Sustainable Finance: Utopia or reality?

Marco Venturelli27 April 2021
Sustainable Finance: Utopia or reality?

How to associate sustainability and finance and allocate your investments and sustain your company broader purpose?

 I am most touched by the kind invite to share with you my thoughts and reflections on the idea of a Sustainable Green Finance. Is it Utopia or reality?

I thank DII and Alice Dousset for the opportunity. I feel a big responsibility being here for my second time. Repeating the success of the first talk in 2018 will be difficult as expectations of the audience and organizers usually increase. I am driving the Sustainability agenda in Novartis Italy.

The topic comes last, after a long day of work and I will try to make it a very interesting and compelling topic. In a country where a ‘Ministere de la transition écologique et solidaire’ exists and so many activities are going on in the Green economy, I fear I will tell you the obvious or something is already deeply into your hearts and brains.

Nobody knows where the island of Utopia is.

Utopia is a Greek pun on ‘ou-topos’ [no place] and ‘eu-topos’ [good place] and in modern times the word has been first used by Thomas More in 1516.

In Utopia, there are no lawyers because of the laws’ simplicity and because social gatherings are in public view, everyone is encouraged to behave well, men and women are educated alike. Nature is respected and loved.

It was a dream place, the opposite of the 16th century that times when Thomas lived where society was a “conspiracy of the rich”. Such men were “greedy, unscrupulous and useless”.

 Critics to the powerful and rich hasn’t changed much. Today the Princess of Utopia is Greta who says that  the rich and old people are stealing the Planet from the young generation. Can Finance help this young woman?

Princess Greta knows that she needs Finance as an ally to change the Financial capitalistic world. Then she invited on her island, Prof Robert Shiller of Yale, a Nobel prize, who wrote a book in 2012 : ‘Finance and the good society’ where he invites all Finance professionals to be the steward of the management of assets towards the common Good.

On the island, Greta invites also a modern Utopist, John Elkington. Already in 1994, John Elkington coined the term Triple Bottom Line proposing to blend profit taking into consideration impact on people and planet. John is publishing a new book ‘Green Swans: The Coming Boom In Regenerative Capitalism’; he declares that ‘the green swan is a symbol of radically better times to come. It’s also a template for exponential change toward the distant goal of a sustainable future for all”.

Another modern utopist, Greta is welcoming, is French: Bertrand Badrè, former CFO of Credit Agricolè and World Bank, currently leading Blue like an Orange, an investment bank. Bertrand, after having listed all the mistakes speculative Finance did before the crisis says in his book “Can Finance save the world?” : “Now is the time to regain control over money to serve the common good. Using finance will help us build a truly sustainable framework for development. It is inconceivable that development should be only short term in its outlook and unequal in its distribution. The immense power that we can unleash with finance is much more far-reaching that most people believe”.

Finally on the Island lands Mervyn E. King, Chair Emeritus of the International Integrated Reporting Council (IIRC). In a book of 2016 ‘Chief Value Officer: Accountants Can Save the Planet’ he radically redefines the role of accountants. The book tells us that currently, too much corporate information is given in coded, and often impenetrable, language that’s designed to meet the letter rather than the spirit of regulatory requirements. It would be refreshing if corporate performance were to begin being communicated in a way in which the layman could understand it. Perhaps integrated reporting is a step along the way; and the CVO acronym will one day become as well-known as CFO and COO.

Just sitting on the shoulders of these giants, on the island arrives Marco, a Country CFO. Marco approached Sustainability at the end of 2016 and understood that United Nations in 2015 launched the recipe for a better world, through the Sustainable developments goals (SDG). About 190 states and many large corporations have subscribed them taking a commitment in terms of improvements of the way we do business, improving wealth distribution, health, reducing poverty.

The SDGs address the world maladies according the definition of prof. Zollo at London Imperial Collage Business School – Leonardo Institute. They call the world maladies: 4 billion of poor people, 100 million starving, we are consuming 2.5 times the earth resources and 16 people own the wealth equivalent to 3..5 billion of the poorest. Just to mention few.

To fix these maladies and reach the SDGs is calculated that we need about 3 trillion USD per year and we would generate an extra growth of about 12tn by 2030.

These SDGs are the modern Utopia or Finance can make them happen?

I started gathering more information. Acceleration of investments in companies with a positive impact on Environment, Society and with a transparent Governance ESG is there, with a value of about 30 trillion in 2019. I am sure Jean Philippe Carrascosa will explain you more broadly. Investors see the opportunity.

Then I have asked myself: It is undisputed today that the CFO is a relevant leader, in each mid to big size corporation. The CFO provides not only financial planning and analysis, but information about where the business is going and how quickly it is getting there. CFOs are deeply involved in supporting and enabling strategy and most work side-by-side with the CEO. According to the Economist, the CFO is, towards the analysts, more credible than the CEO and they define him, the Supremo.

