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Studying Sustainable Finance

The world of finance is both data-driven and unforgiving. Capital flows toward the highest rate of returns and/or the most stable rate of return. But those markets are influenced by government policy, social norms, and consumer behavior.
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In my view, there are four key elements of green finance:

  • The first is to develop private financial instruments and techniques, along with public policies to help attract capital to the sustainable elements of the economy.
  • The second is to identify, for investors, the relative risk of investing in sustainable businesses compared to businesses that ignore sustainability.
  • The third is to enable private and public organizations to analyze and understand the financial costs and benefits of sustainable practices in assessing their own organization's cost structure.
  • The fourth is the growing market in tradable pollution rights, carbon offsets, and other exchanges of environmental assets.

By "sustainable," I mean organizational actions that reduce the one-time use of resources such as energy, water, and other materials, and reduce the impact of production and consumption on ecosystems. In a capitalist global economy, attracting capital and analyzing costs and benefits are everyday and routine tasks. If sustainability elements are ignored--or even worse, trivialized--by the financial community, they have little meaning in the real world. Here at Columbia University, and slowly creeping down toward Wall Street, we are seeing growing attention being paid to sustainable finance.

Last week, Columbia University's Earth Institute and School of Continuing Education announced the approval of a new graduate certification of professional achievement in sustainable finance. It is the third certification, along with another in sustainability analytics and one in sustainable water management, offered in conjunction with our Master of Sustainability Management program. I have directed the sustainability management program for five years and have seen its curriculum develop and expand as more students enroll and graduate with the skills needed to become sophisticated sustainability professionals. We have already graduated 300 students from our sustainability master's programs in the School of Continuing Education. We've graduated over 600 sustainability professionals in our MPA in Environmental Science and Policy program, a collaboration with Columbia's School of International and Public Affairs. The introduction of a certification in sustainable finance is an important milestone, because it is an indication of the growing importance of sustainability factors in organizational management and finance.

The Master of Science programs in Columbia's School of Continuing Education typically require 36 graduate credits to complete; the professional certification programs require 12 credits. Our Master of Sustainability Management program requires all of our students to complete courses in sustainability economics and finance. Some of our students complete both the degree and the certificate. The degree requirement and increased student demand has resulted in the creation of a number of new courses, including Green Accounting, Sustainable Investing and Economic Growth, Sustainable Finance, Energy Markets and Innovation, Global Environmental Markets, and Financing the Green Economy.

Last week, we explored this emerging field at a well-attended panel discussion at the Columbia Club in midtown New York City. Professor Satyajit Bose introduced the session, outlining the program's central concepts, and Professor Travis Bradford did a wonderful job of moderating a lively discussion with sustainability finance professionals. Professor Bradford's panel included:

  • Frank Barbarino, Vice President, Goldman Sachs
  • Michael Davis, Director, Institutional Client Relationships, Calvert Investments
  • Sonal Mahida, Head of North America, Networks & Global Outreach, the Principles for UN Responsible Investment Initiative
  • Kevin Parker, CEO, Sustainable Insight Capital Management
  • Amy Springsteel, Director of Corporate Responsibility, Voya Financial

This new program is important because it is an indication that green finance has reached a turning point. Demand for these courses among students is growing. This may well be because demand for graduates with an understanding of green finance is also starting to grow. The cultural shift now underway is being demonstrated in many places. Writing last week in the Wall Street Journal, Rebecca Smith noted the financial impact of energy efficiency and alternative energy on the nation's electrical infrastructure:

The long-term future of the nation's electric grid is under threat from an unlikely source--energy-conserving Americans. That is the fear of some utility experts who say that as Americans use less power, electric companies won't have the revenue needed to maintain sprawling networks of high-voltage lines and generating plants. And if the companies raise rates too high to make up for declining sales volumes, customers will embrace even more energy-saving gizmos and solar panels, pushing down demand for grid power. The Edison Electric Institute, the trade group for investor-owned utilities, has warned that they could face a "death spiral."

In order to develop a realistic and workable business plan, electric utilities need to analyze and understand the drive toward a sustainable economy. This trend is going to continue. The grid will always be needed, but its monopoly on electric power has come to an end. There will be many other examples of similar trends that need to be encouraged, understood and correctly priced and financed.

As the son, son-in law, brother, nephew and brother-in-law of Certified Public Accountants (CPAs), I understand the importance of finance and our structure of taxation. I hear about it at family celebrations. Behavior is influenced by the availability and price of capital finance and finance is influenced by tax laws. If sustainability factors are not reflected in the world as understood by CPAs, then sustainability is merely symbolic and not real. The interest in sustainability finance I am seeing by investment professionals and my own students are sure indications that we are in the midst of a meaningful economic transition.

It also means that the concepts of sustainability management will become more focused, disciplined and a lot less freewheeling. Sustainability finance can only be fully realized when we have agreement on the definition of sustainability and metrics that uniformly measure the achievement of sustainability objectives. Some of the idealism, mission-orientation, and even creativity of the field will be sacrificed in order to bring the practice of sustainability management into routine organizational management and finance.

The chief driver behind sustainability is the need to continue economic growth while reducing the impact of that growth on the earth's natural systems. That leads to a greater concern on the part of organizational managers for the physical dimensions of sustainability--their use of water, energy and materials and the impact of an organization's production, consumption and products on ecosystems. As sustainability management practices become more standard, they will change the definition of financial risk, management competence, and organizational performance. This in turn will impact the world of finance.

The world of finance is both data-driven and unforgiving. Capital flows toward the highest rate of returns and/or the most stable rate of return. But those markets are influenced by government policy, social norms, and consumer behavior. State, local and some national governments are beginning to push the transition to a sustainable economy. A reluctant finance community is slowly getting the hint and the field of green finance is beginning to take shape.

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