A Green Economy (GE) is growing if economic prosperity goes hand-in-hand with sustainability – developing investments in green sectors and in greening brown sectors. Some investors are already screening companies through enhanced qualitative parameters. However, these practices usually lead investors to companies operating in a green sector (for example renewable energy projects) and not to “normal” companies in the process of implementing a green business model.


These latter companies may be adopting cleaner production processes as part of an integrated strategy to maximize profits by making more efficient use of inputs (such as energy, water, and raw materials), thereby minimizing waste and pollution. This is different from a conventional pollution abatement which captures or converts waste during production and thus increases capital and operating expenditures.

Environmental gains – if included in the company’s evaluation procedure – will also produce financial benefits: cleaner production improves profitability, creditworthiness, and brand loyalty. Many cleaner production initiatives yield paybacks in 3 to 24 months because process re-engineering not only decreases pollution but manufacturing costs as well. Cleaner production initiatives also help companies comply with environmental regulations and obtain a competitive edge on international markets.

Shifting the centre of attention from the narrow and exclusive focus on short-term profits by focussing on responsiveness toward society with a stakeholder management perspective, will support broad and shared value creation processes.

A number of firms have been working with stakeholders – shareholders, employees, customers, suppliers, the surrounding community, etc. – implementing corporate social responsibility (CSR) policies.

Studies have proven that CSR policies universally carry a favourable rate of return. In particular Pavie and Filho (2008) state: “There is a positive correlation between corporate social and financial performance. This relation tends to be bidirectional and simultaneous and a firms’ reputation is an important moderator of this. The various measures of financial and social performance are behind this relation.”

The Framework

The innovative proposal of my research is the development of a SECR an ethical rating system for the evaluation of medium-risk companies. This system is to include parameters based on the principles of environmental economics. The inclusion of social and environmental responsibilities of a given business into the rating system will upgrade the evaluation, encouraging the adoption of eco-friendly choices through credit and investment rewards.

Because this rating system will focus on the profitability of CSR and Environmental policies – such as transparency, social responsibility, and accountability standards that stretch to beyond the minimum legal requirements – which reduce overall corporate risk and allow companies to access less expensive credit lines.

The main function of the rating system is to constitute a tool that efficiently provides a concise indication and summary of the comprehensive scrutiny conducted by independent analysts. The ethical rating will imply a methodologically impartial assessment based on the recognition of shared principles by companies. This rating represents a condensed and easily understandable judgement.

More technical details are available at the following link the Profitability of Sustainable Companies: Towards a Rating System,  or here in Spanish.

Conclusions

Bridging the gap between current investment flows and what is needed to achieve sustainable growth is achievable. By defining the benefits created by investing in a green company, it is easy to conclude that the incremental costs of green growth is negligible compared to the costs of inaction. However, there are important barriers to overcome, such as institutional inertia, the disadvantage of being the first, and a natural resistance to change.

A strong political and business vision is needed to undertake the transformation. More competitive solution are required because these reduce business risk by replacing environmental and social risk with the long-term management of physical and human resources. Improved management reduces the risk of fines for pollution or dumping, or to lose talented or experienced employees due to a contrary public opinion. Companies will gain competitiveness in terms of both financial budget and the financial management of cash flows.

The goal of green finance is to mobilize the largest possible green capital, sharing environmental and social objectives with the public. Mobilising private capital towards green investments will boost performance by increasing corporate competitiveness. Multiplying green public investments creates a win-win-win solution: economic growth receives a boost, environmental impact is reduced, and social equity is assured.

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Guest Author Luisa Nenci is CEO of SustainValues, an Environmental Economist and Green Finance Strategist.