So I went more deeply in understanding what is the most important driver of performance.

Based on Jacob Morgan 2017 book “The employee experience advantage” the demonstration that experiential companies that are investing in cultural, technological and improved physical working environment, generated double the growth when compared with the S&P500 and even better when compared with the Best place to work rated companies.

Very recently, Krekal and others of the Oxford Said Business School in the article “Employee Wellbeing, Productivity, and Firm Performance” conclude: “We find a significant, strong positive correlation between employees’ satisfaction with their company and employee productivity and customer loyalty, and a strong negative correlation with staff turnover. Ultimately, higher wellbeing at work is positively correlated with more business-unit level profitability”.

Willness and Jones (2013) suggested that an organization’s green reputation is crucial to attracting job seekers who identify with organization’s values. While stable employment and regular paychecks may have been the hallmarks of a ‘good job’ in the past, these days employees are seeking out principled and purposeful companies. In fact, a global survey conducted by LinkedIn in 2016 revealed that 74% of candidates want a job where they feel like their work matters.

When you show employees and potential new recruits you care about the environment and our community, they’re more loyal and productive. While it might seem like caring about sustainability is not part of your core business, it’s actually a powerful way to build a more committed and hardworking team.

In their book The Sustainability Edge, authors Suhas Apte, former sustainability officer for Kimberly Clark, and Jagdish N. Sheth, professor of marketing at Emory University, explain, “the next major competency that businesses will need to pursue and fully integrate to gain a sustainable and consistent competitive advantage will be sustainability itself”. In our experience, incorporating the triple bottom line ‘people, planet, profit’ into business DNA from the get-go provided us with an indisputable competitive advantage.

I was fully convinced.

What is Happiness and why it drives the World

At the end of 2016, then I started my personal journey. Every transformation should start from you. I enrolled into the Sustainability Global Novartis team as a volunteer. Revised my diet, eliminating meat whose production has an high environmental impact, followed a mindfullness program to be a better listener and emotional leader. I am proposing the pursuit of happiness as the way to approach the time at work. The meaning I give to happiness is the fulfillment of the individual purpose and scope, the meaning used by the US Constitution founders. Dr. Travis Bradberry, an expert in Emotional intelligence says: “Everybody wants to be happy and live a satisfactory and fulfilling life. “While the good news, continues Travis, is that just 50% of happiness is influenced by genetics the rest is up to us. When it comes to making yourself happy, you need to learn what works for you. Once you discover this, everything else tends to fall into place, and making yourself happy.

Despite that in my search I found that “Happy” and “CFO” seemed an oxymoron and  Google did not find neither correlation nor constant match, I am proposing Happiness as an objective to my CFO colleagues.

My proposal is CFO has then to learn how to facilitate Happiness of the organization to improve profitability.

I decided to bring a different perspective to the Finance profession, as I think that the World needs Happy CFOs, capable to reach the short term objectives of his or her unit without compromising the long term sustainability. Able to optimize the use of money but taking care of environment and social situation. Capable of applying emotional intelligence while allocating resources, taking into consideration the behavioral economics so well described by Kahneman and use it with compassion and understanding of human beings to be fully effective as business partner. Nowadays decisions are so complex that only being open to listen to cross functional expertise and business knowledge would allow Finance to advice on the best option. Models and brain power must be adjusted by empathy, understanding a bit also the humane side of the budget owners.

When the objectives are built on listening, understanding, compassion and consensus, the sense of purpose of the whole unit is greater. Financials and company purpose blend more intimately. For my unit, for example, providing solutions to patients. Then embedded in a broader scope, when numbers turn in the right direction, Finance accomplish its role. The whole Society benefits for proper use of money. Happiness comes. And as shown by the World Happiness report, economic development has a positive impact on Happiness and each CFO can contribute to make the world Happy and grow their organization. If all of us would set sustainable goals the world would be a better place. So the positive circle restart.

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What is the approach a company that wants to transform has to follow. I would like to share with you the case of Novartis. Our new CEO, Vas Narasimhan entering now his third year : “the only reason we can deliver profits to the world, to our company and to our shareholders is when we positively impact society.

How can this be done? First, to prepare a holistic and long-term oriented definition of corporate performance, each company needs to define its own purpose beyond the generic “shareholder-focus”. In so doing, a company needs to define its core business focus and highlight what problems it seeks to solve (Mayer, 2019). Once a company has defined its purpose, it must put this purpose into practice by ensuring that it is at the heart of how long-term value and performance are defined across the organization. With the Purpose to Reimagine Medicine, Novartis opened the dialogue with stakeholders and Society.

