positive impact.
The Hoffmann Global Institute for Business and Society Lessons in Sustainability series highlights lessons learned from integrating sustainability into all nine INSEAD academic areas. Stay tuned for more Lessons in Sustainability.
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