By David Broadstock 27 May, 2016
Entrepreneurial finance could play a key role in funding environmentally sustainable investments that help generate economic value for organisations
Sustainability is the backbone of business – this has always been true and for largely obvious reasons. Any organisation which is absent of sustainability is destined to, at some point or another, fail. Typically this is not a desirable outcome for an organisation. So sustainability is the name of the game.
In today’s society what exactly do we have in mind when referring to sustainability? I will elaborate on the concept under two broad themes: economic, and environmental.
“Economic sustainability” can be taken as meaning a combination of (i) remaining commercially viable (both now and ideally across future generations) and (ii) being able to sustain operations in the face of unexpected and severe events, such as the global financial crisis which struck in 2007/8 for example.
Economic sustainability can be viewed through five capitals, which include:
-Natural capital which comes from our ecological system;
-Produced capital which comes from our productive activities;
-Human capital which comes from our talented people;
-Social capital which comes from social trust and social interaction; and
-Financial capital which connects all the previous four capitals to help grow and sustain an economy.
“Environmental sustainability” is more directly focused on the physical environment. Insofar as I wish to give it a precise definition, in the organisational context it loosely refers to taking responsibility for the environmental impacts connected – either directly or indirectly – to operational activities.
Economic and environmental sustainability are closely linked in several ways, and will become increasingly more so. Producing goods and services requires, to a greater or lesser degree, the use of natural resources – and thus comes attached with an environmental cost.
Additionally, pollution results from the discharge of (possibly transformed or processed) production inputs into the natural environment, and thus represents waste and inefficiency.
Is it possible that organisations can benefit, i.e. create economic gains, from being focused on environmental sustainability? Evidence of the commercial value attached to environmental sustainability suggests the answer to be yes, as can be gauged by looking at the empirical practise of corporate social responsibility (CSR) reporting.
In brief, CSR reporting offers a (often voluntarily adopted) mechanism for organisations to give customers, clients and other interested parties a detailed overview of the environmental impacts connected to their operations. CSR reporting has become widely practised in industry – a point recognised within a previous South China Morning Post article “Taking a three-pronged approach to achieving business sustainability”, by Carlos Lo and Eric Ngai.
So how do the commercial gains arise? Do stakeholders and investors “reward” an environmental conscience? It would be nice to think so, and in some rare cases this may in fact be so, but it is easier to justify corporate “environmental-altruism” by appealing to the commercial opportunities that can be created. [Altruism defined as the process of sacrificing personal gains for the good of the greater society].
Environmental accounting is the business process which underpins the commercial value-added, offering management of financial capital in conjunction with natural capital. Practising environmental accounting helps to identify inefficiencies due to excessive waste discharge and poor use of inputs within the value chain.
Minimising these inefficiencies through careful waste management translates directly into reduced costs, and does not require lowering output. As such, environmental accounting serves to increase the profit margin when applied effectively.
However, across the majority of organisations the function of monitoring, regulating and managing environmental issues has historically been considered out-of-scope. There is a general knowledge gap among society, from which follows a general training gap in organisations.
Organisations require a new training regime that can offer a modern generation of entrepreneurs and leaders the right set of tools to balance both economic and environmental sustainability. Accountants also need to be burnished with new skills in valuing – to an auditable standard and quality – environmental impacts/costs consistently, such that firms could benefit from the potential efficiency gains from environmental accounting.
A common theme connecting economic and environmental sustainability is that managers must take a long term perspective and consider multiple stakeholders in managing each. A consistent pattern among commercial projects is that environmentally friendly projects tend to offer lower returns then “less friendly” ones.
Looking towards the future, it is then fair to posit that entrepreneurial finance will be important in sustaining natural capital. Crowd funding, venture capital, private equity, Green bonds and internet finance are among a range of modern financial instruments that could play a defining role in supporting environmentally sustainable investments and supporting economic sustainability within organisations.
David Broadstock is a visiting scholar at the Centre for Economic Sustainability and Entrepreneurial Finance of The Hong Kong Polytechnic University