The FES impact project was then started to monetize the impact of Novartis on Society. Globally and in more than 80 countries

Here the example of Italy,

To do this, companies need to create consistent and purpose-aligned measurement systems which ensure that business targets are set in accordance with the corporation’s purpose and that progress is measured against these targets. The targets will be both financial and non-financial to capture the variety of risks, dependencies and opportunities that are related to a company’s long-term value.

The measurement of non-financial targets remains a challenge, as there are no universal standards for metrics which companies or investors can refer to. These measures are however key for implementation, internal alignment, and external evaluation of a firm’s purpose. At the functional level, stringent non- financial targets are important to create incentive structures for good management decisions which further purpose implementation. The capacity to make these good decisions relies heavily on consistent and reliable non-financial measurement.

At the board level, non-financial key performance indicators are key to define which issues are considered as material to a company’s purpose. Boards which communicate clear non-financial priorities create alignment within their organizations around how purpose is to be put into practice. At the investor level, reliable and consistent non-financial information enables the allocation of capital to those companies which act responsibly and create sustainable profit without creating harm.

Vas is encouraging Finance to discuss on Purpose and for Novartis in particular, SDG number 3 – Good Health and Well-Being – represents an opportunity to provide solutions to the World. We address Malaria and other communicable disease and reduce premature mortality to more widely spread ones (as for example diabetes and cardiovascular ones) with special programs at minimum margin, while considering the value for society. Developing new and innovative ways to reach people in lower-income countries is one of Novartis top priorities. To expand access to healthcare, it pursue a variety of approaches“.

To date, companies’ non-financial performance is often evaluated using a mix of corporate reporting and for-profit environmental, social and governance (ESG) data. Data quality and reliability are a serious concern as ESG ratings and rankings are often created in a black box, often with a high degree of inconsistency and lack of correlation between different data providers. (Stroehle, et al 2019)

With a focus on questions rather than answers, non-financial measurement systems can provide clear answers to the problems of management, boards and investors. On the reporting side, which is particularly relevant for investors and boards, there is a strong demand for these measurement systems to be standardized. The assumption is that disclosure standards provide a transparent and comparable data environment for all stakeholders, while creating a level playing field for those companies reporting on these standards (Stroehle, et al 2019). The call for standardization is not inconsistent with focussing measurement on the user side.

Then I would like to conclude my presentation with 3 proposal to this powerful and qualified audience:

Create Awareness in the Finance Community and in Society

At this point, it appears very clear that proposing to our CEOs to include Sustainability and Happiness in the company strategy is a must. Engaging stakeholders, Customers, investors, employees to define jointly the company objectives appears the way to go for a socially wise company. The CFO can act as change agent sustaining a long term vision to contrast short termism typical of current times. As companies greatly contribute to economy of a country, doing so, the CFO contributes to the country Happiness and well-being and becomes Happy. It is time to own promotion of Happiness, in the deep meaning that Thomas Jefferson proposes.

SDG 17 Strenghten domestic resource mobilisation while Enhancing policies coherence for sustainable development is the vision and compass we should follow as CFOs. Encourage and promote effective public, public-private and civil society partnerships, building on the experience and resourcing strategies of partnerships is the suggested way for an ESG based strategy.

Voluntary adoption of EU directive

Globally, the company I work for was among corporations that pioneered the adherence to the Global Compact and more recently it is  taking the SDGs as reference for our environmental and social policies. However, at a country level, where I operate, some of these policies may appear a bit distant or only represented by a number of KPIs to be reached. As part of my creating awareness program, in Italy, I realized the first draft of Integrated reporting for the activities in the country. It was very successfully presented in a public conference. Many corporations have developed their global IR but in my case, I think it will be one of the first with a measure of the footprint in a specific country. If we want to make Society aware about corporation impact, it is much better to do it locally, where people can more easily see it.

Plan your new ESG strategy

There is an imperative for the CFO to be the steward of the long term. Bertrand Badrè made it clear in a recent speech in Italy: “It’s boring for the world leaders to talk about changinf the accounting metrics and our leaders won’t like it, but we must work on the “short-term bias” in the financial system, through accounting principles, compensation, and so on. Impact investing, ESG, social-impact bonds are still linked to the good will of few: they have to be incentivized. Otherwise, we should be aware that the machine to produce crises is still there”

Two years ago, I started taking action, under the logo “The Happy CFO”, reflecting and sharing information, ideas about how Finance, Sustainability and Happiness can be connected. My recipe is simple and at the same time, very challenging: «Our companies will continue to be profitable and generate work for our great-grandchildren, if the CFOs convince their CEOs that short term orientation, not balanced with objectives of environmental and social sustainability, will not last long.».. Join me, become a Happy CFO.