Kalle reflects on finance institutions and sustainability

There is a structural problem behind the under-performance of finance institutions.

Since the infancy of the sustainability movement in the 70s, three waves can be discerned in the sustainability consciousness of companies.

• First out were the customer-oriented companies. They responded to an increased interest from a worried public.
• Then, quite logically, responded the production industry that delivered to the customer-oriented companies.
• Finally, we could see a green movement also among finance companies, which lend out to, and/or invest in, production companies.

The finance sector thus arrived relatively late to the sustainability arena. But their progress in a sustainable direction, that was relatively modest from the beginning, still is. As a rule, they still have not gotten past the two main lines of finding “sustainable” investment objects, (i) ethical motives and (ii) clean tech motives. But, if they don’t access the FSSD, how do they know if companies that currently come across as relatively more (i) “ethical” have greater opportunities for systemic, systematic and strategic progress on more and more sustainability driven markets? And likewise, how can they assess if (ii) “clean tech” of today captures innovations that are scalable within the FSSD boundary conditions for sustainability, and/or can serve as smart flexible platforms in that direction (‘D’ of the ABCD)? And indeed, the two lines of investment strategies have close to zero impact on ROI. So the majority of finance institutions are not only underperforming socially and ecologically, the economically good they do for themselves and society at large is questionable too. But taking this into account, how can they then compete on a free market? The answer is, naturally, that the competitors under-perform as well. See previous articles on FSSD as well as on the EU’s new directives for sustainability reporting. This outlined dilemma is particularly painful for investment companies with relatively large investments, such as pension funds, for a couple of reasons. The mechanisms behind this lagging in the finance sector is discussed below.

More in detail

The order of the above stepwise wakening up for the three categories of companies is logical. (Even if the “wakening up” is not all that impressive for any of the three categories). So all of the three categories underperform when it comes to the art of strategically grabbing hold of the huge opportunities on more and more sustainability driven markets. But why is the financial industry still relatively lagging? At first sight, this ought not need to be the case per se, since proactive goods-producing companies would appear as tempting investment objectives. Or, in other words, the Funnel metaphor of the FSSD applies equally mercilessly in both cases (see previous reflections on this).

In my experience from numerous banks and finance institutions, where I have had long-term consulting contracts for sustainable investing, the answer is structural. Unlike goods-producing companies, the finance sector are generally not in control when it comes to the collection of data from the goods-producing companies. So the finance sector typically dont access a rational evaluation of the respective attractiveness of various investment objectives. Instead, the finance sector’s search for rational investment objectives is usually done by relying on data from “data providers” that are usually not employed by the finance companies themselves but are outsourced to provide this service. So, given this dilemma for the financial industry at large, where do we find positive and divergent exceptions?

The answer is partly to be found in the size of the investment companies. Relatively small companies, not rarely family owned, may do quite well. But the larger the company, the larger the investment portfolio. And the larger this is, the larger are the difficulties in “undoing” bad investments that have already been made in the past. An example is very large investments from pension funds. Sales of such stock, when the truth catches up in the “funnel”, will further enhance the financial losses from poor adaptability on more and more sustainability driven markets. The larger the funds in politically correct “ethical” or “clean tech” funds, the more dangerous it is for investors to try “voting with their feet”.

But just as important are the business ideas that characterize each finance company. Sometimes it is about companies where the business idea is to invest in start-ups where the finance company puts itself on the board of directors for some time before “exits”. There the investment company itself can influence directly, not indirectly through outsourcing to data providers, how the investment strategies can be set up. Yet another example are banks that may want to develop their investment and loan-strategies as the “good bank”, advising their clients to become successful and loyal and able to pay back business loans.

For more reading, see my article on the EU’s new directive for reporting directives. At FSSD Global, we are also currently conducting a review of some companies from the finance sector that seem promising in the above terms, and hope to be able to return soon with some valuable reflections.

The picture is AI-generated